[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; brenda.fernandez@sba.gov.

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.


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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);
0
c. Adding a sentence at the end of paragraph (d); and
0
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.

0
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