[Federal Register Volume 82, Number 217 (Monday, November 13, 2017)]
[Rules and Regulations]
[Pages 52174-52186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24535]


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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: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA) is revising its 
regulations 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. This final rule increases SBIC licensing and examination 
fees in annual steps through October 2020, at which time SBA estimates 
that the annual fees will recoup approximately 80% of SBA's annual 
expenses directly related to these activities. Beginning in October 
2021, this rule increases licensing and examination fees annually based 
on inflation.

DATES: This rule is effective December 13, 2017.

FOR FURTHER INFORMATION CONTACT: Theresa Jamerson, Office of Investment 
and Innovation, (202) 205-7563 or sbic@sba.gov.

SUPPLEMENTARY INFORMATION:

I. Background Information

    The Small Business Investment Act of 1958, as amended (``Act''), 
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.'' 
Neither rule included an adjustment for inflation.
    Although fees set in 1996, as adjusted in 1997, were intended to 
fully reimburse SBA's costs, by fiscal year (FY) 1999 (the earliest 
fiscal year for which SBA expenses are readily available), licensing 
and examination fees only covered approximately 85% of SBA's direct 
costs. SBA's direct costs are the expenses related to licensing and 
examination (e.g., personnel compensation and benefits associated with 
licensing and examinations, technology, subscription services, travel 
and other costs associated with licensing and examinations), and 
excludes SBA's overhead costs (e.g., office space, utilities, and other 
supporting offices within SBA). In FY 2016, licensing and examination 
fees reimbursed approximately 35% of SBA's direct licensing and 
examination expenses, and less than a quarter of SBA's licensing and 
examination expenses when including overhead.
    On December 16, 2016, SBA published a proposed rule (81 FR 91049) 
to gradually increase the SBIC licensing and examination fees each year 
through October 1, 2020, and thereafter annually based on inflation, 
beginning on October 1, 2021. The proposed rule detailed the reasons 
for the widening gap between fees received and SBA related expenses. 
Key reasons include inflation, changes in the SBIC portfolio, increased 
capital at risk (SBA-guaranteed leverage and commitments), SBA's 
efforts to improve SBIC program performance, and technology 
implementation.
    As noted above, the Act authorizes SBA to collect fees to cover the 
costs associated with the licensing and examination of SBICs. The Act 
requires SBA to deposit the fees in the account for salaries and 
expenses of the Administration and authorizes SBA to use licensing fees 
to cover licensing costs and examination fees to cover the costs of 
examinations and other program oversight activities. 15 U.S.C. 
681(e)(2) and 687b(b). To the extent that SBA does not cover its 
licensing and examination costs by charging SBICs for these fees, the 
balance is paid out of Agency funds. In other words, when SBICs do not 
pay fees sufficient to cover SBA's licensing and examination costs, 
taxpayers bear the burden of covering those costs. It is an appropriate 
use of SBA's statutory authority in this final rule to increase SBIC 
licensing and examination fees to cover a greater percentage of 
licensing and examination costs.
    The effect of the statutory language authorizing SBA to use 
licensing fees to cover licensing costs and examination fees to cover 
the costs of examinations and ``other program oversight activities'' is 
that SBA may use examination fees to cover a broader category of 
expenses than those for which it may charge (i.e., examination costs 
alone). Although the current and estimated future costs of compensation 
and benefits of SBA personnel involved in licensing and examinations, 
not including any additional related expenses, fully support the fee 
increases in this final rule, in the proposed rule, SBA identified a 
number of costs it expected to pay for with the funds made available

[[Page 52175]]

by this rule, such as technology, training, information services and 
contractor support for examinations. While the expenses other than 
licensing and examinations personnel compensation and benefits 
discussed in the proposed rule and this final rule are not necessary to 
support the fee increases in this final rule, these expenses are 
priorities of SBA. Accordingly, SBA intends to use the additional funds 
made available by this rule--whether those funds are fee revenue or 
Agency funds currently used to pay compensation and benefits of 
personnel involved in licensing and examinations that are replaced by 
fee revenue from this rule--to pay for such expenses.
    SBA received three sets of comments. These comments are addressed 
in the Section-by-Section Analysis.

II. Section-by-Section Analysis

A. General Comments on the Proposed Rule

    SBA received several comments that were generally directed to the 
proposed rule (81 FR 91049) rather than a specific section. Each of 
these is addressed below.
    One comment stated that the proposed rule does not comply with the 
Presidential Executive Order 13771 issued on January 30, 2017, entitled 
``Reducing Regulation and Controlling Regulatory Costs.'' OMB issued 
guidance on April 5, 2017, entitled, ``Guidance Implementing Executive 
Order 13771,'' which states that Executive Order 13771 applies only to 
significant rules, as defined by section 3(f) of Executive Order 12866. 
Since OMB has determined that this rule is not significant, Executive 
Order 13771 does not apply to this rule.
    SBA received a number of comments that centered on the theme that 
SBA is using dollars that should be directed to the SBIC program for 
other programs. For example, one comment stated that SBA's Office of 
Investment and Innovation (OII), which oversees the SBIC program, has 
been redirecting its human capital and funding from the SBIC program to 
other programs, such as the Small Business Innovation Research (SBIR) 
program. Another comment stated that SBICs have no certainty that if 
higher fees are charged that the additional resources generated would 
not be used to offset increased spending for non-SBIC matters, and 
``there is no limitation on monies that are currently spent on 
licensing and examinations from being diverted to other uses by the 
SBA.'' Another comment stated similar concerns and asked what 
assurances SBA could provide that the fee increase would benefit the 
SBIC program. A final comment stated that ``OII should use all its 
resources to support the SBIC program.''
    The comments misunderstand or fail to take into account SBA's 
statutory obligations, extensive transparency with respect to spending, 
and commitments identified in the proposed rule. First, by statute, SBA 
must use SBIC licensing fees for licensing expenses and SBIC 
examination fees for examination and other program oversight expenses. 
15 U.S.C 681(e)(2)(A), 687b(b). This statutory obligation governing the 
use of fees should provide SBICs with certainty that SBA is using the 
fees generated by this final rule only for SBIC matters. Second, SBA 
provides comprehensive budget transparency, which should provide 
additional assurance to SBICs that SBA is using the fee increase in the 
final rule only for SBIC matters. SBA's Congressional Budget 
Justification separately tracks and reports the costs for each of its 
programs, including the costs of the SBIC and SBIR programs. This 
information is made publicly available every year by SBA, and is 
available at www.sba.gov/about-sba/sba-performance/performance-budget-finances/congressional-budget-justification-annual-performance-report. 
Current SBIC licensing and examination fees are applied to SBA's 
account for salaries and expenses, as required by the Act, and are used 
to pay the salaries of personnel associated with SBIC licensing and 
examination activities. In FY 2016, SBA spent an estimated $4.8 million 
on personnel compensation and benefits associated with these activities 
alone, and $5.4 million including travel, technology, subscription 
services and other costs associated with these activities. Licensing 
and examination fees provided only $1.9 million to offset these costs. 
By FY 2021, SBA estimates that direct costs associated with licensing 
and examinations will increase to $9.4 million and that this final rule 
will generate an additional $5 to $6 million in fees annually. 
Accordingly, even after the fee increases in this rule are fully phased 
in, a shortfall of $1.5 million to $2.5 million will still exist 
between aggregate licensing and examination direct expenses. When 
factoring in overhead, SBA's estimated licensing and examination costs 
will even further exceed anticipated fees. Third, SBA recognizes the 
need for additional resources in the SBIC program. Indeed, that is one 
of the purposes of the rulemaking and should provide assurance that the 
additional funds made available by this final rule will be used to 
benefit the SBIC program. As more fully discussed below, SBA intends to 
allocate the additional funds made available by this rule to pay for 
needed resources, including technology, subscription services, 
contractors, and training. Finally, and more broadly, the SBIC program 
is one of many programs operated by SBA. OII manages several programs, 
including, but not limited to, the SBIC program and the SBIR program. 
As is the case with the SBIC program, SBA has statutory obligations 
with respect to operating the SBIR program. SBA assesses resource needs 
for each program to efficiently and effectively execute its statutory 
responsibilities. Consistent with the statute, no SBIC fee revenue has 
been or will be used for this program.
    One comment stated that SBIC program costs have not substantially 
increased in recent years and questioned the need for increased fees. 
The comment is correct that SBIC program costs have not substantially 
increased over the past few years. Nonetheless, excluding SBA overhead, 
the SBIC program direct operating budget has increased from $7.4 
million in FY 1999 (the earliest period for which SBIC budgets are 
readily available) to approximately $12.9 million in FY 2016. Over half 
of the increase is due to inflation ($7.4 million in January 1999 would 
equate to $10.7 million in January 1999 based on the U.S. Bureau of 
Labor Consumer Price Index calculator located at data.bls.gov/cgi-bin/cpicalc.pl) with the remainder due to the addition of subscription 
services, such as Preqin and Lexis/Nexis, technology improvements, and 
the costs associated with more experienced analysts necessary to 
oversee SBA's increased capital at risk (SBA leverage and commitments). 
As discussed in the proposed rule, SBICs ultimately benefit financially 
from improvements in the quality of the SBIC program portfolio through 
lower annual charges on SBA-guaranteed debenture leverage. 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 (a cost savings of $979,500 in just one year for a 
hypothetical SBIC issuing $150 million of debentures at the lower 
annual charge). In FY 1999, SBA had less than $3.9 billion in capital 
at risk; this figure grew to $14.5 billion by the end of FY 2016. 
Analyzing SBICs and SBIC applicants has become more time

[[Page 52176]]

intensive due to the increased complexity of SBIC organizational 
structures, legal documents, management fees, and financings. As an 
example, on October 21, 2014, SBA published a final rule (79 FR 62819) 
requested by the SBIC industry, which allowed the use of up to two 
levels of passive businesses under 13 CFR 107.720(b)(2) in order to 
provide more flexibility to its SBICs in structuring investments. To 
appropriately monitor these financings, SBA must examine each passive 
business used in the financing in addition to the operating business. 
While SBA understands such financings provide SBICs additional 
flexibility in structuring investments, these financings cause 
additional work for SBA to review and monitor.
    One comment asked SBA to identify its priorities for the increased 
fee revenue associated with this rule. SBA intends to use the 
additional funds made available by this rule to: (1) Support its 
continued efforts to migrate from desktop database tools to a secure 
cloud-based system comparable to the systems used by a typical private 
equity fund of funds (an investment fund that holds a portfolio of 
private equity funds); (2) pay for additional contractor services to 
support examinations and facilitate SBA's transition to a paperless 
environment; (3) increase travel related to licensing, examination, and 
other program oversight; (4) train employees; (5) increase access to 
subscription services typically used by a typical private equity fund 
of funds, such as industry reports; and (6) to further offset the 
compensation and benefits of personnel associated with these 
activities.
    One comment stated that the proposed fee increase was excessive and 
it was unclear why an additional $3 to $4 million in fees is needed to 
administer the program, noting that the costs cited in the proposed 
rule only totaled $1.7 million. As support, the comment cited the 
$100,000 in information subscription services, $500,000 in increased 
licensing and examination costs for technology improvements, $100,000 
to incur additional training costs, and $1 million in contracting 
resources identified in the proposed rule.
    Setting aside the $1.7 million in specific additional expenses 
needed for licensing and examination expenses identified in the 
proposed rule, the commenter appears to disregard the licensing and 
examination expenses that current fees are not covering. The intent of 
this final rule is to cover more of SBA's existing expenses for these 
activities and provide sufficient income to pay for the additional and 
necessary expenses identified in the proposed rule. As discussed above, 
in FY 2016, SBA expended approximately $5.4 million, excluding 
overhead, on SBIC licensing and examination activities, but received 
only $1.9 million in licensing and examination fees, resulting in a 
$3.5 million shortfall which was paid out of SBA's taxpayer-funded 
budget. Through this rule, SBA expects to reduce this shortfall.
    One comment suggested that SBA should conduct an in-depth 
accounting of the needs and requirements of OII to provide ``first-
class service'' to SBICs to determine the minimum resources necessary 
to fulfill its mission, identify where costs can be cut, better 
allocate existing resources, improve efficiencies through private 
sector solutions, and then present the final accounting of these 
amounts to the public. Regarding the in-depth accounting requested by 
the comment, the proposed rule set forth in detail current licensing 
and examination expenses and the additional expenses related to these 
functions that SBA believes are critical to fulfilling the statutory 
mission of the SBIC program. This final rule discusses those costs and 
future estimates in further detail. In reviewing existing resources, 
SBA identified five key areas for improvements, which it intends to pay 
for using the additional funds made available as a result of this final 
rule, as follows:
    (1) Technology: SBA's Office of the Chief Information Officer 
(OCIO) is working closely with OII to improve its systems to provide 
functionality similar to a typical private sector private equity fund 
of funds and serve as a virtual data room. In addition to this 
software, SBA needs to migrate from Microsoft Access and acquire data 
visualization and analytical tools commensurate with private equity 
funds and other government loan programs. SBA also expects to 
periodically update its hardware.
    (2) Outsourced Contractor Services: SBA intends to utilize 
contractors to provide certain services for which SBA does not 
currently have sufficient resources to perform and to assist in certain 
risk control functions of OII. This includes hiring contractors for 
scanning, file management, record management, and cyber security to 
help migrate the entire office to a paperless environment. This also 
includes valuation services to help support SBIC program oversight and 
SBIC examinations where SBA determines that an independent valuation is 
appropriate or necessary. In reviewing the examination function, SBA 
has established a goal of increasing the frequency with which 
individual SBICs are examined to further reduce risk of loss to the 
SBIC program. Due to staffing limitation issues, SBA intends to 
outsource certain examination functions in order to ensure that it is 
able to meet statutory examination requirements.
    (3) Travel: SBA intends to increase staff travel in furtherance of 
program objectives for licensing, examinations, and other program 
oversight activities.
    (4) Training: As noted in the proposed rule, the Office of 
Inspector General (OIG) noted that ``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. OII 
intends to devote a larger portion of its budget for employee training.
    (5) Subscription Services: SBA is evaluating information sources 
used by a typical private sector private equity fund of funds to 
identify which sources may most effectively help its analysts better 
evaluate and assess SBICs and applicants.
    SBA regularly assesses needs and resources for all programs to 
ensure that SBA is able to meet its statutory obligations in an 
efficient and effective manner. In assessing the expenses of the SBIC 
program more broadly than licensing and examination expenses alone, 
total program costs for the SBIC program are already low compared to 
cost of the SBIC program from prior eras based on capital at risk and 
comparable current private sector entities based on assets under 
management. SBIC program resources have not kept pace with increased 
capital at risk since FY 1999 (the earliest period for which the SBIC 
program operating budget is readily available). In FY 1999, SBA spent 
$7.4 million, excluding overhead, to manage a portfolio of less than 
$3.9 billion in capital at risk (leverage and commitments); in FY 2016, 
SBA spent $12.9 million to manage a portfolio of $14.5 billion. SBA's 
capital at risk continues to increase, reaching $15.3 billion as of May 
22, 2017. While SBA's capital at risk has more than tripled in size, 
SBA's costs to manage its much larger portfolio have not even doubled. 
As a result, the SBIC program's FY 1999 operating budget, excluding 
overhead, represented 0.19% of its capital at risk and its FY 2016 
operating budget represents 0.09%. If SBA returned to the FY 1999 rate 
of 0.19%, the SBIC program's direct budget would need to increase to 
$29 million today, which would still fall significantly below 
comparable private sector costs. As a comparison, a typical private 
sector fund of funds commonly charges 1% of

[[Page 52177]]

assets under management (AUM) annually to manage the fund; notably, 
SBICs typically charge 2% in annual management fees.
    SBA estimates that by FY 2021 the Agency will need approximately 
$19.9 million, excluding overhead, to manage the SBIC program (``SBIC 
Program Direct Cost Estimates''), as shown in Table 1, SBIC Program 
Direct Cost Estimates (In Millions of Dollars), below. The cost 
estimate includes increases for inflation through FY 2021 and funding 
for the five key areas that are targeted for improvement.

               Table 1--SBIC Program Direct Cost Estimates
                        [In millions of dollars]
------------------------------------------------------------------------
                                                           FY       FY
                       Category                           2016     2021
------------------------------------------------------------------------
Personnel (Compensation & Benefits)...................   $11.65   $13.53
Technology............................................     0.79     3.16
Outsourced Contractor Services........................  .......     2.29
Travel................................................     0.22     0.47
Subscription Services.................................     0.19     0.21
Training and Other Expenses...........................     0.09     0.27
                                                       -----------------
    Total SBIC Program Direct Cost Estimates..........    12.94    19.93
------------------------------------------------------------------------

    Direct licensing costs are expected to increase from approximately 
$2 million in FY 2016 to almost $3 million by FY 2021, and examination 
costs are expected to increase from $3.4 million in FY 2016 to almost 
$6.4 million by FY 2021. Table 2, SBIC Program Direct Cost Estimates 
for Licensing and Examination Activities (In Millions of Dollars), 
below provides a breakdown for SBIC licensing and examination costs.

              Table 2--SBIC Program Direct Cost Estimates for Licensing and Examination Activities
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                          Licensing costs                Examination costs
                    Category                     ---------------------------------------------------------------
                                                      FY 2016         FY 2021         FY 2016         FY 2021
----------------------------------------------------------------------------------------------------------------
Personnel (Compensation & Benefits).............           $1.80           $2.31           $2.96           $4.12
Technology......................................            0.09            0.31            0.20            0.79
Outsourced Contractor Services..................            0.00            0.11            0.00            1.11
Travel..........................................            0.00            0.06            0.22            0.26
Subscription Services...........................            0.12            0.13            0.00            0.00
Training and Other Expenses.....................            0.01            0.03            0.02            0.07
                                                 ---------------------------------------------------------------
    Total SBIC Direct Cost Estimates............            2.02            2.95            3.40            6.35
----------------------------------------------------------------------------------------------------------------

    SBA realized that the cost estimates on which the proposed rule was 
developed (``proposed rule cost estimate'') significantly 
underestimated SBA costs for technology, outsourcing, and overhead. The 
proposed rule identified only $1 million for technology, half of which 
was allocated to licensing and examinations. After further review of 
commercially available systems used by private sector funds of funds 
and tools used by other government financial programs, SBA believes 
technology costs are likely to be significantly higher than originally 
estimated in the proposed rule. The proposed rule cost estimate also 
understated costs for outsourced services, particularly with respect to 
examinations and cyber security. Most significantly, the proposed rule 
used an agency overhead rate of less than half a percent (0.48%) of all 
direct SBIC costs. After publishing the proposed rule, OII became aware 
that the actual agency overhead rate amounts to approximately thirty 
percent (30%) of the program's total cost. (For example, if the total 
program cost were $10 million, $7 million would be the program office's 
direct costs while the other $3 million would represent agency 
overhead.) As a result, the fee increase in this final rule is likely 
to cover less of SBA's license and examination expenses than SBA 
expected when proposing the rule. After the full increase is phased in 
by FY 2021, the fees will cover approximately 80% of SBA's direct 
licensing and examination expenses, and less than 60% of such expenses 
when including overhead. SBA is concerned that the phased in fee 
increase in this final rule may not provide SBA with fees necessary to 
pay for critical resources as quickly as necessary. SBA is also 
concerned that, after the phase-in is complete, fees collected will not 
cover all expenses authorized by statute. Accordingly, SBA is 
considering proposing a new rule after this final rule becomes 
effective to more fully cover its licensing and examination costs in a 
more expedited timeframe.
    One comment questioned OII's priorities, stating that OII recently 
created and hired a position which the commenter believes duplicates a 
currently existing role in OII rather than filling core competencies. 
How SBA chooses to allocate its non-fee related budget is not the 
subject of this rule. In addition, as noted above, SBA regularly 
reviews resource allocations within SBA to maximize efficiency and 
prioritize resources. Based on this review, SBA is currently seeking to 
provide additional resources to licensing and examinations.
    One comment stated that although more staffing resources should be 
allocated to SBIC examinations, those resources should come from other 
areas within OII or sought from congressional appropriations. SBA 
assesses the needs for all of its programs and cannot reallocate money 
from one program to another without repercussions to the program that 
would lose resources. In addition, any reallocations of personnel to 
examination functions would not lower examination costs. Such 
resources, therefore, would not reduce the need for the fees set forth 
in this final rule. SBA could request additional funds from Congress; 
however, Congress gave SBA the authority to recoup its SBIC licensing 
and examination expenses by charging SBIC licensing and examination 
fees. By this final rule, SBA is complying with the statutory intent to 
cover more of its licensing and examination costs through the use of 
fees, which will provide SBA with the ability to pay for necessary 
additional resources required to administer the SBIC program.

[[Page 52178]]

    Two comments noted that technology improvements, such as a virtual 
data room, could significantly reduce costs. Neither commenter provided 
data to support cost reductions. As part of the budget estimate 
presented in Table 1, SBA considered the use of private sector 
technology, such as adopting software commonly used by a typical 
private equity fund of funds, virtual data rooms, and analytical tools 
to improve the efficiency of its processes. In general, SBA has found 
that while technology improves the accessibility of information, it 
does not necessarily decrease the time or manpower required to license 
or examine a fund. For example, while a virtual data room would help in 
accessing a business plan, it takes the same amount of time to read and 
understand the business plan in an electronic version as a paper 
version. Similarly, while a virtual data room helps SBA access SBIC 
financing documents, most of SBA's time is spent reviewing the 
documents, and assessing whether the financing complies with SBIC 
regulations. SBA also notes that such technology is used by SBIC 
managers and other professionals (such as accounting and law firms) 
that charge expenses to SBICs and that their costs have not declined.
    One comment stated that the increased fees would significantly 
deter existing and prospective SBIC fund managers from continuing in 
the program. The fees identified in this final rule represent a small 
percentage of a fund's capital or expenses. Regarding the licensing 
fees, in FY 2016, SBA licensed 21 SBICs with average initial private 
capital exceeding $55 million. Those intending to issue SBA guaranteed 
debentures (``leveraged SBICs'') had average initial private capital of 
$53 million, and those not intending to issue SBA guaranteed debentures 
(``non-leveraged SBICs'') had average initial capital of $74 million. 
The FY 2021 licensing fee of $45,000 represents 0.06% of the average 
non-leveraged SBIC's capital and 0.03% of the leveraged SBIC's total 
capital (assuming the leveraged SBIC will draw leverage equal to two 
times private capital). Even after full phase-in by FY 2021, the 
licensing fee is expected to account for a modest percentage of an 
SBIC's total organizational costs (e.g., legal fees and other 
professional and consulting services, fundraising expenses, etc.), 
which frequently reach or exceed $500,000. Regarding the examination 
fee, under this final rule, in approximately three years (by October 
2020), the examination fee for a leveraged SBIC with $150 million in 
assets at cost would be $44,000 (0.03% of assets) and for a non-
leveraged SBIC $30,000 (0.02% of assets). SBA's goal is to examine 
leveraged SBICs every twelve months and non-leveraged SBICs every 
eighteen months. In FY 2016, an SBIC with $150 million in assets 
typically incurred annual management fees of $3 million and annual 
audit fees between $50,000 and $60,000. SBA believes that while the 
increased fees may deter a few funds with limited ability to raise 
capital from applying to the program, most applicants will not be 
deterred. To the extent that such deterrence occurs, it may help SBA 
focus its resources on stronger SBIC applicants.

B. Indexing Fees

Section 107.50--Definition of Terms
    Current SBIC regulations do not adjust SBA's administrative fees 
for inflation. As a result, fees have not increased since 1996 and do 
not cover SBA's costs. To enable fees to remain current with inflation, 
SBA is adding the term ``Inflation Adjustment'', which is 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. Beginning on October 1, 2021, and prior to each 
federal government fiscal year (October 1) thereafter, SBA would 
recalculate the examination and licensing fees to reflect increases in 
the CPI-U based on the change in the index from the June CPI-U in the 
previous year to the most recent June CPI-U. For example, the CPI-U is 
238.638 in June 2015 and 241.038 in June 2016; a 1.0057% increase would 
be applied and then rounded to the nearest $100. If the CPI-U 
decreases, no change would be made to the fees. SBA would publish the 
resulting fees in a notice in the Federal Register each year prior to 
October 1.
    SBA received one comment that opposed the inflation adjustment, 
stating that instituting an inflation adjustment removes SBA's 
accountability for reducing costs and streamlining processes. SBA does 
not agree. More than half of SBA's SBIC expense increase between 1999 
and 2016 was due to inflation. These increased expenses were funded by 
taxpayers rather than SBICs. Implementing an inflation adjustment to 
ensure that SBA's licensing and examination fees keep pace with 
inflation helps to ensure that, consistent with the statutory authority 
Congress provided to SBA in Sections 301 and 310 of the Act, SBICs, not 
taxpayers, are paying the costs related to these activities. SBA 
estimates that if SBA had instituted an inflation adjustment in 1996, 
over the 5-year period between FYs 2012 and 2016 alone, SBA could have 
saved taxpayers over $6 million. Further, SBA's budget process ensures 
accountability by providing disclosure of SBA's costs to the public 
each year. SBA further notes that using inflation adjustments is in 
line with other federal financial regulators such as bank examiner fees 
(For example, pursuant to 12 CFR 8.2, the Office of the Comptroller of 
the Currency applies an inflation adjustment to the fees it charges for 
examining and supervising national banks.) Finally, SBA remains 
committed to ensuring that the SBIC program is operated efficiently and 
effectively. This final rule adopts the proposed Sec.  107.50 language 
without change.

C. Licensing Fees

Section 107.300--License Application Form and Fee
    Current regulations require SBIC applicants to pay a licensing fee 
when submitting a complete application. Under those regulations, the 
licensing fee consisted of a base fee of $10,000 plus additions as 
follows: $5,000 if the applicant intended to operate as a limited 
partnership; $5,000 if the applicant intended to issue Participating 
Securities leverage (a type of leverage no longer available); and 
$10,000 if the applicant intended to be licensed as an Early Stage SBIC 
(a type of license no longer issued after September 30, 2016).
    SBA proposed to remove the additions and to adopt a uniform 
licensing fee of $25,000 in FY 2017, which would increase by $5,000 
each October through October 1, 2020, resulting in a licensing fee of 
$45,000 by October 1, 2020. Beginning on October 1, 2021, the rule 
proposed to increase the amount based on inflation. The proposed rule 
did not propose changing when the licensing fee was payable. Consistent 
with SBA's existing practice, the preamble to the proposed rule 
discussed SBA's licensing phases and what forms and fees are required 
at each phase as follows:
    The first phase in the licensing process (``Initial Review'') 
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

[[Page 52179]]

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 
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 (``Final 
Licensing''). Final Licensing occurs at the time SBA accepts an 
applicant's complete license application (consisting of an updated SBA 
Form 2181 and complete SBA Forms 2182 and 2183), which application is 
submitted 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.
    As part of the proposed rule, SBA asked for comments as to whether 
an applicant should pay a licensing fee prior to submitting its 
complete license application, since SBA expends significant resources 
prior to that time. SBA received one comment that supported a fee of up 
to $10,000 at the first phase, Initial Review, with a commensurate 
decrease in the licensing fee at the second phase, Final Licensing. The 
commenter also suggested that SBA clarify its licensing standards, 
since half of all applicants that apply to the program do not receive a 
Green Light Letter. SBA recommends that applicants use the pre-
screening process described on its Web site at www.sba.gov/sbic/applying-be-sbic/pre-screening-process, which will remain free of 
charge after this final rule is published. This process helps 
applicants identify whether they are likely to qualify for a license 
before beginning the licensing process.
    SBA agrees that a fee at Initial Review is appropriate; this final 
rule includes a $10,000 fee at Initial Review (``Initial Licensing 
Fee'') beginning on the effective date of this rule. The amount of the 
licensing fee due at Final Licensing (``Final Licensing Fee'') in this 
final rule has been reduced from the amount for such fee in the 
proposed rule by a commensurate decrease of $10,000. Accordingly, by 
October 1, 2020, the combined licensing fees for a single applicant 
will total $45,000, which is the total amount of licensing fees 
proposed by SBA in the proposed rule. The amount of the Final Licensing 
Fee is the amount due in effect on the date when SBA accepts an 
applicant's license application. Due to the timing of this final rule, 
SBA removed the proposed FY 2017 licensing fee. Table 3, SBIC Initial 
and Final Licensing Fees, below, identifies the Initial Licensing Fee 
and Final Licensing Fees in this final rule for each fiscal year.

                                 Table 3--SBIC Initial and Final Licensing Fees
----------------------------------------------------------------------------------------------------------------
                                                                                    Initial           Final
                                     Time                                        licensing fee    licensing fee
----------------------------------------------------------------------------------------------------------------
December 13, 2017-September 30, 2018..........................................          $10,000          $20,000
October 1, 2018-September 30, 2019............................................           10,000           25,000
October 1, 2019-September 30, 2020............................................           10,000           30,000
October 1, 2020-September 30, 2021............................................           10,000           35,000
----------------------------------------------------------------------------------------------------------------

Beginning on October 1, 2021, SBA will increase the Initial Licensing 
Fee and Final 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.
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 licensing processes. Current regulations require SBICs seeking a 
change in control to pay a $10,000 fee, similar to the licensing fee. 
Since the procedures and costs are similar to those in the licensing 
process, the proposed regulations changed the current fee to be equal 
to the licensing fee identified in Sec.  107.300. SBA received no 
comments on this section. As noted above, this final rule does not 
change the total amount of the licensing fee in the proposed rule, but 
requires two payments rather than one: the Initial Licensing Fee and 
the Final Licensing Fee. The final Sec.  107.410 modifies the language 
in proposed Sec.  107.410 to reflect the combined Licensing Fee 
(Initial Licensing Fee plus the Final Licensing Fee) as defined in the 
final Sec.  107.300.

D. Examination Fees

Section 107.692(b)--Base Fee
    Current Sec.  107.692(b) identifies a base examination fee 
calculated as a percentage of an SBIC's total assets at cost. As 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.
    SBA proposed to modify Sec.  107.692(b), to 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. The 
Minimum Base Fee would increase to $5,000 in FY 2017 and increase each 
October by $1,000 through October 1, 2020. As proposed, the Maximum 
Base Fee for Non-leveraged SBICs would increase to $20,000 in FY 2017 
and increase by $2,500 each October through October 1, 2020. The 
Maximum Base Fee for Leveraged SBICs would increase to $20,000 in FY 
2017 and then by $6,000 each October through October 1, 2020. Beginning 
on October 1, 2021, the Minimum and Maximum Base Fee (for both 
Leveraged and Non-leveraged SBICs) would increase using the Inflation 
Adjustment.
    For the purposes of calculating the examination fee, the proposed 
rule defined 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, hold 
no Earmarked Assets. An SBIC that satisfies these requirements must 
also certify to SBA that it will not seek new SBA leverage in the 
future.
    SBA received one comment supporting SBA's proposal to tie the 
examination fee to assets, noting that a fee not tied to assets would 
have been burdensome for smaller funds.

[[Page 52180]]

    SBA received one comment that the increase is excessive, noting 
that while there is an increase in the number of SBICs to be examined, 
there was no evidence provided that the cost of examining an individual 
SBIC has doubled. As discussed previously, over half of the increase in 
examination expenses since 1999 is due to inflation, with most of the 
remainder due to the addition of subscription services, technology 
improvements, and costs associated with more experienced analysts 
necessary to oversee SBA's increased capital at risk (SBA leverage and 
commitments), particularly in larger leveraged SBICs with over $60 
million in assets. 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 December 31, 2016, 122 
of the 129 SBICs with over $60 million in assets used leverage and 72 
of the 74 SBICs with over $120 million in assets used leverage. SBA 
applies a higher level of scrutiny in examining leveraged SBICs than 
non-leveraged SBICs in exams, since SBA bears credit risk with respect 
to leveraged SBICs. In addition, larger leveraged SBICs often use 
complex transaction structures which are more time-consuming to 
examine. For example, the percentage of SBIC financings made through 
passive businesses (a type of financing that is generally prohibited, 
but with permitted exceptions for passive businesses that pass through 
proceeds to eligible active small businesses) increased from 3% in 1996 
to over 14% over the past few years. This is partially due to the 
expansion of SBIC passive business rules on December 23, 2014 (78 FR 
77377), which revised 13 CFR 107.720(b)(2) to allow SBICs to invest in 
up to two levels of passive businesses under certain circumstances. 
Although SBA understands that these types of accommodations are 
necessary to enable SBICs to finance certain small businesses, these 
transactions require SBA to use more resources to monitor and examine 
them.
    SBA believes the examination base fee is reasonable and consistent 
with the cost of other auditing services and is finalizing Sec.  
107.692(b) as proposed with the exception of one timing-related change. 
Due to the timing of this final rule, SBA is removing the FY 2017 fee 
increase identified in the proposed rule and will begin with the FY 
2018 fee, after the effective date of this rule. The final Sec.  
107.692(b) replaces 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 change each year as shown on Table 4, Minimum and 
Maximum Base Fees, and are adjusted for inflation each year beginning 
October 1, 2021:

                                     Table 4--Minimum and Maximum Base Fees
----------------------------------------------------------------------------------------------------------------
                                                                                  Maximum base     Maximum base
      Time period (based on the examination start date)          Minimum base     fee for non-       fee for
                                                                     fee        leveraged SBICs  leveraged SBICs
----------------------------------------------------------------------------------------------------------------
December 13, 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
----------------------------------------------------------------------------------------------------------------

Section 107.692(c)--Adjustments to Base Fee and (d) Fee Discounts and 
Additions Table
    Current Sec.  107.692(c) provides for the following adjustments to 
the base examination fee calculated under Sec.  107.692(b): 15% 
discount for no prior violations; 10% discount for responsiveness; 5% 
addition if SBIC is structured as a partnership or limited liability 
company; 10% addition if the SBIC was licensed with the intent of 
issuing Participating Securities; 10% addition if SBIC records are 
maintained at multiple locations; and 10% addition if the SBIC is 
licensed as an Early Stage SBIC. These adjustments were summarized in 
tabular form in Sec.  107.692(d).
    SBA proposed to revise Sec.  107.692(c) as follows:
     Retain No Violation Discount: SBA proposed to retain the 
no violation discount, which gives a 15% discount on the Base Fee to 
SBICs that have no outstanding regulatory violations at the time of the 
examination start date and had no violations as a result of the most 
recent prior examination.
     Add Low and Moderate Income (LMI) Investing Discount: 
SBICs would receive 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. LMI 
Investments are defined in Sec.  107.50.
     Remove Fully-responsive Discount; Add Non-Responsiveness 
Addition: During development of the proposed rule, SBA found that most 
SBICs regularly received the 10% discount available under Sec.  
107.692(c) for being ``fully responsive to the letter of notification 
of examination.'' SBA therefore took into account the cost efficiencies 
resulting from responsiveness when formulating the revised Base Fees in 
proposed Sec.  107.692(b). To compensate SBA for the additional time 
required to examine the minority of SBICs that are not responsive, 
proposed Sec.  107.692(c)(3) included an addition of 15% of the Base 
Fee for any SBIC that is ``not fully responsive to the letter of 
notification of examination.''
     Retain Records/Files at Multiple Location Addition: 
Proposed Sec.  107.692(c)(4) also retained the 10% addition charged to 
SBICs that maintain records located in multiple locations.
     Add Unresolved Finding Addition: To encourage SBICs to 
resolve findings in a timely manner, Sec.  107.692(c)(5) SBA proposed 
an additional fee equal to 5% of the Base Fee for every 30 calendar 
days or portion thereof that any examination finding that remains 
unresolved after a 90 calendar day cure period (beginning on the date 
that SBA notifies the SBIC that corrective action must be taken), 
unless SBA ultimately resolves the finding in the SBIC's favor.
     Remove Additions for Partnership and LLC: Since almost all 
SBICs are organized as partnerships and LLCs, the proposed rule removed 
these additional fees from Sec.  107.692(c) and incorporated the cost 
into the Base Fee.
     Remove Additions for Participating Securities Licensees 
and Early Stage SBICs: SBA proposed to remove the fee additions for 
Participating Securities Licensees and Early Stage SBICs, both of which 
SBA no longer licenses.
    SBA received one comment that supported the removal of additions 
for early stage, participating securities, and

[[Page 52181]]

partnership/LLC; this final rule adopts these proposed changes to Sec.  
107.692(c).
    SBA received one comment that opposed the LMI discount, stating 
that discounts should not be used for political or social goals. SBA 
proposed this discount partly in response to a comment submitted by the 
same commenter on a different rule proposed by SBA, the Impact SBIC 
Rule (81 FR 5666), which comment stated, ``facilitating investment 
dollars in LMI areas is consistent with the core statute and the 
Congressional mandate for the SBIC program'' and suggested that the LMI 
discount might be helpful. SBA agrees that LMI investments are 
consistent with the SBIC program mission. Nonetheless, since the public 
opposed this discount in the context of this rule, and LMI investments 
do not have a meaningful impact on the amount of time and resources 
required by SBA in connection with an examination, this final rule 
Sec.  107.692(c) does not include this discount in Sec.  107.692(c).
    SBA received several comments on the proposed adjustments to the 
examination base fee in the proposed rule. One comment stated that SBA 
should not make adjustments to the examination fee based on arbitrary 
decisions by examiners, including the no violation discount, non-
responsive addition, records/files at multiple locations addition, and 
the unresolved finding addition. Examination fee adjustments are not 
determined arbitrarily, but rather, through a process requiring exam 
manager review. An examination may only apply an adjustment to the fee 
if an SBA exam manager agrees with the decision by the examiner that an 
adjustment is warranted. SBA exam managers review examination fees 
prepared by each examiner to ensure they are fairly and accurately 
assessed. Furthermore, SBICs have the right to dispute any examination 
fee invoice. SBA receives questions from SBICs concerning less than 
approximately 3% of its examination invoices. Each of the adjustments 
SBA received comments on is addressed in further detail below:
     No Violation Discount: SBA received one comment that 
supported a uniform examination fee, with no discounts and no 
additional fees, except in egregious cases. SBA agrees, in part, with 
this comment, and believes that a more uniform examination fee is 
desirable. Accordingly, this final rule seeks to avoid any single 
discount or addition being applied to a majority of SBICs. Although the 
proposed rule proposed to retain the no violation discount in current 
SBA regulations, since over 70% of SBICs examined in FY 2016 received 
the no violation discount, SBA believes it is appropriate not to retain 
this discount. Further, and consistent with the desire for a more 
uniform examination fee, the examination base fee identified in this 
final rule reflects SBA's average cost to examine an SBIC, and 
examinations resulting in violations require SBA to spend time and 
resources to identify and address those violations. If SBA were to 
retain the no violation discount, the examination fee would not fully 
cover SBA's cost of examining the SBIC. Therefore, and in light of the 
comment received supporting a more uniform examination fee, SBA removed 
the no violation discount in this final rule.
     Non-Responsive Addition: The comment objecting to this 
addition was particularly concerned that such an addition would be 
applied arbitrarily and without warning. SBA agrees with the comment 
that a written warning would be appropriate prior to assessing this 
addition. As with all additions, this addition may only be applied with 
exam manager approval. Over 97% of SBICs examined in FY 2016 received 
the discount for being responsive, and SBA expects that if SBIC 
responsiveness remains similar to FY 2016, it will only be necessary to 
apply the non-responsive addition in less than 3% of cases. For the 
reasons discussed above regarding SBA's desire for a more uniform 
examination fee consisting of an examination base fee that reflects 
SBA's average cost to examine an SBIC with adjustments which increase 
that cost, the final rule includes the non-responsive addition. Since 
uncooperative SBICs increase SBA's costs, this final rule adopts the 
non-responsive addition of 15% as proposed, but with the clarification 
that SBA will provide a written warning prior to assessment.
     Records/Files at Multiple Location Addition: SBA received 
one comment objecting to this addition, which is currently in SBA 
regulations and which SBA proposed to retain. SBA notes that there is 
no risk of arbitrary application of this addition, since SBIC records 
are maintained either in a single or multiple locations. Further, in FY 
2016, less than 2% of SBICs received this addition. This final rule 
maintains this addition in Sec.  107.692(c) since traveling to multiple 
locations increases SBA's time and costs.
     Unresolved Finding Addition: One comment objected to this 
addition on the grounds that some resolutions, such as the sale of a 
portfolio company, may take more than 90 days to resolve. SBA agrees 
with the comment that certain resolutions may take longer than 90 days 
to resolve. Accordingly, the final Sec.  107.692(c) adopts this 
addition, since SBA spends a significant amount of time trying to 
resolve unresolved findings, but clarifies the language to account for 
resolutions requiring longer than 90 days to resolve.
    A summary of the resulting final Sec.  107.692(c) examination fee 
additions (also presented in tabular form in final Sec.  107.692(d)) is 
summarized in Table 5, Proposed Examination Fee Additions, below.

               Table 5--Proposed Examination Fee Additions
------------------------------------------------------------------------
                                          Amount of addition - % of base
       Examination fee additions                       fee
------------------------------------------------------------------------
(1) Non-responsive.....................  15%.
(2) Records/Files at multiple locations  10%.
(3) Unresolved Findings................  5% of Base Fee for every 30
                                          days or portion thereof beyond
                                          the 90 day cure period or such
                                          later date as SBA sets forth
                                          in the notice 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 the adjustments identified in 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 ($7,000 + .024% x $125 million) computes to $37,000. Since 
the Base Fee may not exceed the Maximum Base Fee for the relevant time 
period, the Base Fee would be equal to $32,000. If the SBIC is non-
responsive to the examiner's requests and has records in multiple 
locations, the examination fee would be calculated as follows:

[[Page 52182]]



                                                 Table 6--Example March 2019 Examination Fee Calculation
--------------------------------------------------------------------------------------------------------------------------------------------------------
             Amount                                                                    Explanation
--------------------------------------------------------------------------------------------------------------------------------------------------------
 $32,000.......................  Base Fee determined per final Sec.   107.692(b).
+ $ 4,800......................  15% addition for non-responsiveness per final Sec.   107.692(c)(1).
+ $ 3,200......................  10% addition for records in multiple locations per final Sec.   107.692(c)(2).
 $40,000.......................  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 cure 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.

Section 107.692(e)--Delay Fee

    Current Sec.  107.692(e) states 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.
    SBA proposed to amend Sec.  107.692(e) to increase the current $500 
per day delay fee to $700 per day, to 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. SBA 
received one comment objecting to the fee, asserting that it could be 
assessed arbitrarily in an examiner's discretion. SBA does not assess 
this fee arbitrarily, and any assessment requires the process set forth 
in the SBIC Examinations Guidelines Standard Operating Procedure (10 
09, October 28, 2013, Ch. 4, Sec.  2(e)), which provides that only the 
Associate Administrator for Investment and Innovation may assess this 
delay fee after consulting with the Director of SBIC Examinations. SBA 
did not assess this delay fee for any of the SBICs examined in FY 2016. 
Delays can significantly increase SBA examination costs, therefore, SBA 
maintained this delay fee in cases involving delays due to a lack of 
cooperation on the part of the SBIC or the poor condition of the SBIC's 
records. This final rule adopts proposed Sec.  107.692(e) without 
change.
Compliance With Executive Orders 12866, 12988, 13132 and 13771, 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 Act authorizes SBA to collect administrative fees to cover 
licensing and examination costs. Currently, licensing fees cover less 
than a quarter of SBA's direct licensing costs and examination fees 
cover less than half of direct examination costs. It is critical that 
SBA increase fees in order to cover a larger portion of its licensing 
and examination expenses as contemplated by Congress. In addition, SBA 
will use the funds made available as a result of the rule to: (1) 
Improve 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 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 than those in this 
final rule. The increase in SBA's licensing costs has been driven not 
only by inflation since 1996, but also by the real increase in SBA's 
capital at risk (SBA guaranteed leverage and commitments) and the 
increased complexity of SBIC applicant organizational documents. 
Therefore, SBA 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 proposed and finalized in this rule, 
in order to obtain the same technology and resources utilized by 
industry peers, and contractor support to reduce times in the licensing 
process. SBA did not attempt to fully cover its licensing costs in the 
proposed rule; at that time, SBA stated that it believed the proposed 
fee increases would be sufficient to meet essential needs while 
remaining well within the ability of qualified applicants to pay. In 
re-evaluating its technology resources utilized in licensing in 
response to a comment SBA received on the proposed rule, SBA now 
believes it will require technology and other licensing resources 
similar to industry peers. Therefore, SBA's licensing costs, excluding 
overhead, are expected to increase from approximately $2 million in FY 
2016 to approximately $3 million by FY 2021. SBA is concerned that this 
final rule will only offset half of SBA's licensing costs, excluding 
overhead, by FY 2021. SBA is considering proposing a new rule after 
this final rule to further offset its costs.
    SBA also considered implementing a larger increase immediately in 
order to offset costs more quickly. For the time being, SBA is opting 
to pursue the gradual increase identified in the proposed rule to allow 
potential applicants time to adjust to these increases. However, in 
order to obtain technology similar to private sector peers more 
quickly, SBA may consider a future rule to accelerate this phased in 
schedule.
B. Examination Fees
    SBA considered several alternatives to the examination fees in this 
final regulation. SBA considered indexing the fees in current Sec.  
107.692(b) to reflect inflation from 1997 to 2017. This alternative did 
not produce sufficient fees to offset SBA's examinations costs. In 
assessing the reasons for this, SBA analyzed the SBIC portfolios from 
both periods and determined 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 
guaranteed debentures, 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 smaller examination fee increases that were 
sufficient only to cover current costs and did not provide additional 
money needed to address technology upgrades,

[[Page 52183]]

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 the examination 
fees in the proposed rule are less than fees charged for similar 
activities such as financial audits. SBA calculated the median private 
sector financial audit fee paid by SBICs examined in FY 2016 to be 
$53,000; this rule would result in an average FY 2021 Examination Fee 
for those SBICs of less than half of that amount: approximately only 
$24,000. Third, while SBA's outstanding leverage in its operating 
portfolio has more than quadrupled from $2.2 billion at the end of 
September 30, 1999 to $10.7 billion as of March 31, 2017, the number of 
personnel in SBIC Examinations has declined by almost a third. In order 
to continue to monitor the SBIC program at the same level as in 
previous years, SBA intends to hire contractors with specialized skills 
to support this function.
    SBA also considered a flat examination fee applicable to all SBICs 
regardless of the cost of assets they hold. SBA believes its 
examination activities are similar to financial auditor or bank 
examiner activities, which typically charge fees, based on asset cost, 
and therefore rejected this alternative. SBA also received a comment to 
the proposed rule that expressed concerns about adverse impact on 
smaller funds if the examination fee were not based on assets.
    SBA considered increasing the fees more quickly to cover most of 
its estimated costs, but believed that a gradual increase over a multi-
year period would allow SBICs time to budget and adjust to the higher 
fees. As stated above, SBA is now concerned that the gradual approach 
will not allow SBA to obtain critical resources in a timely manner, and 
is considering proposing a new rule to accelerate and further increase 
the fee increase.
3. Potential Benefits and Costs
    SBA anticipates this final rule may benefit taxpayers by covering a 
larger portion of SBIC program administrative costs through the 
collection of an additional estimated $5 million to $6 million per year 
by October 2020. As noted previously, 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, (4) provide contractor resources to support 
licensing and examination activities, and (5) cover a higher portion of 
existing costs of licensing and examination activities. Collections are 
expected to increase annually each year beginning in October 2021 based 
on the CPI-U Inflation Adjustment.
    SBICs should also benefit from the improved technology SBA expects 
to acquire with the additional funds made available as a result of this 
final rule.
    This final rule will increase licensing costs for applicants and 
examination costs for SBICs. Beginning on the effective date, the final 
rule will increase licensing costs by $10,000 for an applicant applying 
for Initial Review and by $5,000 for an applicant submitting a complete 
license application at Final Licensing. The Final Licensing fee will 
increase by $5,000 each fiscal year, so by October 2020, the fee at 
Final Licensing will increase by an additional $15,000 from the first 
increase after the effective date of this Final Rule. SBA estimates 
that by October 2020, the average non-leveraged examination fee will 
increase by $7,000 and the average examination fee for leveraged SBICs 
will increase by $18,000 based on FY 2014-2016 examinations data. 
Thereafter, SBICs' costs will increase further through the annual 
increases to reflect inflation adjustments.
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 developing this rule, SBA talked with fund of funds managers, 
auditors, and contractors to determine whether the fees in this final 
rule were reasonable and, based in part on those discussions, SBA 
believes the fees in this final rule are reasonable. In reviewing 
organizational costs for SBIC applicants, including legal and other 
professional costs, SBIC applicants often incur organizational costs 
amounting to $500,000 or more. The 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 SBIC examination fees in this final rule. 
SBA believes the final licensing and examination fees are reasonable in 
comparison to the market.
    The table below provides the capital and typical SBIC expenses for 
the average fund size of an SBIC licensed in FY 2016. As shown, SBIC 
licensing and examination fees represent a small percentage of the 
SBIC's total capital and its expenses.

  Table 7--SBA Licensing and Examination Fees in Comparison to Capital and Typical Expenses for SBIC of Average
                                          Fund Size Licensed in FY 2016
----------------------------------------------------------------------------------------------------------------
                                                                                                  Non-leveraged
                                  Description                                    Leveraged SBIC        SBIC
----------------------------------------------------------------------------------------------------------------
Total Capital.................................................................     $157,500,000      $73,750,000
    Private Investor Capital..................................................       52,500,000       73,750,000
    SBA-Guaranteed Leverage...................................................      105,000,000                0
Typical Organizational Costs
    Organizational Costs in FY 2016...........................................          500,000          500,000
    SBA Licensing Fee in FY 2021..............................................           45,000           45,000
Typical Annual SBIC Operating Expenses
    Management Fee (2%).......................................................        3,150,000        1,475,000
    Other Expenses (Excluding SBA Leverage Interest, Leverage Fees, &                   500,000          250,000
     Examination Fees)........................................................
    SBA Examination Fee in FY 2021 (Assumes asset cost equal to total capital.           44,000           26,700
     Non-leveraged SBICs are typically only examined every 18 months.)........
----------------------------------------------------------------------------------------------------------------


[[Page 52184]]

Executive Order 12988
    This rule meets 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 rule will not 
have retroactive or presumptive effect.
Executive Order 13132
    For the purpose of Executive Order 13132, SBA has determined that 
this rule will not have substantial, direct effects on the States, on 
the relationship between the national government and the States, or on 
the distribution of power and responsibilities among the various levels 
of government. Therefore, for the purpose of Executive Order 13132, 
Federalism, SBA has determined that this final rule has no federalism 
implications warranting the preparation of a federalism assessment.
Executive Order 13771
    This rule is not an E.O. 13771 regulatory action because this rule 
is not significant under E.O. 12866.
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 will 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 actions on 
small entities, small non-profit businesses, and small local 
governments. Pursuant to the RFA, when an agency issues a final rule, 
the agency must prepare a Final Regulatory Flexibility Act (FRFA) 
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 a regulatory flexibility analysis, if the rulemaking 
is not expected to have a significant economic impact on a substantial 
number of small entities. This final rule will affect all applicants 
that submit applications (which averaged 50 per year for FYs 2014 to 
2016), and all operating SBICs (316 as of May 22, 2017). SBA estimates 
that approximately 98% of these SBICs are small entities. Therefore, 
this rule will have an impact on a substantial number of small 
entities. However, SBA has determined that the rule will not have a 
significant economic impact on small entities affected by the rule.
    As noted above, the final Sec.  107.300 will increase licensing 
costs by $10,000 for all applicants that submit an application for 
Initial Review after the effective date of the rule, and by an 
additional $20,000 by October 1, 2020, for all applicants that submit a 
license application for Final Review. The combined total increase of 
$30,000 represents less than 0.05% of the average applicant's 
Regulatory Capital based on newly licensed SBICs between October 1, 
2014, and September 30, 2016. Many applicants have organizational costs 
totaling around $500,000, and some have far in excess of that amount. 
The combined FY 2021 initial and final licensing fee of $45,000 would 
represent a small fraction of those costs.
    SBA estimates that Sec.  107.692 in this final rule will eventually 
increase the average non-leveraged examination fee by $7,000, 
representing less than 0.02% of the average non-leveraged SBIC's 
Regulatory Capital, and the average leveraged SBIC examination fee by 
$18,000, representing 0.02% 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, and did not incur any exam fee additions, the exam fee 
in FY 2021 would amount to $44,000, representing less than 0.03% 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 administrative fee increases 
identified in this final rule. SBA asserts that the economic impact of 
the rule is minimal. Accordingly, the Administrator of the SBA 
certifies that this final rule will not have a significant economic 
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 amends 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'' in alphabetical order to read as follows:


Sec.  107.50   Definition 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 (initial 
review and final licensing), as follows:
    (a) Initial review. Except as provided in this paragraph, SBIC 
applicants must submit a MAQ and the Initial Licensing Fee. MAQ means 
the Management Assessment Questionnaire in the form approved by SBA and 
available on SBA's Web site at www.sba.gov/sbic. Initial Licensing Fee 
means a non-refundable fee of $10,000. An applicant under Common 
Control with one or more Licensees must submit a written request to 
SBA, and the Initial Licensing Fee, 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 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 
the Final Licensing Fee. The Final Licensing Fee

[[Page 52185]]

means a non-refundable fee (determined as of the date SBA accepts the 
application) adjusted annually as follows:

------------------------------------------------------------------------
                                                        Final licensing
                     Time period                              fee
------------------------------------------------------------------------
December 13, 2017 to September 30, 2018..............            $20,000
October 1, 2018 to September 30, 2019................             25,000
October 1, 2019 to September 30, 2020................             30,000
October 1, 2020 to September 30, 2021................             35,000
------------------------------------------------------------------------

    (2) Beginning on October 1, 2021, SBA will annually adjust both the 
Initial Licensing Fee and Final Licensing 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).

* * * * *
    (b) Fee. A processing fee equal to the combined Licensing Fee 
(Initial Licensing Fee plus the Final Licensing Fee then in effect) 
defined in Sec.  107.300 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 section, 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
      Time period (Based on the examination start date)          Minimum base     fee for non-       fee for
                                                                     fee        leveraged SBICs  leveraged SBICs
----------------------------------------------------------------------------------------------------------------
December 13, 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 increased based on the following criteria:
    (1) 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) after a written warning by the SBA, you will pay an 
additional charge equal to 15% of your Base Fee;
    (2) 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
    (3) 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) or such later date 
as SBA sets forth in the notice, 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 cure period, unless SBA 
resolves the finding in your favor.
    (d) Fee additions table. The following table summarizes the 
additions noted in paragraph (c) of this section:

------------------------------------------------------------------------
  Examination fee additions        Amount of addition - % of base fee
------------------------------------------------------------------------
Non-responsive...............  15%.
Records/Files at multiple      10%.
 locations.
Unresolved Findings..........  5% of Base Fee for every 30 days or
                                portion thereof beyond the 90 day cure
                                period or such later date as SBA sets
                                forth in the notice for each unresolved
                                finding.
------------------------------------------------------------------------

    (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.


[[Page 52186]]


    Dated: November 6, 2017.
Linda E. McMahon,
Administrator.
[FR Doc. 2017-24535 Filed 11-9-17; 8:45 am]
 BILLING CODE 8025-01-P