[Federal Register Volume 83, Number 189 (Friday, September 28, 2018)]
[Rules and Regulations]
[Pages 48908-48915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21112]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 125
RIN 3245-AG85
Ownership and Control of Service-Disabled Veteran-Owned Small
Business Concerns
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is
amending its regulations to implement provisions of the National
Defense Authorization Act for Fiscal Year 2017 (NDAA 2017). The NDAA
2017 placed the responsibility for issuing regulations relating to
ownership and control for the Department of Veterans Affairs
verification of Veteran-Owned (VO) and Service-Disabled Veteran-Owned
(SDVO) Small Business Concerns (SBCs) with the SBA. Pursuant to NDAA
2017, SBA issues one definition of ownership and control for these
concerns, which applies to the Department of Veterans Affairs in its
verification and Vets First Contracting Program procurements, and all
other government acquisitions which require self-certification. The
legislation also provided that in certain circumstances a firm can
qualify as VO or SDVO when there is a surviving spouse or an employee
stock ownership plan (ESOP).
DATES: This rule is effective October 1, 2018.
FOR FURTHER INFORMATION CONTACT: Brenda Fernandez, Office of Policy,
Planning and Liaison, 409 Third Street SW, Washington, DC 20416; (202)
205-7337; [email protected].
SUPPLEMENTARY INFORMATION:
Introduction
The Vets First Contracting Program within the Department of
Veterans Affairs (VA) was created under the Veterans Benefits, Health
Care, and Information Technology Act of 2006 (Pub. L. 109-461), 38
U.S.C. 501, 513. This contracting program was created for Veteran-Owned
Small Businesses and expanded the Service-Disabled Veteran-Owned
contracting program for VA procurements. Approved firms are eligible to
participate in Veteran-Owned Small Business (VOSB) and Service-Disabled
Veteran-Owned Small Business (SDVOSB) set-asides issued by VA. More
information regarding the Vets First Contracting Program can be found
on the Department of Veterans Affairs website at https://www.va.gov/osdbu/faqs/109461.asp.
This rule complies with the directive in the National Defense
Authorization Act of 2017 (Pub. L. 114-328), section 1832, to
standardize definitions for VOSBs and SDVOSBs between VA and SBA. As
required by section 1832, the Secretary of Veterans Affairs will use
SBA's regulations to determine ownership and control of VOSBs and
SDVOSBs. The Secretary would continue to determine whether individuals
are veterans or service-disabled veterans and would be responsible for
verification of applicant firms. Challenges to the status of a VOSB or
SDVOSB based upon issues of ownership or control would be decided by
the administrative judges at the SBA's Office of Hearings and Appeals
(OHA).
The VA proposed its companion rule, VA Veteran-Owned Small Business
(VOSB) Verification Guidelines (RIN 2900-AP97) on January 10, 2018 (83
FR 1203)(Docket Number: VA-2018-VACO-0004). Their proposed rule sought
to remove all references related to ownership and control and to add
and clarify certain terms and references that are currently part of the
verification process. The NDAA also provides that in certain
circumstances a firm can qualify as VOSB or Service-Disabled Veteran
Owned Small Business (SDVOSB) when there is a surviving spouse or an
employee stock ownership plan (ESOP). The final VA rule was issued on
September 24, 2018 and is effective October 1, 2018. 83 FR 48221.
Similarly, SBA has finalized another related rule on March 30,
2018. SBA Final Rule: Rules of Practice for Protests and Appeals
Regarding Eligibility for Inclusion in the U.S. Department of Veterans
Affairs Center for Verification and Evaluation Database (83 FR 13626;
RIN: 3245-AG87; Docket Number: SBA-2017-0007). This rule, also
effective October 1, 2018, amends the rules of practice of SBA's Office
of Hearings and Appeals (OHA) to implement procedures for protests of
eligibility for inclusion in the Department of Veterans Affairs (VA)
Center for Verification and Evaluation (CVE) database, and procedures
for appeals of denials and cancellations of inclusion in the CVE
database. OHA added two subparts to 13 CFR part 134: one for protests;
the other for appeals. These amendments are issued in accordance with
sections 1832 and 1833 of the National Defense Authorization Act for
Fiscal Year 2017 (NDAA 2017).
SBA proposed this rule on January 29, 2018 (83 FR 4005; Docket
Number: SBA-2018-0001). Sixty-eight comments were received, not all of
which were germane to the rulemaking.
SBA received several comments related to this rulemaking as a
whole. Two comments were supportive of the rule because the rule would
align SBA's and VA's regulations, and would help to define elements
previously addressed only outside the regulations through OHA decisions
or case-by-case determinations. Six commenters opposed the proposed
rule for addressing issues beyond just standardizing SBA's and VA's
definitions. As explained in the section-by-section analysis, this rule
codifies standards and practices that SBA has applied consistently
through determinations and OHA decisions. SBA believes it benefits VOSB
and SDVOSBs to have these standards and practices reflected in the
regulations.
One commenter stated that SBA and VA should jointly issue
regulations. SBA has consulted with VA in order to properly understand
VA's positions and implement the statutory requirements in a way that
is consistent with both SBA's and VA's interpretations. SBA and VA will
each issue regulations effective on October 1, 2018, which will have
the effect of creating a single ownership and control rule for both
agencies.
[[Page 48909]]
Section-by-Section Analysis, Comments, and SBA's Responses
Section 125.11
In response to the NDAA 2017 changes, SBA proposed to amend the
definitions in Sec. [thinsp]125.11 by incorporating language from VA's
regulations and also from SBA's 8(a) Business Development (BD) program
regulations. 13 CFR part 124, subpart A. SBA is defining a surviving
spouse and the requirements for a surviving spouse-owned SDVO SBC to
maintain program eligibility. Further, SBA is adding definitions for
Daily Business Operations, Negative Control, Participant, and
Unconditional Ownership. The added definitions are being adopted from
SBA's 8(a) BD regulations found in part 124. SBA received two comments
on the proposed definition of ``Daily business operations.'' One
comment advised that ``setting of the strategic direction of the firm''
is better categorized as long-term operations. SBA agrees and has
deleted the reference to ``setting of the strategic direction of the
firm'' from the definition of ``daily business operations.'' A second
comment objected to the inclusion of executive oversight, company
policy, and strategic direction. SBA's deletion of strategic direction
addresses this comment because, although the definition includes
executive supervision and policy implementation, the definition does
not address oversight or the creation of policy.
SBA received one comment on the ``unconditional ownership''
definition stating that it should be subject to the same conditions as
extraordinary circumstances. SBA does not see a reason to conflate
ownership and control requirements, and therefore is not changing the
``unconditional ownership'' definition.
SBA is adding a definition for Employee Stock Ownership Plan
(ESOP). This definition is adopted from section[thinsp]1832(a)(6). SBA
is also replacing the definitions of permanent caregiver, service-
disabled veteran, and surviving spouse. SBA is adding a new definition
for service-disabled veteran with a permanent and severe disability.
These definitions are being updated in consultation with VA in an
effort to ensure consistency across programs at both Agencies. SBA is
also adding a definition for small business concerns. Concerns will
need to meet all the requirements of part 121, including Sec.
[thinsp]121.105(a)(1), which requires that the firm be organized for
profit, ``with a place of business located in the United States, and
which operates primarily within the United States or which makes a
significant contribution to the U.S. economy through payment of taxes
or use of American products, materials or labor.'' This definition will
address how to generally determine the size of a concern. VO and SDVO
SBCs will still be required to meet size standards corresponding to the
NAICS code assigned to each contract pursuant to Sec. Sec.
[thinsp]125.14 and 125.15. SBA did not receive any comments on these
definitions.
SBA proposed to add a definition for ``extraordinary
circumstances'' under which a service disabled veteran owner would not
have full control over a firm's decision-making process, but would not
render the firm ineligible as a firm owned and controlled by one or
more service disabled veterans. This definition will be used to
identify discrete circumstances that SBA views as rare. The new
definition will be used to allow minority equity holders to have
negative control over these enumerated instances. SBA listed five
limited circumstances in which a service-disabled veteran owner will
not have full control over the decision making process. These five
circumstances are exclusive, and SBA will not recognize any other facts
or circumstances that would allow negative control by individuals that
are not service-disabled. SBA received four comments on the definition
for ``extraordinary circumstances.'' One comment was supportive, and
three comments suggested that SBA either eliminate the list, or add
more protection for non-service-disabled-veteran owners. One commenter
cited two SBA Office and Hearing Appeals size decisions to argue that
the new rule is more restrictive than SBA's affiliation regulations.
Upon reviewing those two cases, Size Appeal of EA Engineering, Science
and Technology, Inc., SBA No. SIZ-4973 (2008), and Size Appeal of
Carntribe-Clement 8AJV #1, LLC, SBA No. SIZ-5357 (2012), SBA does not
agree that they govern the matter of control of an SDVO SBC by a
service-disabled veteran. In Firewatch Contracting of Florida, LLC, SBA
No. VET-137 (2008), OHA specifically stated that EA Engineering does
not interpret the SDVO SBC regulations. The ``extraordinary
circumstances'' definition already includes both of the powers
addressed in Carntribe-Clement, adding a new stakeholder and
dissolution. Other cases involving the SDVO SBC regulations, including
Apex Ventures, LLC, VET-219 (2011), show that SBA's current regulation
requiring that the service-disabled veteran control ``all'' decisions
is stricter than the proposed definition. SBA believes that current
definition strikes a clear balance in favor of ensuring that SDVO SBCs
are actually controlled by the service-disabled veteran. SBA has
decided not to change the definition of ``extraordinary
circumstances.''
Section 125.12
SBA proposed to amend Sec. [thinsp]125.12(b), which pertains to
the requirement for ownership of a partnership. SBA's prior regulation
required service-disabled veterans to own at least 51% of each type of
partnership interest. Therefore, if a partnership had general partners
and limited partners it was required that the service disabled veteran
be both a general and limited partner. SBA is changing the requirement
so that service-disabled veterans will need to own at least 51% of the
aggregate voting interest in the partnership. SBA received one comment
on this change that stated that the proposed rule was inconsistent with
the treatment of corporations. SBA does not find that the treatment of
partnership and corporations must be identical, and therefore SBA is
adopting Sec. 125.12(b) as proposed.
SBA proposed to add coverage to Sec. [thinsp]125.12(d) to address
statutory language with regard to public companies and ownership. This
language does not include any equity held by an ESOP when determining
ownership for a publicly owned business. SBA did not receive any
comments on this change.
SBA proposed to add a new Sec. [thinsp]125.12(g) to provide
clarity with regard to requirements for dividends and distributions. In
general, one's right to receive benefits, compensation, and the
ultimate value of one's equity should be consistent with the purported
amount of equity. For example, it is not consistent with SBA's
regulations for a firm to state that a service-disabled veteran owns 60
percent of the equity but records show that he or she is entitled only
to a smaller amount of the firm's profit, or that the residual value of
that equity is less than 60 percent if the firm is sold. SBA received
two comments on Sec. 125.12(g). One commenter argued that this new
rule would be inconsistent with SBA's regulations for joint ventures
which require profit distribution based on workshare. SBA does not find
that the SDVO SBC regulation needs to be consistent with the joint
venture regulations, which address an entirely different situation. A
joint venture is not itself an SDVO SBC and is therefore treated
differently. SBA does not see a benefit of treating joint ventures and
[[Page 48910]]
SDVO SBCs as if they were the same. One commenter indicated that
requiring that the service-disabled veteran be entitled to the full
value of the veteran's stated equity would prevent the veteran from
being able to secure commercial loans. As noted from the proposed rule,
the proposed language is similar to already existing 8(a) BD
requirements. Through experience with that program, SBA has not
witnessed the adverse effects predicted by this comment. The commenter
presented no evidence to support the prediction, so SBA is adopting the
proposed rule.
Under the new Sec. [thinsp]125.12(h), ownership decisions will be
decided without regard to community property laws. This provision is
similar to SBA's ownership regulations for women owned businesses. See
13 CFR 127.201. SBA did not receive any comments on this change.
The new Sec. [thinsp]125.12(i) allows the transfer of ownership in
a SDVO SBC from a service-disabled veteran to his or her spouse upon
the death of the service-disabled veteran without adversely affecting
the firm's status as a SDVO SBC. SBA received two comments requesting
that SBA extend survivor benefits beyond 100% service-disabled
veterans. This allowance is taken from statute and can be seen in the
definition of Surviving spouse in the proposed changes to Sec. 125.11.
As noted in the definition, the statutory provision can be found at 38
U.S.C. 101(3). SBA does not believe it has the authority to modify the
definition and its application in the manner requested by the
commenters. As such SBA is retaining the proposed language as is.
Section 125.13
SBA proposed to add several new paragraphs to Sec. [thinsp]125.13
to incorporate provisions from SBA's 8(a) BD program and VA's former
ownership and control regulations. SBA will continue to rely on the
8(a) program rules in part 124 for guidance in interpreting these
control requirements.
SBA proposed to add language to describe how to determine if a
service-disabled veteran controls the Board of Directors in Sec.
[thinsp]125.13(e). This language is adopted from SBA's 8(a) BD
regulations and is added to provide more clarity. In Sec. 125.13(f),
SBA added language that will require firms to provide notification of
supermajority voting requirements. This regulation will simplify the
procedures for reviewing eligibility criteria related to super majority
requirements. SBA did not receive any comments on these changes.
SBA proposed that Sec. [thinsp]125.13(g), (h), (i), and (j) would
adopt policies and language from SBA's 8(a) BD program and VA's
regulations. These provisions provide guidance on when SBA may find
that a non-service-disabled veteran controls the firm. These
regulations add more clarity and detail to specific issues such as
quorum requirements and loan arrangements with non-service-disabled
veterans. SBA received several comments on Sec. 125.13(i). One comment
recommended that SBA present the requirement as a rebuttable
presumption. SBA agrees that language about a rebuttable presumption
adds clarity and consistency. As such, SBA has adopted the suggestion.
SBA received three comments on the provision in Sec. 125.13(i)(1)
that a non-service-disabled veteran owner or manager not be a former
employer or principal of a former employer. Specifically, the
commenters mentioned that as written the requirement is not easily
understood. One commenter recommended that SBA add ``current'' employer
to the requirement because being a current employer is even more likely
to lead to issues than being a former employer. SBA agrees and is
adding ``current.'' SBA also agrees that that the regulation could be
clearer, and as such SBA has changed the language based on the
suggestions in the comments. SBA does not believe that these changes
affect the intent of the requirement.
SBA received three comments on the provision in Sec. 125.13(i)(2)
that a non-service-disabled veteran cannot receive higher compensation
than the highest officer. One comment requested that SBA remove the
requirement in its entirety. SBA believes this rule is necessary and
has enough options for high payment of sought-after professionals to
not hinder business progress. VA's regulations had a similar
regulation, and SBA's 8(a) BD program currently includes this
regulation. Two commenters requested changes to the language without
challenging the intent of the regulation. One of these commenters
requested that SBA adopt VA's position that a non-service-disabled
veteran that is the highest-compensated employee should not be an
officer or a manager. The proposed language mirrors language from SBA's
8(a) BD program. SBA believes that this language has a track record of
providing clarity to participants about compensation expectations,
while also allowing the flexibility for firms to make business
decisions that benefit the concern without harming the service-disabled
veteran.
SBA received two comments on Sec. 125.13(i)(3), relating to when
an SDVO SBC is co-located with another firm. One comment suggested a
revision and another suggested deletion. SBA believes the co-location
regulation is necessary to address a common situation where a service-
disabled veteran is not in control of the concern because of reliance
on the co-located firm. Like the other elements in the control
regulation, this co-location element is a rebuttable presumption, so it
is still possible to find control by the service-disabled veteran if
the SDVO SBC presents sufficient evidence to rebut the presumption. SBA
changed the last word in the proposed regulation to clarify that the
regulation will apply when the co-located firm or individual has an
equity interest in the concern seeking SDVO SBC status.
SBA proposed to add rebuttable presumptions to Sec.
[thinsp]125.13(k) and (l). Paragraph (k) adds a rebuttable presumption
that a person not working for a firm regularly during normal working
hours does not control the firm. As a rebuttable presumption, this is
not a full-time devotion requirement and can be rebutted by providing
evidence of control. SBA received four comments on this proposed rule.
All commenters stated that this regulation was a new hindrance placed
on SDVO SBCs and should not be included. The rule, however, reflects a
control element that SBA and VA are already applying to current SDVO
SBCs. This has always been a factor that SBA will consider, but now it
is clearly rebuttable by providing evidence of control. If a service-
disabled veteran is not working during the firm's normal hours or has
outside employment, SBA may presume that another individual is assuming
the management role not being filled by the service-disabled veteran.
This recognizes the reality of day-to-day control. SBA's regulations
have always required that the day-to-day management and administration
of SDVO SBC business operations must be conducted by one or more
service-disabled veterans. The rebuttable presumption in paragraph (k)
provides clarity on how SBA has always viewed the ``day-to-day
management'' requirement and such is not a new requirement. Day-to-day
management typically requires that an individual manage on a daily
basis. In this case, if a firm does not require, and does not have an
individual providing, management on a daily basis, the firm may provide
that evidence to SBA to rebut the presumption.
Similarly, SBA proposed Sec. [thinsp]125.13(l) to add a rebuttable
presumption
[[Page 48911]]
regarding place of work. SBA received four comments on this proposed
rule. All commenters stated that this regulation was a new hindrance
placed on SDVO SBCs and should not be included. As with Sec.
125.13(k), this is not a new policy by SBA. This is how SBA has been
treating this issue already, and how SBA would treat this issue even if
this paragraph was not included. A case from OHA supports SBA's
position. See In the Matter of First Capital Interiors, Inc., VET-2006-
10-25-07 (2006). That decision makes clear that an inquiry into how an
individual manages a firm remotely is reasonable, and that it is the
SDVO SBC's responsibility to demonstrate that a service-disabled
veteran actually controls the firm. With this regulation, SBA is
attempting to address the situation where no service-disabled veteran
owner lives or works near the firm's headquarters or worksites. SBA
will presume that this indicates a lack of control because there is
work at the headquarters and jobsites being managed and directed by
individuals that are not service-disabled veterans. All of the comments
focused on the ability to work remotely in today's current environment,
but this does not address SBA's main concern. As noted in SBA's
proposed regulation, the main issue in these place of work instances is
not remote management, but over-delegation of authority to non-service-
disabled-veteran individuals who work at the office and who are at the
work sites, namely, when there is evidence that individuals located at
the headquarters and onsite are providing day-to-day management that
should be provided by a service-disabled veteran. SBA's regulations
require control over day-to-day operations, but remote observation and
over-delegation do not meet this requirement. As noted in the proposed
rule, this is a rebuttable presumption in which the firm may present
evidence that the service-disabled has not abdicated authority to
others to run the firm. Therefore, SBA is adopting the rule as
proposed.
SBA is adopting Sec. 125.13(m) and (n) as proposed. SBA did not
receive comments on either subsection. The new Sec. [thinsp]125.13(m)
is an exception to the control requirements in ``extraordinary
circumstances.'' As noted above, SBA has defined extraordinary
circumstances to include a limited and exhaustive list of five
circumstances. The rule will allow an exception to the general
requirement that SDVs control long term decision making. The new Sec.
[thinsp]125.13(n) is an exception to the control requirements when an
individual in the reserves is recalled to active duty. SBA and VA do
not think a firm owned by a service-disabled veteran should lose its
status due to the necessary military commitments of its owner when
serving the nation.
SBA had proposed to make technical changes to Sec. Sec. 125.22 and
125.23. These technical changes along with several others have already
been implemented pursuant to other rulemaking. 83 FR 13849. As such,
SBA has removed the proposed changes from this final rule.
Justification for the October 1, 2018 Effective Date
The Administrative Procedure Act (APA) requires that ``publication
or service of a substantive rule shall be made not less than 30 days
before its effective date, except * * * as otherwise provided by the
agency for good cause found and published with the rule.'' 5 U.S.C.
553(d)(3). The purpose of the APA provision delaying the effective date
of a rule for 30 days after publication is to provide interested and
affected members of the public sufficient time to adjust their behavior
before the rule takes effect. For the reasons set forth below, SBA
finds that good cause exists to make this final rule become effective
on October 1, 2018, less than 30 days after it is published in the
Federal Register.
As noted above, SBA and the VA have been working together to
jointly implement the provisions of NDAA 2017. In doing so, SBA and the
VA believe a single date on which all of the changes go into effect is
the most effective path for implementation. SBA and the VA consider
October 1, 2018 to be the best date for implementation of new unified
rules for the programs. October 1, 2018 is the start of the new fiscal
year, and is therefore the best date for separation of contract actions
between different sets of regulations. Having contracts actions
applying different regulations in the same fiscal year can often lead
to confusion among contracting officials, and program participants.
Procurements conducted in fiscal year 2018 will generally follow the
old rules, while all new procurements in fiscal year 2019 will follow
the new jointly developed regulations which SBA believes will lead to
less confusion.
In addition to the joint effort in implementing these provisions of
NDAA 2017, SBA has in a parallel rule making process implemented
Sections 1932 and 1833 of NDAA 2017. These sections dealt with the
transition of certain protest and appeal functions from the VA to SBA's
Office of Hearing and Appeals. The final rule implementing those
sections also has an implementation date of October 1, 2018. 83 FR
13626.
SBA and VA believe that a uniform transition combining the programs
ownership and control requirements is extremely important. As such, SBA
believes that an earlier effective date that aligns with the new fiscal
year for contracting, and with the other changes implementing NDAA 2017
is the best course of action.
Compliance With Executive Orders 12866, 12988, 13132, 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
OMB has determined that this rule does not constitute a
``significant regulatory action'' under Executive Order 12866. This
rule is also not a major rule under the Congressional Review Act, 5
U.S.C. 800. This rule amends the rules concerning ownership and control
of VO and SDVO SBCs. As such, the rule has no effect on the amount or
dollar value of any Federal contract requirements or of any financial
assistance provided through SBA or VA. Therefore, the rule is not
likely to have an annual economic effect of $100 million or more,
result in a major increase in costs or prices, or have a significant
adverse effect on competition or the United States economy. In
addition, this rule does not create a serious inconsistency or
otherwise interfere with an action taken or planned by another agency,
materially alter the budgetary impact of entitlements, grants, user
fees, loan programs or the rights and obligations of such recipients,
nor raise novel legal or policy issues arising out of legal mandates,
the President's priorities, or the principles set forth in the
Executive Order.
This rule is part of a joint effort by the VA and SBA to reduce the
regulatory burden on the veteran business community. This rule
consolidates ownership and control requirements in one regulation thus
eliminating duplicate functions. Prior to the enactment of this
regulation business owners had the burden of complying with both
regulations. This regulation will eliminate that burden. The single
rule helps streamline the verification and certification processes
which will save business owners time and money. This will also lead to
less confusion.
Executive Order 12988
This action meets applicable standards set forth in section 3(a)
and 3(b)(2) of Executive Order 12988, Civil
[[Page 48912]]
Justice Reform, to minimize litigation, eliminate ambiguity, and reduce
burden. The action does not have retroactive or preemptive effect.
Executive Order 13132
This rule does not have Federalism implications as defined in
Executive Order 13132. It will not have substantial direct effects on
the States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government, as specified in the Executive Order. As
such it does not warrant the preparation of a Federalism Assessment.
Executive Order 13771
This rule is not an E.O. 13771 regulatory action because this rule
is not significant under E.O. 12866.
Paperwork Reduction Act
The SBA has determined that this rule does not impose additional
reporting or recordkeeping requirements under the Paperwork Reduction
Act, 44 U.S.C. Chapter 35. However, this rule does include an
information collection for the VA and the OMB approval number for this
collection is 2900-0675.
Regulatory Flexibility Act
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601-612, as
amended, requires Federal agencies to consider the potential impact of
regulations on small entities during rulemaking. Small entities include
small businesses, small not-for-profit organizations, and small
governmental jurisdictions. Section 605 of the RFA allows an agency to
certify a rule, in lieu of preparing an analysis, if the rulemaking is
not expected to have a significant economic impact on a substantial
number of small entities.
This rule merges SBA and VA regulations concerning ownership and
control of VO and SDVO SBCs as directed by Congress. The regulation is
not attempting to create new regulation, but to streamline two already
existing regulations into a single regulatory framework. In SBA's
determination, this rule will not have a significant economic impact on
any small business.
There are approximately 21,000 firms registered as SDVO SBCs in the
System for Award Management (SAM) and approximately 13,000 firms that
have been certified by the VA. To a large extent SBA's and the VA's
ownership and control rules were substantially similar in terms of the
regulatory language, and in many instances identical. Thus, the vast
majority of these firms will not be impacted by this rule. For example,
this rule will not impact firms that are 100% owned and control by a
service-disabled veteran. To the extent there are differences in SBA's
and the VA's ownership and control rules, this rule will reduce cost
and positively impact all SDVO firms, because there will be one set of
criteria to measure service-disabled-veteran ownership and control
throughout the Federal government. Further, SBA's current rules do not
ignore ESOPs when determining ownership, which means firms that are
majority owned by ESOPs are not eligible for SDVO set-asides or sole
source awards. We have no data on the number of firms that this rule
will be impact, but the number is very small. After consulting with
industry representatives, many firms owned by ESOPs are entirely owned
by the ESOP, especially those that operate in industries with employee
based size standards. Those firms will still not qualify if this rule
is finalized because there is still a 51% service-disabled-veteran
ownership requirement of the remaining ownership interest, not
including ESOPs. However, some firms that intend to institute an ESOP
may do so in way that allows the firm to qualify under this rule. With
respect to surviving spouse, SBA's current rules do not recognize
ownership or control by a surviving spouse. Although the VA does allow
firms owned and controlled by surviving spouses to qualify under its
certification program, the number of firms that qualify under the
exception is extremely small. To the extent firms qualify under the
surviving spouse exception the benefit will be positive, not negative.
Firms that were previously not eligible to continue as SDVO firms will
be able to continue for a period of time.
Therefore, the Administrator of SBA determines, under 5 U.S.C.
605(b), that this rule would not have a significant economic impact on
a substantial number of small entities.
List of Subjects in 13 CFR Part 125
Government contracts, Government procurement, Reporting and
recordkeeping requirements, Small businesses, Technical assistance,
Veterans.
Accordingly, for the reasons stated in the preamble, SBA amends 13
CFR part 125 as follows:
PART 125--GOVERNMENT CONTRACTING PROGRAMS
0
1. The authority citation for part 125 is revised to read as follows:
Authority: 15 U.S.C. 632(p), (q), 634(b)(6), 637, 644, 657(f),
657q, and 657s; 38 U.S.C. 501 and 8127.
0
2. Revise Sec. 125.11 to read as follows:
Sec. 125.11 What definitions are important in the Service-Disabled
Veteran-Owned (SDVO) Small Business Concern (SBC) Program?
Contracting officer has the meaning given such term in section
27(f)(5) of the Office of Federal Procurement Policy Act (41 U.S.C.
423(f)(5)).
Daily business operations include, but are not limited to, the
marketing, production, sales, and administrative functions of the firm,
as well as the supervision of the executive team, and the
implementation of policies.
ESOP has the meaning given the term ``employee stock ownership
plan'' in section 4975(e)(7) of the Internal Revenue Code of 1986 (26
U.S.C. 4975(e)(7)).
Extraordinary circumstances, for purposes of this part, are only
the following:
(1) Adding a new equity stakeholder;
(2) Dissolution of the company;
(3) Sale of the company;
(4) The merger of the company; and
(5) Company declaring bankruptcy.
Negative control has the same meaning as that set forth in Sec.
121.103(a)(3) of this chapter.
Participant means a veteran-owned small business concern that has
verified status in the Vendor Information Pages database, available at
https://www.vip.vetbiz.gov/.
Permanent caregiver, for purposes of this part, is the spouse, or
an individual, 18 years of age or older, who is legally designated, in
writing, to undertake responsibility for managing the well-being of the
service-disabled veteran with a permanent and severe disability, as
determined by Department of Veterans Affairs' Veterans Benefits
Administration, to include housing, health and safety. A permanent
caregiver may, but does not need to, reside in the same household as
the service-disabled veteran with a permanent and severe disability. In
the case of a service-disabled veteran with a permanent and severe
disability lacking legal capacity, the permanent caregiver shall be a
parent, guardian, or person having legal custody. There may be no more
than one permanent caregiver per service-disabled veteran with a
permanent and severe disability.
(1) A permanent caregiver may be appointed, in a number of ways,
including:
(i) By a court of competent jurisdiction;
(ii) By the Department of Veterans Affairs, National Caregiver
Support
[[Page 48913]]
Program, as the Primary Family Caregiver of a Veteran participating in
the Program of Comprehensive Assistance for Family Caregivers (this
designation is subject to the Veteran and the caregiver meeting other
specific criteria as established by law and the Secretary and may be
revoked if the eligibility criteria do not continue to be met); or
(iii) By a legal designation.
(2) Any appointment of a permanent caregiver must in all cases be
accompanied by a written determination from the Department of Veterans
Affairs that the veteran has a permanent and total service-connected
disability as set forth in 38 CFR 3.340 for purposes of receiving
disability compensation or a disability pension. The appointment must
also delineate why the permanent caregiver is given the appointment,
must include the consent of the veteran to the appointment and how the
appointment would contribute to managing the veteran's well-being.
Service-connected has the meaning given that term in 38 U.S.C.
101(16).
Service-disabled veteran is a veteran who possesses either a valid
disability rating letter issued by the Department of Veterans Affairs,
establishing a service-connected rating between 0 and 100 percent, or a
valid disability determination from the Department of Defense or is
registered in the Beneficiary Identification and Records Locator
Subsystem maintained by Department of Veterans Affairs' Veterans
Benefits Administration as a service-disabled veteran. Reservists or
members of the National Guard disabled from a disease or injury
incurred or aggravated in line of duty or while in training status also
qualify.
Service-disabled veteran with a permanent and severe disability
means a veteran with a service-connected disability that has been
determined by the Department of Veterans Affairs, in writing, to have a
permanent and total service-connected disability as set forth in 38 CFR
3.340 for purposes of receiving disability compensation or a disability
pension.
Small business concern means a concern that, with its affiliates,
meets the size standard corresponding to the NAICS code for its primary
industry, pursuant to part 121 of this chapter.
Small business concern owned and controlled by service-disabled
veterans (also known as a Service-Disabled Veteran-Owned SBC) means any
of the following:
(1) A small business concern--
(i) Not less than 51 percent of which is owned by one or more
service-disabled veterans or, in the case of any publicly owned
business, not less than 51 percent of the stock (not including any
stock owned by an ESOP) of which is owned by one or more service-
disabled veterans; and
(ii) The management and daily business operations of which are
controlled by one or more service-disabled veterans or, in the case of
a veteran with permanent and severe disability, the spouse or permanent
caregiver of such veteran;
(2) A small business concern--
(i) Not less than 51 percent of which is owned by one or more
service-disabled veterans with a disability that is rated by the
Secretary of Veterans Affairs as a permanent and total disability who
are unable to manage the daily business operations of such concern; or
(ii) In the case of a publicly owned business, not less than 51
percent of the stock (not including any stock owned by an ESOP) of
which is owned by one or more such veterans.
Surviving spouse has the meaning given the term in 38 U.S.C.
101(3).
Unconditional ownership means ownership that is not subject to
conditions precedent, conditions subsequent, executory agreements,
voting trusts, restrictions on or assignments of voting rights, or
other arrangements causing or potentially causing ownership benefits to
go to another (other than after death of incapacity). The pledge or
encumbrance of stock or other ownership interest as collateral,
including seller-financed transactions, does not affect the
unconditional nature of ownership if the terms follow normal commercial
practices and the owner retains control absent violations of the terms.
Veteran has the meaning given the term in 38 U.S.C. 101(2). A
Reservist or member of the National Guard called to Federal active duty
or disabled from a disease or injury incurred or aggravated in line of
duty or while in training status also qualify as a veteran.
Veteran owned small business concern means a small business
concern:
(1) Not less than 51 percent of which is owned by one or more
veterans or, in the case of any publicly owned business, not less than
51 percent of the stock of which is owned by one or more veterans; and
(2) The management and daily business operations of which are
controlled by one or more veterans. All of the provisions of subpart B
of this part apply for purposes of determining ownership and control.
0
3. Amend Sec. 125.12 by:
0
a. Revising the introductory text;
0
b. Revising the first sentence in paragraph (b);
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c. Adding a sentence at the end of paragraph (d); and
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d. Adding paragraphs (g) through (i).
The revisions and additions read as follows:
Sec. 125.12 Who does SBA consider to own an SDVO SBC?
Generally, a concern must be at least 51% unconditionally and
directly owned by one or more service-disabled veterans. More
specifically:
* * * * *
(b) * * * In the case of a concern which is a partnership, at least
51% of aggregate voting interest must be unconditionally owned by one
or more service-disabled veterans. * * *
* * * * *
(d) * * * In the case of a publicly owned business, not less than
51 percent of the stock (not including any stock owned by an ESOP) must
be unconditionally owned by one or more veterans.
* * * * *
(g) Dividends and distributions. One or more service-disabled
veterans must be entitled to receive:
(1) At least 51 percent of the annual distribution of profits paid
to the owners of a corporation, partnership, or limited liability
company concern;
(2) 100 percent of the value of each share of stock owned by them
in the event that the stock or member interest is sold; and
(3) At least 51 percent of the retained earnings of the concern and
100 percent of the unencumbered value of each share of stock or member
interest owned in the event of dissolution of the corporation,
partnership, or limited liability company.
(4) An eligible individual's ability to share in the profits of the
concern must be commensurate with the extent of his/her ownership
interest in that concern.
(h) Community property. Ownership will be determined without regard
to community property laws.
(i) Surviving spouse. (1) A small business concern owned and
controlled by one or more service-disabled veterans immediately prior
to the death of a service-disabled veteran who was the owner of the
concern, the death of whom causes the concern to be less than 51
percent owned by one or more service-disabled veterans, will continue
to qualify as a small business concern owned and controlled by service-
disabled veterans during the time period if:
(i) The surviving spouse of the deceased veteran acquires such
[[Page 48914]]
veteran's ownership interest in such concern;
(ii) Such veteran had a service-connected disability (as defined in
38 U.S.C. 101(16)) rated as 100 percent disabling under the laws
administered by the Secretary of Veterans Affairs or such veteran died
as a result of a service-connected disability; and
(iii) For a participant, immediately prior to the death of such
veteran, and during the period described in paragraph (i)(2) of this
section, the small business concern is included in the database
described in 38 U.S.C. 8127(f).
(2) The time period described in paragraph (i)(1)(iii) of this
section is the time period beginning on the date of the veteran's death
and ending on the earlier of--
(i) The date on which the surviving spouse remarries;
(ii) The date on which the surviving spouse relinquishes an
ownership interest in the small business concern; or
(iii) The date that is 10 years after the date of the death of the
veteran.
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4. Amend Sec. 125.13 by revising paragraph (e) and adding paragraphs
(f) through (n) to read as follows:
Sec. 125.13 Who does SBA consider to control an SDVO SBC?
* * * * *
(e) Control over a corporation. One or more service-disabled
veterans (or in the case of a veteran with permanent and severe
disability, the spouse or permanent caregiver of such veteran) must
control the Board of Directors of the concern.
(1) SBA will deem service-disabled veteran individuals to control
the Board of Directors where:
(i) A single service-disabled veteran individual owns 100% of all
voting stock of an applicant or concern;
(ii) A single service-disabled veteran individual owns at least 51%
of all voting stock of an applicant or concern, the individual is on
the Board of Directors and no super majority voting requirements exist
for shareholders to approve corporation actions. Where super majority
voting requirements are provided for in the concern's articles of
incorporation, its by-laws, or by state law, the service-disabled
veteran individual must own at least the percent of the voting stock
needed to overcome any such super majority voting requirements; or
(iii) More than one service-disabled veteran shareholder seeks to
qualify the concern (i.e., no one individual owns 51%), each such
individual is on the Board of Directors, together they own at least 51%
of all voting stock of the concern, no super majority voting
requirements exist, and the service-disabled veteran shareholders can
demonstrate that they have made enforceable arrangements to permit one
of them to vote the stock of all as a block without a shareholder
meeting. Where the concern has super majority voting requirements, the
service-disabled veteran shareholders must own at least that percentage
of voting stock needed to overcome any such super majority ownership
requirements. In the case of super majority ownership requirements, the
service-disabled veteran shareholders can demonstrate that they have
made enforceable arrangements to permit one of them to vote the stock
of all as a block without a shareholder meeting.
(2) Where an applicant or concern does not meet the requirements
set forth in paragraph (e)(1) of this section, the service-disabled
veteran individual(s) upon whom eligibility is based must control the
Board of Directors through actual numbers of voting directors or, where
permitted by state law, through weighted voting (e.g., in a concern
having a two-person Board of Directors where one individual on the
Board is service-disabled veteran and one is not, the service-disabled
veteran vote must be weighted--worth more than one vote--in order for
the concern to be eligible). Where a concern seeks to comply with this
paragraph (e)(2):
(i) Provisions for the establishment of a quorum cannot permit non-
service-disabled veteran Directors to control the Board of Directors,
directly or indirectly; and
(ii) Any Executive Committee of Directors must be controlled by
service-disabled veteran directors unless the Executive Committee can
only make recommendations to and cannot independently exercise the
authority of the Board of Directors.
(3) Non-voting, advisory, or honorary Directors may be appointed
without affecting service-disabled veteran individuals' control of the
Board of Directors.
(4) Arrangements regarding the structure and voting rights of the
Board of Directors must comply with applicable state law.
(f) Super majority requirements. One or more service-disabled
veterans must meet all super majority voting requirements. An applicant
must inform the Department of Veterans Affairs, when applicable, of any
super majority voting requirements provided for in its articles of
incorporation, its by-laws, by state law, or otherwise. Similarly,
after being verified, a participant must inform the Department of
Veterans Affairs of changes regarding super majority voting
requirements.
(g) Licenses. A firm must obtain and keep current any and all
required permits, licenses, and charters, required to operate the
business.
(h) Unexercised rights. A service-disabled veteran owner's
unexercised right to cause a change in the control or management of the
applicant concern does not in itself constitute control and management,
regardless of how quickly or easily the right could be exercised.
(i) Control by non-service-disabled veterans. Non-service-disabled
veteran individuals or entities may not control the firm. There is a
rebuttable presumption that non-service-disabled veteran individuals or
entities control or have the power to control a firm in any of the
following circumstances, which are illustrative only and not inclusive:
(1) The non-service-disabled veteran individual or entity who is
involved in the management or ownership of the firm is a current or
former employer or a principal of a current or former employer of any
service-disabled veteran individual upon whom the firm's eligibility is
based. However, a firm may provide evidence to demonstrate that the
relationship does not give the non-service-disabled veteran actual
control over the concern and such relationship is in the best interests
of the concern.
(2) One or more non-service-disabled veterans receive compensation
from the firm in any form as directors, officers or employees,
including dividends, that exceeds the compensation to be received by
the highest-ranking officer (usually CEO or President). The highest
ranking officer may elect to take a lower amount than the total
compensation and distribution of profits that are received by a non-
veteran only upon demonstrating that it helps the concern.
(3) In circumstances where the concern is co-located with another
firm in the same or similar line of business, and that firm or an
owner, director, officer, or manager, or a direct relative of an owner,
director, officer, or manager of that firm owns an equity interest in
the concern.
(4) In circumstances where the concern shares employees, resources,
equipment, or any type of services, whether by oral or written
agreement with another firm in the same or similar line of business,
and that firm or an owner, director, officer, or manager, or a direct
relative of an owner, director, officer, or manager of that firm owns
an equity interest in the concern.
(5) A non-service-disabled veteran individual or entity, having an
equity
[[Page 48915]]
interest in the concern, provides critical financial or bonding
support.
(6) In circumstances where a critical license is held by a non-
service-disabled individual, or other entity, the non-service-disabled
individual or entity may be found to control the firm. A critical
license is considered any license that would normally be required of
firms operating in the same field or industry, regardless of whether a
specific license is required on a specific contract.
(7) Business relationships exist with non-service-disabled veteran
individuals or entities which cause such dependence that the applicant
or concern cannot exercise independent business judgment without great
economic risk.
(j) Critical financing. A non-service-disabled veteran individual
or entity may be found to control the concern through loan arrangements
with the concern or the service-disabled veteran(s). Providing a loan
or a loan guaranty on commercially reasonable terms does not, by
itself, give a non-service-disabled veteran individual or entity the
power to control a firm, but when taken into consideration with other
factors may be used to find that a non-service-disabled firm or
individual controls the concern.
(k) Normal business hours. There is a rebuttable presumption that a
service-disabled veteran does not control the firm when the service-
disabled veteran is not able to work for the firm during the normal
working hours that businesses in that industry normally work. This may
include, but is not limited to, other full-time or part-time
employment, being a full-time or part-time student, or any other
activity or obligation that prevents the service-disabled veteran from
actively working for the firm during normal business operating hours.
(l) Close proximity. There is rebuttable presumption that a
service-disabled veteran does not control the firm if that individual
is not located within a reasonable commute to firm's headquarters and/
or job-sites locations, regardless of the firm's industry. The service-
disabled veteran's ability to answer emails, communicate by telephone,
or to communicate at a distance by other technological means, while
delegating the responsibility of managing the concern to others is not
by itself a reasonable rebuttal.
(m) Exception for ``extraordinary circumstances.'' SBA will not
find that a lack of control exists where a service-disabled veteran
does not have the unilateral power and authority to make decisions in
``extraordinary circumstances.'' The only circumstances in which this
exception applies are those articulated in the definition.
(n) Exception for active duty. Notwithstanding the provisions of
this section requiring a service-disabled veteran to control the daily
business operations and long-term strategic planning of a concern,
where a service-disabled veteran individual upon whom eligibility is
based is a reserve component member in the United States military who
has been called to active duty, the concern may elect to designate in
writing one or more individuals to control the concern on behalf of the
service-disabled veteran during the period of active duty. The concern
will not be considered ineligible based on the absence of the service-
disabled veteran during the period of active duty. The concern must
keep records evidencing the active duty and the written designation of
control, and provide those documents to VA, and if requested to SBA.
Dated: September 21, 2018.
Linda E. McMahon,
Administrator.
[FR Doc. 2018-21112 Filed 9-27-18; 8:45 am]
BILLING CODE 8025-01-P