This action, pursuant to 5 U.S.C. 553, proposes an amendment to regulations issued to carry out a marketing order as defined in 7 CFR 900.2(j). This proposed rule is issued under Marketing Order No. 905, as amended (7 CFR part 905), regulating the handling of oranges, grapefruit, tangerines, and pummelos grown in Florida. Part 905, (referred to as the “Order”) is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.” The Committee locally administers the Order and is comprised of growers and handlers of fresh citrus operating within the production area, and a non-industry member.

The Agricultural Marketing Service (AMS) is issuing this proposed rule in conformance with Executive Orders 12866 and 13563. Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. This action falls within a category of regulatory actions that the Office of Management and Budget (OMB) exempted from Executive Order 12866 review.

This proposed rule has been reviewed under Executive Order 13175—Consultation and Coordination with Indian Tribal Governments, which requires agencies to consider whether their rulemaking actions would have tribal implications. AMS has determined that this proposed rule is unlikely to have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. This proposed rule is not intended to have retroactive effect.

The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with Department of Agriculture (USDA) a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and request a modification of the order or to be exempted therefrom. Such handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed no later than 20 days after the date of the entry of the ruling.

This proposed rule would exempt pummelos from all requirements under the Order, including registration, assessment, and reporting requirements. The Committee unanimously recommended this action at its November 30, 2021, meeting.

This proposed action would create the exemption under a new § 905.130. Section 905.7 provides the authority to require handlers to be registered with the Committee pursuant to rules recommended by the Committee and approved by the Secretary of Agriculture (Secretary). Section 905.41 authorizes the Committee to collect assessments, such that each handler shall pay the Committee a pro rata share of the expenses.

Sections 905.70 and 905.71 provide the authority for the Committee to collect reports from handlers including, information regarding the variety, grade, and size of each standard packed carton of fruit shipped, and any other information deemed necessary to administer the Order, with the approval of the Secretary. Section 905.80 of the Order allows the Committee to specify additional types of shipments or purposes that would not be subject to regulation or payment of assessments, with the approval of the Secretary.

The regulations associated with these authorities include § 905.107 which outlines the registered handler requirements, § 905.171, which requires handlers to report the list of growers for whom they handled, and § 905.235, which requires handlers pay assessments of $0.015 per 4/5-bushel carton to the Committee.

The Florida citrus industry voted to incorporate pummelos into the Order when it was amended in 2016, as pummelos were being used to develop new citrus hybrids. However, there are not yet any pummelo hybrid varieties produced in commercial volume. The current market for pummelos is small, estimated at 100,000 boxes, or 200,000 cartons. In comparison, the entire Florida citrus industry shipped over 6 million cartons during the 2020-21 season.

The Order regulates shipments of fresh citrus leaving the State of Florida for grade and size. Intrastate shipments are covered by parallel State regulations. The Florida Department of Agriculture and Consumer Services inspects fresh citrus at packinghouses and provides shipment data to the Committee. The Committee then uses this data to bill for assessments and to issue industry reports. There are currently no quality requirements in effect for pummelos or pummelo hybrids under the Order, nor are there any State requirements. As a result, there is no inspection and therefore no established method of data collection for pummelos.

Since the Order was amended, Committee staff have been in contact with pummelo growers and handlers, working on a way to collect required information and assessments. Under the current Order requirements and industry practices, there is no uniform way to meet the requirements without creating a specific reporting requirement for pummelos. In addition, pummelo growers and shippers have communicated to the Committee that they would like to be excluded from Order requirements.

During the November 30, 2021, Committee meeting, members discussed the issues related to pummelo shipments, including whether to develop a new system for collecting information and assessments on pummelo fruit. The Committee reports that there are only six pummelo producers and three shippers, most of whom are small grower-shippers not handling any other citrus covered under the Order.

Committee members indicated that with the volume for pummelo and pummelo hybrids remaining stagnant, there is currently no desire to establish grade and size requirements on pummelo at the State or Federal level. Therefore, there would be no data from inspection. Consequently, if pummelo and pummelo hybrids remain subject to Order requirements for reporting and assessments, it would be necessary for the Committee to establish separate reporting procedures and documentation for pummelo movement.

The Committee expressed uncertainty that creating requirements specifically for pummelo would add value to the industry. Even if the shipment data were collected, because of confidentiality concerns, the Committee may not be able to report out the results due to the small number of handlers. Further, at the estimated volume shipped, additional assessments would total $3,000. This amount may not be sufficient to cover the cost of developing the necessary reports and ensuring compliance.

The Committee has previously recommended, and AMS approved, exemptions for gift packages, minimum shipments, and animal feed. These are shipping channels or volumes that would not affect overall demand for fresh fruit. Similarly, the Committee believes demand would not be harmed if pummelo shipments continued without being subject to the requirements of the Order.

This proposed change would exempt pummelos from all requirements under the marketing order, including registration, assessment, and reporting requirements. This exemption would be codified in a new § 905.130. If a handler ships pummelo as well as other regulated citrus, the handler will still have to meet all requirements related to the other citrus covered by the Order. Further, the Committee could consider removing this exemption if conditions change over time. Thus, the Committee unanimously recommended exempting pummelo fruit from all Order requirements. After consideration of all relevant material presented, including the information and recommendations submitted by the Committee and other available information, AMS has determined that this proposed rule is consistent with and will effectuate the purposes of the Act.

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), AMS has considered the economic impact of this action on small entities. Accordingly, AMS has prepared this initial regulatory flexibility analysis.

The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and the rules issued thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf.

There are approximately 500 producers of Florida citrus in the production area and about 15 handlers subject to regulation under the Order. The Committee reports there are six pummelo producers and three shippers. Small agricultural producers of orange groves are defined by the Small Business Administration (SBA) (13 CFR 121.201) as those having annual receipts of $3,500,000 or less, and small agricultural service firms are defined as those whose annual receipts are $30,000,000 or less (13 CFR 121.201).

According to data from the National Agricultural Statistics Service (NASS) and the Committee, the weighted average packing house door equivalent price for fresh Florida citrus for the 2020-21 season was approximately $6.52 per carton with total shipments of 6,022,426 cartons. Using the number of handlers, the majority of handlers have average annual receipts of less than $30,000,000 ($6.52 times 6,022,426 cartons equals $39,266,217.52 divided by 15 handlers equals $2,617,747.83 per handler).

In addition, based on the NASS data, the weighted average grower price for the 2020-21 season was estimated at $4.95 per carton of fresh citrus. Based on grower price, shipment data, and the total number of Florida citrus growers, the average annual grower revenue is below $3,500,000 ($4.95 times 6,022,426 million cartons equal $29,811,008.70 divided by 500 growers equals $59,622.02 per grower). Thus, the majority of Florida citrus handlers and growers may be classified as small entities.

This proposed rule would exempt pummelos from all requirements under the marketing order, including assessment and reporting requirements. Without this exemption, it would be necessary for the Committee to establish separate reporting procedures for pummelos. This proposed rule would create § 905.130 to establish the pummelo exemption. Authority for this change is provided in §§ 905.7, 905.41, 905.70, 905.71, and 905.80.

This action is not expected to increase the costs associated with the Order's requirements. Rather, it is anticipated this action would have a beneficial impact by exempting pummelo handlers, primarily small entities, from regulation, assessment, and reporting requirements.

Exemption from assessments would create a minimal loss of revenue. Using the current assessment rate and pummelo shipments estimated by Committee members (200,000 cartons), there would be about $3,000 lost per year. Developing an alternative reporting process and maintaining compliance would likely cost the Committee more than that amount in staff time. Pummelo growers and handlers should benefit from this change regardless of their size.

The Committee discussed an alternative to this action. It considered whether there was a need to establish grade and size requirements for pummelo and track the shipments as they do for other citrus fruits. Committee members indicated the pummelo market is not experiencing quality concerns, and there is no industry interest in creating such requirements. Therefore, the Committee rejected this alternative.

Committee meetings were widely publicized throughout the citrus industry. All interested persons were invited to attend Committee meetings and participate in Committee deliberations on all issues. Like all Committee meetings, the November 30, 2021, meeting was a public meeting and all entities, both large and small, were able to express views on this issue. Interested persons are invited to submit comments on this proposed rule, including the regulatory and informational collection impacts of this action on small businesses.

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the Order's information collection requirements have been previously approved by the OMB and assigned OMB No. 0581-0189, Fruit Crops. No changes in those requirements would be necessary as a result of this proposed rule. Should any changes become necessary, they would be submitted to OMB for approval.

This proposed rule would not impose any additional reporting or recordkeeping requirements on either small or large citrus handlers. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies. AMS has not identified any relevant Federal rules that duplicate, overlap, or conflict with this proposed rule.

AMS is committed to complying with the E-Government Act, to promote the use of the internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at: https://www.ams.usda.gov/rules-regulations/moa/small-businesses. Any questions about the compliance guide should be sent to Richard Lower at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

A 30-day comment period is provided to allow interested persons to respond to this proposed rule. All written comments timely received will be considered before a final determination is made on this matter.

For the reasons set forth in the preamble, the Agricultural Marketing Service proposes to amend 7 CFR part 905 as follows:

This action, pursuant to 5 U.S.C. 553, proposes an amendment to regulations issued to carry out a marketing order as defined in 7 CFR 900.2(j). This proposed rule is issued under Marketing Order No. 922, as amended (7 CFR part 922), regulating the handling of apricots grown in designated counties in Washington. Part 922 (referred to as the “Order”) is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.” The Committee locally administers the Order and is comprised of producers and handlers operating within the production area.

AMS is issuing this proposed rule in conformance with Executive Orders 12866 and 13563. Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. This action falls within a category of regulatory actions that the Office of Management and Budget (OMB) exempted from Executive Order 12866 review.

In addition, this proposed rule has been reviewed under Executive Order 13175—Consultation and Coordination with Indian Tribal Governments, which requires agencies to consider whether their rulemaking actions would have tribal implications. AMS has determined this proposed rule is unlikely to have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. This proposed rule is not intended to have retroactive effect.

The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to a marketing order may file with the Department of Agriculture (USDA) a petition stating that the marketing order, any provision of the marketing order, or any obligation imposed in connection with the marketing order is not in accordance with law and request a modification of the marketing order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after the date of the entry of the ruling.

This proposed rule would terminate the Order regulating the handling of apricots grown in designated counties in Washington. Following its meeting on May 11, 2021, the Washington Apricot Marketing Committee (Committee) unanimously recommended this action after determining the Order is no longer necessary to maintain orderly marketing conditions. AMS suspended, indefinitely, reporting and assessment collection requirements under the Order while it considered the Committee's recommendation and information submitted (87 FR 21741). After reviewing the Committee's recommendation, years without marketing program activity, the decline in apricot production, and the decision to indefinitely suspend reporting and assessment collection requirements, AMS determined that the Order no longer tends to effectuate the declared policy of the Act. This proposed rule invites comments on proposed termination of the Order and, if implemented, would remove the Order from the Code of Federal Regulations.

Section 922.64(b) of the Order provides that United States Secretary of Agriculture (Secretary) may terminate or suspend any or all provisions of the Order when a finding is made that the Order does not tend to effectuate the declared policy of the Act. In addition, section 608c(16)(A) of the Act provides that the Secretary terminate or suspend the operation of any order whenever the order or any provision thereof obstructs or does not tend to effectuate the declared policy of the Act.

The Order has been in effect since 1957 and has provided the apricot industry in Washington with authority for grade, size, quality, maturity, pack, and container regulations, as well as authority for mandatory product inspection.

The Committee, which locally administers the Order, meets regularly to consider recommendations for modification, suspension, or termination of the Order's regulatory requirements. Committee meetings are open to the public and interested persons may express their views at these meetings. AMS reviews Committee recommendations, including information provided by the Committee and from other available sources, and determines whether modification, suspension, or termination would tend to effectuate the declared policy of the Act.

In 2006, the Committee unanimously recommended AMS suspend container regulations after determining they were no longer necessary to ensure orderly marketing and that suspension would provide greater flexibility to handlers for packing and shipping apricots. Following the Committee's recommendation, AMS suspended container regulations for apricots for one year in 2006 (71 FR 16979), and subsequently extended that suspension indefinitely in 2007 (72 FR 16263).

In 2013, the Committee unanimously recommended AMS suspend handling regulations after determining the cost of complying with the Order's handling and inspection requirements outweighed its benefits to both producers and handlers of apricots. Based on the Committee's recommendation, AMS issued an interim rule suspending the handling regulations for apricots on October 23, 2013 (78 FR 62963). A final rule affirming the indefinite suspension published in the Federal Register on March 20, 2014 (79 FR 15539).

Following these regulatory suspensions, the Committee continued to levy assessments to maintain its functionality. The Committee believed that it should continue to fund its full operational capability, collect industry statistics on an ongoing basis, and maintain the program in the event market conditions warranted regulation.

On May 11, 2021, the Committee met and discussed current market dynamics, budget and assessments, and deliberated the continuance of the Order. During the meeting, the Committee discussed that the volume of apricots produced in Washington has declined over the years, and in 2020, the industry experienced a significant drop in crop produced from the prior year's production. In addition, management and administrative costs to maintain the Order have also increased. Staff management hours includes a greater quantity of hours worked than in previous years.

The Committee discussed the alternative, that to maintain the Order would require an assessment rate increase of approximately over 300 percent, from $2.86 to $13.30 per ton. However, the Committee determined that the decrease in the 2020 crop suggests an overall decline in apricot production, and an assessment rate increase of over 300 percent would not benefit apricot producers and handlers. The Committee discussed that the industry has functioned without container and handling regulations for a combined period of more than 14 years. It was the belief of the Committee that the suspension of container and handling requirements had not adversely affected the marketing of Washington apricots and, therefore, terminating the Order would not negatively impact the industry. The Committee concluded that the Order is no longer necessary to maintain orderly marketing conditions and that the cost to maintain the Order outweighs its benefit to industry. Following this meeting, the Committee voted unanimously to terminate the Order.

On July 7, 2021, the Committee formally recommended AMS terminate the Order. In preparing to terminate the Order, the Committee recommended AMS suspend the collection of assessments and reporting requirements. The Committee also recommended a budget of expenditures of $5,508 for the period beginning April 1, 2021, and ending with the termination of the Order. Following the Committee's recommendation, AMS suspended, indefinitely, the remaining reporting and assessment collection requirements under the Order while it considered the recommendation and information submitted by the Committee to terminate the Order. A proposed rule to suspend reporting and assessment collection requirements published in the Federal Register on November 23, 2021 (86 FR 66462). AMS received one comment that did not address the merits of the rule. Accordingly, no changes were made to the rule as proposed and the final rule published on April 13, 2022 (87 FR 21741). The suspension of regulations, reporting requirements, and assessment collections continued while AMS evaluated the Committee's recommendation for terminating the Order. After reviewing the Committee's recommendation, years without marketing program activity, the decline in apricot production, and the decision to indefinitely suspend reporting and assessment collection requirements, AMS determined that the Order no longer tends to effectuate the declared policy of the Act.

This proposed rule is intended to solicit input and any additional information available from interested parties regarding whether the Order should be terminated. AMS will evaluate all available information prior to making a final determination on this matter. If implemented, this proposed rule would terminate the Order and the rules and regulations issued thereunder.

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), AMS has considered the economic impact of this proposed rule on small entities. Accordingly, AMS has prepared this initial regulatory flexibility analysis.

The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions so that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act are unique in that they are brought about through group action of essentially small entities acting on their own behalf.

There are approximately 315 growers of Washington apricots and approximately 8 apricot handlers in the production area subject to regulation under the Order. Small agricultural service firms (postharvest crop activities (except cotton ginning), NAICS code 115114) are defined by the Small Business Administration (SBA) as those having annual receipts of $30,000,000 or less, and small agricultural producers (other non-citrus fruit farming, NAICS code 111339) are defined as those having annual receipts of $3,000,000 or less (13 CFR 121.201).

Based on USDA National Agricultural Statistics Service (NASS) data, and given the number of Washington apricot growers, average grower revenue is well below $3,000,000. NASS's 2020 value of utilized Washington apricot crop production was $3.866 million. Dividing the $3.866 million crop value by 315 growers equals average annual receipts per grower of $12,273. Thus, most Washington apricot growers would be considered small businesses under the SBA definition.

In addition, according to data from AMS's Market News, the estimated Washington apricot 2020 season average Free on Board (f.o.b.) shipper (handler) price per carton was approximately $31.59 (for Washington apricots, 2-layer tray pack carton, all sizes, June-July 2020, midpoint of the “mostly low” and “mostly high” prices). With a standard Market News weight of 18 pounds per tray pack carton of apricots, the f.o.b. price was approximately $1.755 per pound, ($31.59 divided by 18 pounds), or $3,510 per ton. The Committee reported that the industry shipped 1,628 tons for the 2020 season. Total 2020 estimated handler receipts are $5.714 million (1,628 tons times $3,510 per ton). Average annual receipts per handler are approximately $714,000 ($5.714 million divided by 8 handlers). Thus, most Washington apricot handlers would be considered small businesses under the SBA definition.

This rule proposes to terminate the Order, and the rules and regulations issued thereunder. Termination would remove the Order from the Code of Federal Regulations.

On July 7, 2021, the Committee made the recommendation to terminate the Order. The alternative, to maintain the Order, would require the Committee to increase the assessment rate by approximately 300%, from $2.86 to $13.30 per ton. However, the 2020-2021 crop production was the smallest crop on record, and evidence suggests that this decline is a continuation of an industry trend.

In addition, the prior suspension of the container and handling regulations, effectuated by a separate rulemaking published on April 5, 2006 (71 FR 16979), has not adversely affected the marketing of Washington apricots in any of the subsequent years. AMS confirmed data from the past 7 years shows that apricots can be marketed from the production area in the absence of the Order's requirements without a negative economic impact on the industry.

After considering the alternative, the Committee concluded that regulating the handling of apricots under the Order is no longer necessary to ensure orderly marketing of Washington apricots, that the costs associated with the administration of the Order outweigh the benefits, and that termination of the Order would not have a negative impact on industry. Therefore, following its meeting on May 11, 2021, the Committee unanimously voted to terminate the Order. The suspension of regulations, reporting requirements, and assessments collections continued for an indefinite period while USDA evaluated the Committee's recommendation to proceed with the termination of the Order.

This proposed rule is intended to solicit input and other available information from interested parties on whether the Order should be terminated. AMS will evaluate all available information prior to making a final determination on this matter.

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the Order's information collection requirements have been previously approved by OMB and assigned OMB No. 0581-0189 Fruit Crops. AMS will extract the remaining apricot marketing order-related forms from the forms package during the next three-year renewal process, should the Order be terminated.

This rule would effectuate the removal of reporting and recordkeeping requirements on apricot handlers, both small and large. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies. In addition, AMS has not identified any relevant Federal rules that duplicate, overlap or conflict with this proposed rule.

AMS is committed to complying with the E-Government Act, to promote the use of the internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

The Committee's meetings were widely publicized throughout the Washington apricot industry, and all interested persons were invited to attend the meetings and participate in Committee deliberations on all issues. Meetings were held virtually or in a hybrid style with participants having a choice on whether to attend in person or virtually.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at: https://www.ams.usda.gov/rules-regulations/moa/small-businesses. Any questions about the compliance guide should be sent to Richard Lower at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

This rule invites comments on the proposed termination of Marketing Order No. 922, which regulates the handling of apricots grown in designated counties in Washington. A 60-day comment period is provided to allow interested persons to respond to this proposal. All written comments timely received will be considered before a final determination is made on this matter.

Based on the foregoing, and pursuant to § 608c(16)(A) of the Act and § 922.64 of the Order, AMS is considering termination of the Order. If AMS decides to terminate the Order, trustees would be appointed to conclude and liquidate the Committee affairs and would continue in that capacity until discharged by AMS. In addition, AMS would notify Congress 60 days in advance of termination pursuant to § 608c(16)(A) of the Act.

The mission of the Small Business Investment Company (SBIC) program is to enhance small business access to capital by stimulating and supplementing “the flow of private equity capital and long-term loan funds which small-business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply.” SBA carries out this mission by licensing and monitoring privately owned and managed investment funds that raise capital from private investors (“Private Capital”) and issue SBA-guaranteed Debentures (“Debentures”) to make private long-term equity and debt investments = into qualifying small businesses.

SBA currently has two types of Debentures available for private funds that have received an SBIC license: a current pay (or “Standard”) Debenture and a “Discount” Debenture. The vast majority of licensed SBICs applying for SBA leverage use the Standard Debenture with a ten-year maturity and interest due and payable on a semi-annual basis. This structure aligns with the cash flows of a subset of private fund strategies, including funds with mezzanine, private credit, and leveraged buyout strategies. The Standard Debenture aligns with these strategies because private funds utilizing such mezzanine, private credit, or leveraged buyout strategies typically generate fund-level cash liquidity within the time period required to meet semi-annual interest payments. The Discount Debenture is issued at a steep discount to face value and accrues to face value over five years, at which time the SBICs must pay current interest; this Debenture is only available for low and moderate income (LMI) investments and Energy Saving Qualified Investments (as defined in 13 CFR 107.50). Although SBICs have invested almost 20% of their investments in LMI areas, as of December 31, 2021, less than 0.5% of Debentures committed and issued since Fiscal Year (“FY”) 2000 used the Discount Debenture to make such investments. ( Note: The Federal Government FY is the period of October 1 through September 30, where the FY is designated by the calendar year in which the FY ends.) No SBIC has used the Discount Debenture for Energy Saving Qualified Investments. Market feedback suggests that the reason SBICs do not utilize the Discount Debenture is due to the steep discount at issue and the misalignment of the required interest payments commencing at year five to the typical cash flow patterns of patient capital investors, such as long-duration private equity funds. Between FYs 1994 through 2004, SBA was authorized to issue Participating Securities, which were an SBIC Program instrument designed to support equity investors. The program ceased due to losses in that program.

Based on SBA's analysis of SBICs licensed for the legacy Participating Securities instrument, SBA found widespread evidence that participating security SBIC losses were largely due to the instruments' statutorily mandated structural flaws and regulations which enabled high risk portfolio construction decisions. These issues were further exacerbated by macro-economic conditions, concentration in early-stage venture (which, at the time, was an emerging alternative investment strategy), and pervasive information asymmetry in the venture market in the early 2000s. One of the major flaws in the participating security was that SBA advanced interest payments (known as “prioritized payments”) on behalf of the Licensee and was only repaid out of the Licensee's capped profits. Once the Licensee achieved the capped time-based return, SBA could no longer meaningfully “participate” in the profit distributions of the Licensee. As a result of the cap and the time dependency, less than half of the $2.8 billion in prioritized payments advanced by SBA were reimbursed by SBICs licensed in the participating securities program. Further, statutory complexities created further unnecessary complexities in the distribution waterfall. Due to the complexities associated with the statutory distribution waterfall, computing a single distribution required a significant amount of time and effort on the part of the Licensee and SBA. For example, Licensees were required to file hard copies of the computation documents with the SBA for regulatory monitoring and examination purposes. These complications increased the workload on SBA to calculate each distribution, increased fund administration expenses for the Licensee, and created loopholes whereby Licensees could sequence profits distributions such that SBA would receive only its capped share of profits (typically less than 10%). In several cases, private investors received substantial returns based on early profit distributions and the SBIC would subsequently incur losses, resulting in SBA being the only party not fully repaid. Further, Licensees in the Participating Securities program typically did not have diverse portfolios and SBA did not consider portfolio diversification at the fund-of-fund level as a means to mitigate risk, an important consideration in modern portfolio theory. As a result, about half of the participating securities financings prior to 2001 were in computers, information technology, and related professional technical services. Additionally, almost half of the participating securities financings prior to 2001 were in companies under 2 years of age at first financing. As a result, when the “Dot Com” bubble financial downturn arrived in 2000, the SBIC portfolio was not appropriately diversified for sustained portfolio financial performance.

Between October 1, 2016, and September 30, 2021, SBICs provided over $29 billion in financings to small businesses. However, only 18% of Debenture SBIC financings were in the form of patient capital equity investments, and less than a quarter of SBICs licensed were focused on equity. Over 75% of all financings of small businesses by Debenture SBICs included a debt component. During this same timeframe, SBA licensed 116 SBICs with almost $7.8 billion in initial Private Capital, and two-thirds of licenses were approved for subsequent funds from asset management firms that had previously received an SBIC license. As of December 31, 2021, SBA had 298 operating SBICs across 207 asset management firms with almost $35 billion in Regulatory Capital and Debentures, including undrawn commitments.

SBA is proposing changes to 13 CFR part 107 to reduce barriers to program participation for new SBIC fund managers and funds investing in (i) underserved communities and geographies, (ii) capital intensive investments, and (iii) technologies critical to national security and economic development. This proposed rule will help SBA implement Executive Order (“E.O.”) 13985, Advancing Racial Equity and Support for Underserved Communities Through the Federal Government by reducing financial and administrative barriers to participation in the SBIC program and modernizing the program's license offerings to align with a more diversified set of new funds investing in underserved small businesses. SBA notes that newly managed funds are consistently among top performers based on net total value to paid-in capital as of June 30, 2019, data from Cambridge Associates, LLC.

One of the key proposed changes is the implementation of a new type of Debenture (“Accrual Debenture”) designed to align with the cash flows of long-term, equity-oriented funds (“Accrual SBICs”). As evidenced by a December 2020 Fairview Capital study, among private market funds, the largest opportunity set to invest in a manner that advances racial and gender equity exists among new equity-oriented funds. This is even more pronounced in the universe of private venture equity strategies. Equity-oriented funds currently account for 18% of SBA leverage and credit/debt-oriented strategies account of ~82% of capital from Debenture SBICs. In order to promote E.O. 13985, Advancing Racial Equity and Support for Underserved Communities Through the Federal Government, it is essential that SBA offer SBICs an opportunity to issue Debentures capable of aligning with the financial structure of equity strategies.

To further promote E.O. 13985, SBA is proposing to revise the existing prohibited investment requirements under § 107.720 that permit SBICs to invest in relenders or reinvestors under specific circumstances. As evidenced by consistent and broad industry feedback, SBA expects this revision should improve the SBIC program's investment diversification and likely mitigate default risk across the SBIC program while creating more program entry points for new fund managers. According to a 2017 Preqin study (Preqin-Special-Report-Private-Equity-Funds-of-Funds-November-2017), institutional fund-of-funds and similar pooled primary fund investment structures are almost twice as likely to invest in first-time funds as other institutional investors. Furthermore, fund-of-funds and similar pooled investment vehicles, which diversify investment across underlying funds, can limit investment performance volatility and protect against downside risk through benefits of enhanced diversification. It should also be noted that fund-of-funds and similar pooled vehicles frequently require additional fees to compensate for the construction, implementation, and management of the portfolio of primary fund investments. Investors in such vehicles, as with any investment, must contemplate the net-of-fee risk/return potential of the investment rather than its gross-of-fee risk/return potential. The proposed revisions under § 107.720 will provide greater clarity to the market, and additional capital to underserved markets, while fostering a more inclusive and equitable asset management industry, capable of supporting access to capital for a broader base of small businesses across all corners of the U.S. while enhancing the diversification of SBA's invested capital and reducing risk of default or losses to SBA.

SBA is also proposing to modernize the licensing, operations, and examinations rules to lower cost and administrative barriers faced by new funds applying to the SBIC program. These proposed changes include reducing licensing fees for first- and second-time funds, adding an exception to the conflict-of-interest rules for follow-on financings in small businesses, reducing regulatory examinations fees for non-Debenture and smaller funds, and permitting Leveraged funds to access a qualified line of credit without SBA approval, subject to certain conditions. SBA is also proposing measures to strengthen SBIC program investment and operational risk controls to safeguard the program's ability to operate at zero subsidy across market cycles. These modernization activities include implementing a formal licensee “enhanced monitoring” process and a consistent approach to investor and SBA distributions to help (a) ensure that Debentures are repaid and (b) reduce the time to repayment. This proposed rule also includes several technical corrections and clarifications to increase SBIC program accessibility for new funds.

On December 19, 2018, the Spurring Business in Communities Act, Public Law 115-333, was enacted. This legislation gives priority in licensing to SBIC applicants located in under licensed States with below median financing. In September 2019, SBA issued a notice that gives priority in licensing to such applicants. This proposed rule implements Public Law 115-333 and provides an opportunity for the public to comment.

On August 15, 2017 (82 FR 38617), SBA published a request for information seeking input from the public on SBA regulations that should be repealed, replaced or modified because they are obsolete, unnecessary or burdensome. On October 13, 2017 (82 FR 47645), SBA extended the comment period. SBA received one set of comments regarding the SBIC program. During 2018, SBA held three roundtables with SBIC program stakeholders (May 22, July 17, and August 7) to solicit additional feedback regarding SBIC program regulations. Based on the feedback from these round tables and subsequent discussions with industry since that time, SBA is also proposing changes to reduce burden for SBICs.

SBA proposes to add two terms associated with the new Accrual Debenture discussed in paragraph I.B. of this rule: “Accrual Debenture” and “Accrual SBIC.” The Accrual Debenture would mean a Debenture issued at face value that would accrue interest over its ten-year term where SBA guarantees all principal and unpaid accrued interest. As discussed in the preamble, SBA believes that the Standard Debenture does not align with the cash flows needed for patient capital strategies solely investing in the equity of small businesses. Although SBA considered a zero coupon (an instrument issued at a steep discount from face value that then matures over its term to full value), SBA believes issuing the leverage at full face value (subtracting only the 2% draw fee) is far more attractive to potential applicants. The Accrual Debenture would only be available to Accrual SBICs to align with the types of equity investing they perform. Standard SBICs may only issue Standard Debentures and Discount Debentures. The proposed definition also provides that if a Licensee that issued an Accrual Debenture is unable to pay the principal and accrued interest at its ten-year maturity, that Licensee may apply for a roll-over Accrual Debenture which would have a five-year term. Approval would be subject to SBA credit procedures and statutory limitations. SBA proposes this to provide a longer horizon for private funds seeking to make longer term investments that might require more patient capital.

The proposed rule defines an Accrual SBIC as a Section 301(c) Licensee that will (a) invest at least 75% of its total financings (based on dollar amount) in Equity Capital Investments (as defined in § 107.50); (b) will generally own no more than 50% of the small business concern at initial Financing; and (c) elect at the time of licensing to issue Accrual Debentures. SBA expects that Accrual SBICs will most commonly be formed as limited partnerships that are subject to 13 CFR 107.160. Given SBA's additional risk associated with the Accrual Debentures, SBA proposes to limit the Accrual Debenture to SBICs that focus on Equity Capital Investments. SBA believes that a 75% equity investment threshold for Accrual SBIC's financings reasonably describes an equity focus.

SBA is reserving the Accrual Debenture only for those Licensees that generally will own no more than 50% of a small business concern at initial Financing. SBA believes that its Standard Debenture fully supports Licensees performing private credit, mezzanine, and buyout transactions. While Licensees performing buyout transactions may perform a high percentage of equity, based on program licensing and cash flow data, SBA believes its Standard Debenture already supports these investment strategies.

SBA recognizes that some multi-strategy funds that include venture and growth equity investments might want more flexibility than will be afforded by the terms of the Accrual Debenture. One such limitation is the percentage of equity investment required. Some multi-strategy funds may want to do a more balanced blend between equity and debt. Another limitation is a fund's investment strategy which contemplates the performance of buyout transactions in which the fund would take 50% or more ownership of a small business concern at initial financing. Still another limitation is the amount of SBA leverage available to Accrual SBICs. In order to determine the maximum amount of leverage that Accrual SBICs may have outstanding, SBA will aggregate the total principal leverage plus ten years of accrued interest on such principal to determine the total Accrual Debentures that the Accrual SBIC may issue. For example, if an Accrual SBIC has $100 million in Regulatory Capital, the total Accrual Debenture principal they may be approved for may be only $118 million if the forecast interest would accrue to approximately $57 million over a ten-year timeframe at a 4% interest rate, since higher amounts would result in total SBA guaranteeing outstanding leverage amounts in excess of $175 million. It is not SBA's intent to discourage such funds from applying if they can make a case for their business plan as a standard SBIC. SBIC Applicants will be required to identify whether they intend to use Standard or Discount Debentures or if they intend to use the Accrual Debenture as an Accrual SBIC. SBA will evaluate and approve a license as either a standard SBIC or as an Accrual SBIC.

SBA proposes to revise the definition of “Associate” regarding the status of an entity Institutional Investor based on its ownership interest in a Partnership. Currently an entity Institutional Investor whose ownership represents over 33 percent of the Licensee's private capital is considered an “Associate”. SBA proposes to change this to 50 percent or more to align with the financing practices of Community Development Corporations and other institutional investors seeking patient capital investment funds and first-time funds. Under this proposal, an entity Institutional Investor, as a limited partner in a partnership Licensee, will not be considered an Associate solely because that entity's investment in the Partnership, including commitments, represents 10 percent or more but less than 50 percent of the Licensee's Private Capital, provided that such investment also represents no more than five percent of the entity's net worth.

The proposed rule defines the term “Annual Charge” that is currently defined as “Charge” in the current 13 CFR 107.50. SBA proposes this change because this is typically the term used to refer to the annual fee associated with SBA-guaranteed Leverage in both its website and much of its documentation and more appropriately refers to the recurring payment associated with this Leverage fee. SBA would maintain the term “Charge” in its regulations for backwards compatibility, but indicate it has the same meaning as “Annual Charge”. Currently, the term “Charge” is defined as the annual fee on Leverage issued to or after October 1, 1996. Since there is no outstanding Leverage issued prior to October 1, 1996, this language would be removed from the definition. The current definition also states that the Leverage is subject to the terms and conditions set forth in § 107.1130(d). This proposed rule adds a reference to § 107.585. Although current § 107.585 identifies restrictions regarding reductions in Regulatory Capital (which are typically performed in conjunction with a distribution to its private investors), this proposed rule expands § 107.585 to define new distribution requirements for SBICs issuing leverage. (See § 107.585 later in this proposed rule.)

SBA proposes amending the definition of “Control Person” under section 107.50 to clarify what constitutes a controlling relationship over a Limited Partnership Licensee with a government sponsored non-profit management company relationship. Section 107.50 would be amended to state that when over 30% of the private capital managed by the licensee comes from unaffiliated and unassociated entities (outside of their association as an investor in the Licensee), the management company of the Licensee is a government sponsored non-profit entity and the general partners of the licensee are bound by a fiduciary duty to the investors in the licensee, the management of the licensee can be determined to be free from outside control.

The term “Equity Capital Investments” refers to equity and equity-like investments, defined in § 107.50 to include common or preferred stocks, limited partnership interests, certain subordinated debt, and warrants. SBA recognizes that venture capital and private equity transactions continue to evolve and is seeking public input for any suggested changes to “Equity Capital Investments” that SBA should consider.

The proposed rule includes under § 107.50 the terms “Final Licensing Fee” and “Initial Licensing Fee,” as these terms have been defined in § 107.300 and used in § 107.410.

SBA also proposes to define the term “GAAP” as “Generally Accepted Accounting Principles” as established by the Financial Accounting Standards Board (FASB), which refer to financial accounting and reporting standards for public and private companies and not for profit organizations in the United States. The U.S. Securities and Exchange Commission has recognized the financial accounting and reporting standards of the FASB as “generally accepted” under section 108 of the Sarbanes-Oxley Act. SBA is proposing to define this term as the proposed rule will refer to GAAP in various locations in the proposed regulations.

SBA proposes to amend the term “Leverage” to remove the inclusion of “Participating Securities” and “Preferred Securities” which are no longer available in the SBIC program and no longer outstanding in operating SBICs. While SBICs with outstanding Participating Securities Leverage remain in the Office of SBIC Liquidation, those Licensees are subject to the regulations at the time that Leverage was issued. SBA also proposes to clarify that Leverage and SBA's guarantee would apply to both the principal and unpaid accrued interest associated with the Accrual Debenture. This definition would clarify SBA's guarantee in relation to the new security and the Leverage maximum restrictions regarding Accrual Leverage. For example, SBA will not approve Accrual Debentures for an amount in which the principal balance and ten years of accrued interest exceed $175 million. This definition also clarifies the total capital that SBA is guaranteeing at any time. For example, if an Accrual SBIC had $20 million principal in Accrual Debentures that accrued $4 million in interest, SBA's guarantee would be $24 million, as SBA's guarantee extends to the accrued interest. SBA would also consider this in its overall commitment authorization level. SBA is required under statute to guarantee both principal and interest on outstanding leverage. This proposed rule requires SBA to estimate the interest rate associated with any Accrual Debenture commitment in a conservative manner to ensure that the total capital that SBA guarantees does not exceed its overall authority set forth in the Small Business Investment Act of 1958, as amended (the “Act”), or other applicable federal laws. For example, if SBA has a $5 billion Debenture authorization and has approved $4 billion in Standard Debentures for regular SBICs, SBA would need to estimate the interest rate for the Accrual Debentures over the 10-year accrual period in a manner that safeguards the SBA from exceeding its authorization ceiling.

SBA is proposing the terms “Leveraged Licensee” and “Non-leveraged Licensee” in § 107.50. Current regulations provide greater flexibility to Licensees that do not have outstanding leverage and do not intend to issue leverage since SBA has no credit risk. This proposed rule would provide further benefits and flexibility to such Licensees. In order to simplify the regulations, Leveraged Licensees would include any Licensee with outstanding Leverage, Leverage commitments, Earmarked Assets (which are only associated with Licensees that issued Participating Securities), and any Licensee that intends to issue Leverage in the future. The intent of the certification is to ensure that SBA applies the appropriate scrutiny to any Licensee that intends to seek SBA Leverage in the future. This regulation is not intended to prohibit subsequent SBIC funds from seeking Leverage. This proposed rule also defines Non-leveraged Licensee as a Licensee that has no outstanding Leverage or Leverage commitment, certifies (in writing) that such Licensee will not seek Leverage throughout the life of the fund, and has no Earmarked Assets. For example, if ABC, LP has outstanding Leverage of $10 million and subsequently (a) fully repays its outstanding Leverage, (b) has no further Leverage commitments, (c) has no Earmarked Assets, and (d) certifies that it will not seek any Leverage in the future, ABC, LP would be considered a Non-leveraged Licensee, even if the management company of ABC, LP also has a Leveraged Licensee (ABC II, LP) with outstanding Leverage of $20 million. As another example, if DEF, LP is granted an SBIC License and certifies to SBA (in writing) that it does not intend to issue Leverage, SBA would consider DEF, LP to be a Non-leveraged Licensee.

SBA proposes to define the term “Qualified Line of Credit”, which would be as defined in the proposed § 107.550(c). (See Section 107.550 under this Part II.)

SBA proposes to modify the term “Retained Earnings Available for Distribution” to include the acronym “READ” and to clarify that READ distributions must be performed in accordance with proposed § 107.585. As discussed in that section, SBA will propose clarifications to distributions for existing Licensees and new distribution rules for Licensees licensed on or after October 1, 2023. (See § 107.585 under this Part II.)

SBA proposes to add the terms “SBIC” or “Small Business Investment Company” to have the same meaning as Licensee. SBA uses the terms “SBIC” and “Licensee” interchangeably throughout the regulations and in its policies and documents.

SBA proposes to add the term “SBIC website” as www.sba.gov/sbics which is the public website that SBA maintains all information on the SBIC program, including all standard operating procedures, policies, SBIC forms, and any reports that SBA publishes from time to time. Regulations refer to this site throughout the regulations.

This proposed rule adds the terms “State” and “Underlicensed State” in § 107.50 to support implementation of Public Law 115-333 which gives priority in Licensing to applicants headquartered in underlicensed states with below median SBIC financing. The term “State” would include all of the fifty States, the Commonwealth of Puerto Rico, the District of Columbia, and all U.S. territories with permanent populations (Guam, U.S. Virgin Islands, Northern Mariana Islands, and American Samoa). The term “Underlicensed State” means a State in which the number of operating licensees per capita is fewer than the median number for all States. To determine the per capita per State, SBA would use the most recent resident population from the U.S. Census as of the date of the calculation. SBA would publish the list of Underlicensed States periodically on the SBIC website.

SBA is proposing to add the term “Total Leverage Commitment” to have the meaning as defined in proposed § 107.300. As discussed under that section, SBA proposes to approve the Total Leverage Commitment at the time of licensing.

SBA proposes to add the term “Enhanced Monitoring” as defined in the proposed § 107.1850. As discussed under that section, SBA is implementing an Enhanced Monitoring process to better monitor its SBICs.

SBA proposes to change the term “Wind-up” Plan to “Wind-down” plan throughout part 107 because SBA believes that it better reflects the wind-down of a fund at the end of its life cycle.

This regulation identifies the SBIC ownership diversification requirement under section 302(c) of the Act (also referenced in Part 107 as the “diversification requirement”). That section requires SBIC ownership be “sufficiently diversified from and unaffiliated with the ownership of the licensee in a manner that ensures independence and objectivity in the financial management and oversight of the investments and operations of the licensee.” To ensure independence per statute, current § 107.150 paragraph (b) requires that “no Person or group of Persons who are Affiliates of one another may own or control, directly or indirectly, more than 70 percent of your Regulatory Capital or your Leverageable Capital.” SBA proposes to remove the “indirectly” requirement to provide greater clarification as to sources of Regulatory Capital available to an SBIC.

As an exception to the diversification ownership requirement under § 107.150(b)(1), SBA allows an investor that is a Traditional Investment Company (a term defined in 13 CFR 107.150(b)(2)) to own and control more than 70 percent of the Licensee's Regulatory Capital. Such SBICs are essentially drop-down funds for that Traditional Investment Company and are structured exclusively to pool capital from more than one source for the purpose of investing and generate profits. SBA proposes also to include non-profit entities to also own more than 70 percent of the Licensee's Regulatory Capital to facilitate capital raising efforts, particularly for first-time funds and funds targeting investments in underserved geographies and critical technologies.

By meeting the requirements of § 107.150(c)(2), such non-profit entities would be exempt from requirements under § 107.150(c)(1) which state that the management of the Licensee must be unaffiliated from the sources of Regulatory Capital. It should be noted that SBA will continue to review and monitor such entities to ensure that the SBIC is a for-profit vehicle for the non-profit, the management of the Licensee is bound by a fiduciary duty to investors, and to ensure such entities do not pose undue investment or operational risk to SBA.

This section identifies minimum private capital requirements for SBICs. SBA proposes to amend the term “Wind-up” to “Wind-down” as previously discussed in paragraph II.A discussing § 107.50. SBA also proposes to remove all references to “Participating Securities” since SBA no longer issues such leverage and any SBICs in SBA's portfolio that issued such leverage are either in Wind-down or are monitored by the Office of SBIC Liquidations.

Paragraph (a)(1) requires SBICs (with the exception of Early Stage SBICs) to have Regulatory Capital of at least $5 million, but provides an exception for SBA, in its sole discretion and based on a showing special circumstances and good cause, to license an applicant with only $3 million if the applicant: (i) meets its licensing standards with the exception of minimum capital; (ii) has a viable business plan reasonably projecting profitable operations; and (iii) has a reasonable timetable for achieving Regulatory Capital of at least $5 million. Public Law 115-333 specifically allows an applicant licensed under this exception and located in an Underlicensed State to receive up to 1 tier of Leverage until the Licensee meets the $5 million minimum Regulatory Capital requirement. SBA proposes to specify that one example of “good cause” would be the applicant is headquartered in an Underlicensed State. If licensed, Leveraged Licensees from Underlicensed States would be eligible for up to 1 tier of Leverage until they raise the $5 million minimum Regulatory Capital requirement.

This regulation identifies the process and rules regarding applying for a License and the associated Licensing Fees. SBA proposes to amend the introductory paragraph to give priority to applicants headquartered in Underlicensed States with below median SBIC financing dollars, in accordance with Public Law 115-333. Applicants may have branch offices in other locations, but the headquarters for the applicant must be in an Underlicensed State with below median SBIC financing dollars to receive priority. The proposed regulation provides that SBA will publish the list of states in a notice on the SBIC website, which was previously discussed under II.A. of this rule. SBA also proposes that once priority is established, such applicants will continue to receive priority throughout the licensing process. For example, if Iowa is identified as an Underlicensed State with below median financing and an applicant headquartered in Iowa applies to receive an SBIC license, SBA would give them priority in licensing. If SBA then published a new list of states qualifying for licensing priority after the applicant was given priority, the applicant would continue to have priority in both phases of the licensing process (initial review and final licensing) even if Iowa is no longer identified as an Underlicensed State with below median SBIC financing dollars.

SBA proposes to amend paragraph (b) to identify that SBA will approve the total leverage commitments for the life of the Licensee at licensing. SBA believes that similar to private investors, SBA should approve the entire leverage commitment at licensing, based on the evaluation criteria set forth in § 107.305 and the maximum leverage commitment limits set forth in § 107.1150. This change is intended to (1) reduce the burden associated with separate commitment requests performed after the fund has been licensed and (2) reduce the uncertainty with regard to SBA's leverage commitment and consequently reduce the private capital raise timeframe for a prospective Licensee. SBA recognizes that Licensees often raise capital after licensing. However, SBA notes that it is important for Licensees to raise their capital prior to submitting their Licensing application for Final Review, as this practice will help SBA better evaluate applicants, monitor for potential risks, and process applications faster. SBA will continue to maintain its right to deny any new issuance of Leverage at draw and other rights and remedies as discussed in part 107, subpart J in the event of regulatory violations, including capital impairment. SBA is also seeking to better diversify its leverage portfolio for maximum impact across underserved sectors as proposed under § 107.320.

SBA proposes to modify its Licensing fees to lower financial barriers for new funds. Effective October 1, 2022, the Initial Licensing Fee is $11,500 and the Final Licensing Fee is $40,200 for a combined Licensing Fee of $51,700. Each year, SBA adjusts these fees based on the Consumer Price Index. Although larger more established funds can easily afford these fees, smaller funds and new fund managers view the fees as prohibitive to SBIC program participation given their smaller size. Additionally, SBA charges the same fee for applicants seeking to issue Debentures as those who do not intend to issue Debentures. SBA is proposing to revise the Initial Licensing Fees based on its fund sequence (meaning the order of succession of the fund) as follows:

SBA will determine the applicant's Fund Sequence based on the applicant's management team composition and experience as a team, including the business plan (also known as the strategy) of the fund provided in Phase I of the application process. For example, if the management team of applicant DEF I consists primarily of the same team members of funds ABC I and ABC II, SBA will consider the fund sequence of DEF I as a Fund III, regardless of the number in the applicant's name.

SBA proposes to change the Final Licensing Fee as the Final Licensing Base Fee plus 1.25 basis points multiplied by the Leverage dollar amount requested by the applicant, where the Final Licensing Base Fee would be as follows:

For example, a fourth time fund seeking $175 million in Leverage would pay a Final Licensing Base Fee of $51,875, computed as $30,000 plus 1.25 basis points (or .0125%) times $175 million.

SBA believes that its Non-leveraged Licensees present less credit risk to SBA, while accomplishing the SBIC mission of providing equity and long-term loans to small business concerns. SBA's proposed changes would effectively lower the combined Licensing Fee for all Non-leveraged applicants and lower the fees for applicants with less SBA capital at risk and new funds. Fund managers seeking a 4th or later fund and seeking leverage would pay a higher fee and the fee would scale with the dollar amount of SBA's capital commitment. SBA notes that SBA's licensing costs are substantially higher than even the highest proposed combined Licensing Fee. SBA believes this modernized licensing fee model, which is designed to make fees commensurate with years of participation in the SBIC program and the dollar amount of SBA's capital at risk, will reduce cost barriers for small funds and new funds applying to the SBIC program.

SBA is also proposing an application resubmission penalty fee of $10,000 for any applicant that has previously withdrawn or otherwise is not approved for a license that must be paid in addition to the Initial and Final Licensing Fees. SBA's proposed licensing fees remain below SBA's expenses required to process such applications. The intent of the resubmission fee is to impose a penalty for each time an applicant resubmits its application to offset the requirement of additional SBA time and resources. Applicants can request SBA approval to waive the resubmission penalty fee that SBA may consider on a case-by-case basis.

Current § 107.305 discusses how SBA evaluates an applicant to the program. Paragraph (a) describes management qualifications. SBA is proposing to amend paragraph (a) to include two additional management qualifications. The first is relevant industry operational experience, which may be combined with investment skill to demonstrate managerial capacity. The second, if applicable, is the applicant's experience in managing a regulated business, including but not limited to an SBIC. Paragraph (b) describes how SBA evaluates an applicant's track record. SBA is amending paragraph (b) to include two additional performance qualifications. The first is the inclusion of an applicant's operating experience, which when combined with an investment team's prior relevant industry investing experience, is relevant in assessing an applicant's investment performance. The second addition, when applicable, is the applicant's past adherence to statutory and regulatory SBIC program requirements. This addition will be considered for applicants with past SBIC program experience.

Paragraph (c) describes how SBA evaluates the applicant's investment strategy. SBA is amending paragraph (c) to clarify that the applicant's investment strategy is to be contained in its business plan, as well as to underscore the importance of section 102 “Statement of Policy” of the Act which describes the public purpose of the SBIC program.

Current § 107.320 discusses how SBA evaluates Early Stage SBICs and reserves the right for SBA to maintain diversification among Early Stage SBICs with respect to the year they commence operations and their geographic location. In light of the fact that SBA used its entire Leverage authorization in FY 2021, SBA proposes to modify this regulation to reserve SBA's right to maintain Leverage Portfolio Diversification in approving Leverage commitments with respect to the year in which they commenced, the SBIC's geographic location, giving first priority to Licensees from Underlicensed States with below median SBIC financing dollars, their asset class and investment strategy. SBA's intent is to maximize the SBIC program's economic impact to underserved small business concerns while managing risk through portfolio diversification. SBA notes that SBA will continue to license all qualified applicants based on its evaluation criteria and will not take into consideration any projected shortage or unavailability of leverage when reviewing and processing SBIC license applications.

This regulation requires Licensees to prepare and maintain a valuation policy that must be approved by SBA for use in determining the value of its investments. Current regulations require that Licensees adopt without change the model valuation policy set forth in SBA's Valuation Guidelines for SBICs or obtain SBA's prior approval of an alternative valuation policy. SBA established this requirement to ensure it could adequately monitor the SBIC portfolio, that valuations were performed in a reasonable and standard fashion, and to minimize Leverage losses in order to maintain zero subsidy cost. SBA recognizes that private equity typically uses valuations performed in accordance with GAAP and that many SBIC private investors require GAAP. This causes many SBICs to maintain two sets of valuations. SBA is currently working to re-evaluate this requirement for Leveraged Licensees. SBA is requiring both valuations based on SBA Valuation guidelines and those reported to their private investors in accordance with GAAP to assess the potential impact. SBA is also working with its valuation contractor to evaluate what changes to SBA's Valuation Guidelines would be necessary to make them GAAP compliant and the impact to SBA's monitoring and risk should SBA adopt GAAP compliant guidelines. SBA is seeking input from the public on this issue as part of this proposed rule. However, SBA recognizes that Non-leveraged Licensees pose no credit risk to SBA. SBA is therefore proposing that Non-leveraged Licensees (which include both those licensed as Non-leveraged Licensees and Licensees that fully repay Leverage and seek no further Leverage) may adopt a Valuation Policy in accordance with GAAP. SBA believes this will lower the burden associated with current regulations.

Current paragraph (d) requires licensees with outstanding Leverage or Earmarked assets to value their portfolio twice a year (at the end of the second quarter and the end of the fiscal year). SBA is proposing to clarify that this requirement applies to all Leveraged Licensees and increase reporting from semi-annually to quarterly, commensurate with the required quarterly reporting of the Form 468.

This regulation identifies the equipment and office requirements needed by SBICs to operate within the program. The current regulation requires a personal computer with a modem and internet access under paragraph (a) and the need for a facsimile capability under paragraph (b). SBA received industry comments that this regulation was outdated. Some SBICs indicated that they bought facsimile machines to ensure they complied with the requirement. The intent of this regulation is to ensure that SBICs can properly communicate with SBA, receive official correspondence, prepare and provide electronic reporting, and apply for Leverage. The proposed changes would eliminate the modem requirement under paragraph (a); eliminate the facsimile requirement under paragraph (b); and modify paragraph (a) to more broadly require that SBICs must have technology to securely send and receive emails, scan documents, and prepare and submit electronic information and reports required by SBA. This language would allow for reasonable changes in technology without the need to modify regulations. All SBICs already utilize this technology in their day-to-day operations. This change should reduce costs by eliminating unnecessary equipment.

This regulation requires SBICs to obtain prior SBA approval for secured third-party debt for Leveraged Licensees.

Section 107.550(a) defines secured third-party debt to include Temporary Debt, a defined term in § 107.570 that applies only to SBICs with outstanding Participating Securities. Since there are no operating SBICs with outstanding Participating Securities, except in the Office of SBIC Liquidation, SBA proposes to remove § 107.570 and references to Temporary Debt and Participating Securities throughout this section.

Section 107.550(c) identifies rules associated with secured lines of credit in existence on April 8, 1994. This proposed rule would remove that requirement since it is obsolete.

This proposed rule would replace § 107.550(c) with a secured “Qualified Line of Credit” which SBICs could utilize without SBA prior approval. Current § 107.550(b) requires Licensees with Leverage to obtain SBA approval for any secured third-party debt, including lines of credit secured by unfunded commitments. Any third-party debt (secured and unsecured) increases SBA's credit risk because SBA leverage is generally never senior to the claims of other creditors: under § 107.560, the first $10 million of SBA leverage is generally subordinated to other debt of an SBIC, and leverage above $10 million is pari passu (on equal footing) with other debt. Nonetheless, SBA recognizes that it is typical practice for investment funds to use a line of credit to help bridge capital needs for financings and can generally draw on a line of credit more quickly than investors pay in capital when called. SBA regularly approves third party debt for lines of credit as discussed under TechNote 5—Credit Management Procedures, issued in November 2000 ( www.sba.gov/document/technote-5-technote-number-5 ). In order to streamline this process, based on those lines of credit SBA has historically regularly approved, SBA is proposing a new “Qualified Line of Credit” that would be exempt from mandatory SBA prior approval if it meets certain requirements regarding the overall size, term, the holder, and the borrowings under the credit facility as follows:

(1) The line of credit is limited to 20% of total unfunded binding commitments from Institutional Investors. The 20% of unfunded commitments was based on the Institutional Limited Partnership Association's document, “Subscription Lines of Credit and Alignment of Interests: Considerations and Best Practices for Limited and General Partners” published in June 2017 which recommended the line of credit be limited to between 15-25% of unfunded commitments. Although this proposed rule would allow up to 20%, this is a maximum only and limited partners may further reduce this amount in the SBIC's limited partnership agreement.

(2) The term of the line of credit does not exceed 12 months. Based on feedback from industry, SBA understands that most lines of credit are renewed on an annual basis and generally have a duration of 12 months. In this proposed rule, SBA is proposing a 12-month limitation on the duration of the line of credit, which may be renewable on an annual basis if it remains in compliance with this regulation.

(3) The line of credit is held by a federally regulated financial institution. SBA proposes this requirement, that the lender be regulated by a federal financial institution regulator ( e.g., the FDIC, OCC, or NCUA) to ensure that the lender is creditworthy, that the credit terms are reasonable and customary, and that the lender will not seek unusual remedies in the event of a default.

(4) All borrowings under the line of credit meet certain conditions: (i) Are only secured by unfunded Regulatory Capital up to 100 percent of the amount of the borrowing and 90 days of interest; (ii) Are for the purpose of maintaining the SBIC's operating liquidity or providing funds for a particular Financing of a Small Business; (iii) Must be fully repaid within 90 days after the date they are drawn; and (iv) Must be fully paid off for at least 30 consecutive days during the SBIC's fiscal year so that the outstanding third-party debt is zero for at least 30 consecutive days. SBA proposes these requirements to ensure that such debt is unsecured except for the amount of the borrowing and interest which may only be secured by unfunded Regulatory Capital, since secured third party debt presents a higher credit risk to SBA and must be approved by SBA under § 107.550. Further, the third-party debt must be solely for the purpose of maintaining the SBIC's operating liquidity or providing funds for a particular financing of a small business. Finally, since such borrowings are temporary in nature, the line of credit should be repaid quickly and not continuously refinanced. SBA believes these requirements are typical or provide greater latitude than for a typical line of credit and would provide SBICs with access to a standard industry tool while minimizing SBA's credit risk. SBA is seeking comments from industry as to whether these requirements present any issues.

SBA notes that SBIC investors may negotiate more stringent rules regarding how its SBIC may use a line of credit as part of its limited partnership agreement. These proposed regulations only present the minimum standards which SBICs must utilize to avoid requiring SBA prior approval. For example, the limited partnership agreement may specify that the line of credit may be no greater than 15 percent of uncalled private capital. Although the proposed regulations allow for a line of credit up to the total uncalled private capital, private investors may establish a lower level.

Since this rule would provide an exemption for most instances of third-party debt that SBA would likely approve, the proposed rule eliminates paragraphs (d) and (e) which discuss conditions for SBA approval and automatic approval. The proposed Qualified Line of Credit obviates the need for these requirements. Any other third-party debt would require SBA review to ensure that such line of credit does not increase the risk to repayment of SBA-guaranteed Leverage.

This regulation identifies restrictions on third-party debt for SBICs that issued Participating Securities. As discussed under paragraph II.J, no operating SBICs have outstanding Participating Securities and SBA is no longer authorized to provides such Leverage. SBA proposes to remove this regulation.

This section is currently titled, “Voluntary decrease in Licensee's Regulatory Capital” and requires Licensees to obtain SBA's prior written approval to reduce Regulatory Capital by more than two percent in any fiscal year. Current § 107.1000(b)(2) exempts Non-Leveraged Licensees from § 107.585 if the decrease does not result in Regulatory Capital below what is required by the Act and the regulations and is reported to SBA within 30 days. Typically, reductions in capital are performed in conjunction with a distribution that represents a return of capital, to its private investors. SBA allows profit distributions, also known as “Retained Earnings Available for Distribution” or “READ” without SBA prior approval, unless the Licensee was licensed as an Early Stage SBIC or if the SBIC issued Participating Securities.

SBA received comments from private investors that the regulations were unclear as to when a Licensee could distribute to its investors. SBA has also had instances in which Leveraged Licensees made “READ” distributions, and subsequently wrote down assets that would have reduced or removed “READ”. Leveraged Licensees must consider such write-downs before making such distributions to avoid “improper” distributions. SBA is also concerned that Licensees may distribute profits without repaying Leverage. In particular, equity investors often have returns that are less consistent than private creditor or mezzanine funds. SBA has incurred losses in several Licensees that returned profits to its private investors through early profit distributions and then wrote down assets later in the fund's life.

SBA is proposing to retitle this regulation to “Distributions and Reductions in Regulatory Capital” and modify the requirements to address these concerns. SBA proposes to separate distribution requirements based on three categories of SBICs: (1) Non-Leveraged Licensees; (2) Leveraged Licensees licensed prior to October 1, 2023, and Leveraged Licensees wholly owned by Business Development Companies (“BDCs”) that are not Accrual SBICs; and (3) Leveraged Licensees licensed on or after October 1, 2023, not wholly owned by BDCs and Accrual SBICs. The rationale for these categories and the specific requirements follows.

(1) Non-leveraged Licensees. SBA proposes a separate set of requirements for Non-leveraged Licensees because they pose no credit risk to SBA. Proposed rules would allow Non-leveraged Licensees to distribute to their private investors without SBA prior approval as long as they retain sufficient Regulatory Capital to meet minimum capital requirements under § 107.210, unless such amounts are in accordance with their SBA approved Wind-up Plan. If a Non-leveraged Licensee does not have an SBA approved Wind-up Plan, they may make distributions, as long as such Non-leveraged Licensees retain sufficient Regulatory Capital to meet minimum capital requirements under 107.210. If a Non-leveraged Licensee has an SBA-approved Wind-down Plan, their Regulatory Capital can drop below the minimum capital requirements if such amounts are in accordance with that plan. This requirement should provide even greater flexibility to Non-leveraged Licensees. In accordance with current policies, the proposed rule would clarify that Non-leveraged Licensees must report any reductions in Regulatory Capital to SBA within 30 days on an updated Capital Certificate, which is Exhibit K in SBA form 2181.

(2) Leveraged Licensees licensed prior to October 1, 2023, and Leveraged Licensees wholly owned by BDCs that are not Accrual SBICs. SBA recognizes that existing licensees and current applicants to the program expect to be able to distribute READ based on current regulations. SBA also recognizes that SBICs wholly owned by BDCs (“BDC-SBICs”) must distribute profits to their investors. SBA proposes that SBICs licensed prior to October 1, 2023, and BDC-SBICs should remain under the current rules with some clarifications, as long as they are not Accrual SBICs. Since Accrual SBICs perform at least 75% in equity, which has the highest variance in returns, SBA proposes that any Accrual SBIC be excluded from this category. For SBICs licensed prior to October 1, 2023, and BDC-SBICs, SBA proposes substantively the same requirements as in the current regulations except to clearly identify that such SBICs may distribute READ only after considering any material adverse changes to its portfolio. In accordance with current policies, the proposed rule would clarify that these Licensees must report any reductions in Regulatory Capital to SBA within 30 days on an updated Capital Certificate.

(3) Leveraged Licensees licensed on or after October 1, 2023, and not wholly owned by a BDC and Accrual SBICs. SBA proposes for these SBICs a distribution waterfall that repays SBA the principal balance on outstanding Leverage on at least a pro rata basis with private investors. SBICs must repay Leverage at its ten-year maturity and may prepay Leverage at any time. SBA proposes the following waterfall:

a. Payment of Annual Charges and accrued interest associated with Leverage. (Interest will be paid to the bond holders based on the Leverage terms.)

b. Calculate SBA's share based on the ratio of Total Leverage Commitments and Initial Regulatory Capital established as follows: SBA Share = Total Distributions × [Total Leverage Commitment/(Total Leverage Commitment + Initial Regulatory Capital)].

c. Repay SBA Leverage to bond holders in an amount no less than SBA's Share to the extent of outstanding Leverage. If SBA's share is more than the outstanding Leverage held by the Licensee and the Licensee has unfunded Leverage Commitments, the Licensee must submit a Leverage Commitment cancellation equal to SBA's share minus the SBA Leverage redemptions. The rationale for this cancellation requirement is to minimize the risk that the SBIC will distribute significant profits to its private investors, then issue additional SBA leverage that results in losses, leaving SBA with losses after the private investors made significant profits.

d. Distribute to private investors the remaining amount.

e. Report the distribution to SBA. You must report the distribution and calculations to SBA on your Form 468 submission(s).

If permitted under a Licensee's partnership agreement, a Licensee may choose to reserve capital or reinvest all or a portion of it instead of distributing to the SBA and investors. In this circumstance, a Licensee would decrease the amount to its investors so that the private investors receive no more on a pro rata basis as the repayment of SBA Leverage and interest due. SBA is only concerned that private investors have at least the same risk for loss as SBA.

This regulation identifies requirements for Licensees to maintain active operations and submit a Wind-up Plan when they decide they are no longer making any new investments. SBA proposes to change the name to “Wind-down Plan” as discussed under II.A.

This regulation specifies the threshold of information requested by SBICs from Portfolio Concerns. The SBA proposes to amend specified information collections for Financings after the effective date of the rule to provide certain optional demographic information on Portfolio Concerns. The SBA is amending information collections to enhance reporting accuracy and consistency around the small business demographic impact of the SBIC program.

This regulation identifies requirements associated with Licensee's financial statements on Form 468. Paragraph (a) requires the annual Form 468 to be submitted on or before the last day of the third month following the end of the fiscal year, except for information in paragraph (e). This is not consistent with § 107.650 which requires portfolio valuations which are submitted on the Form 468 within 90 days following the end of the fiscal year. Current § 107.630 also does not have a paragraph (e). SBA believes the entire Form 468 should be due at the same time. SBA therefore proposes to make the annual Form 468 due date consistent with § 107.650.

Paragraph (d) requires certain economic information regarding each Licensee's portfolio companies, so that SBA can assess the program's economic impact. SBA proposes adding information to help SBA determine net jobs created and total jobs created or retained, including identifying the number of jobs added due to a business acquisition versus growth in the business.

SBA is also proposing to add fund management contact information and optional demographic information. SBA is seeking to collect management contact information in order to improve its customer relationship management and to better assess relationships between its Licensees. Demographic information regarding fund management is requested for reporting purposes only and on a voluntary basis.

This regulation currently requires Licensees to submit a Portfolio Financing Report on SBA Form 1031 within 30 days of the closing date of the Financing. In response to comments received as part of its modernization improvement efforts (see I.D), SBA is proposing to make this a quarterly submission in which the Licensee must report the financing within 30 calendar days of the calendar year quarter following the closing date of the Financing. For example, if a Licensee closes a financing on February 10, 2023, the Licensee will need to submit the related Form 1031 no later than April 30, 2023. If the Licensee is identified as requiring Enhanced Monitoring, as proposed under § 107.1850, SBA may require more frequent reporting.

This regulation currently requires Licensees to report portfolio valuations within 90 days of the end of the Licensee's fiscal year and quarterly valuations 30 days following the close of each quarter. SBA proposes to clarify that only Leveraged Licensees are required to report for quarterly reporting periods. All Licensees must report at least annually. In response to comments received as part of its modernization improvement efforts (see I.D), SBA proposes to expand the timeframe for quarterly valuations, including material adverse changes, to 45 calendar days following the close of each quarter. This is intended to give Licensees additional time to prepare reports.

This regulation identifies other items required by the Licensee. Paragraph (a) requires the Licensee to provide to SBA a copy of any report it gives to its private investors. Although the Licensee is required under current regulations to provide to SBA report they provide to their private investors, SBA proposes to specify valuation data items to improve clarity. SBA also proposes to specify that Licensees should submit to SBA any report it gives to its private investors no later than 30 days after the date these sent the report to its private investors. This requirement is intended to keep SBA aware of any important communications regarding the licensee in a timely fashion.

This regulation identifies how SBA calculates examination fees. Currently under paragraph (b), SBA charges a Minimum Base Fee + .024% of assets at cost up, not to exceed a Maximum Base Fee. SBA adjusts the Minimum Base Fee and the Maximum Base Fee annually. Although current regulations give Non-leveraged Licensees a lower Maximum Base Fee, this formula does not fully address the risk and additional monitoring required associated with Leveraged Licensees. SBA proposes to change and streamline this formula to $10,000 + .035% of their Total Leverage Commitment established at Licensing (see paragraph II.D.). By establishing the examination fee up front, SBA believes this will reduce uncertainty in cashflows. Because SBICs licensed prior to this proposed rule may not have a Total Leverage Commitment, SBA proposes that the formula for existing licensees be $10,000 + .035% of their outstanding Leverage plus SBA's undrawn commitment amount. Since this proposed formula would give all Non-leveraged licensees a flat rate of $10,000 and SBA incurs more costs based on the assets of the Licensee, SBA proposes that any Non-leveraged Licensee with over $50 million in assets at cost pay an additional $20,000. Although SBA recognizes that a Leveraged Licensee with over $50 million in assets at cost and $30 million in leverage commitments would only pay $20,500 in exam fees versus $30,000 for a Non-leveraged Licensee, SBA is nevertheless proposing this additional fee for larger Non-leveraged Licensees with over $50 million in assets based on the infrequency of requests for less than one tier of leverage.

This regulation identifies small businesses in which Licensees may not invest. Paragraph (a) restricts Licensees from making investments into relenders or reinvestors as defined under paragraph (a)(1). Paragraph (a)(2) currently gives an exception for Venture Capital Financings to relenders or reinvestors that qualify as Disadvantaged Businesses unless the Disadvantaged Business is a bank or savings and loans not insured by agencies of the Federal Government and agricultural credit companies. SBA is proposing to modify this exception to equity investments in “underserved” relenders or reinvestors that make financings solely to Small Business Concerns that a Licensee may directly finance under part 107. SBA believes expanding this provision will significantly help improve its footprint to underserved communities. By more broadly defining “underserved,” SBA can more quickly adapt to the changing markets by clarifying what constitutes “underserved” through policy notices and increase its economic impact to underserved communities. While Disadvantaged Business would continue to be considered underserved, rural and low-and-moderate-income areas, as well as businesses owned by women or veterans may also be applicable to this group. To ensure that capital continues to be directed to SBIC's mission, SBA also proposes to restrict relender and reinvestor investments to those that existing SBICs could finance. This proposal also helps SBA grow its emerging fund manager pipeline.

Current § 107.730 prohibits Licensees from transactions that constitute conflicts of interest, as required by the Act. Paragraph (a) provides a general rule that Licensees may not self-deal to the prejudice of a Small Business, the Licensee, its shareholders or partners, or SBA, and must obtain prior written exemptions for transactions that may constitute a conflict of interest and specifies certain transactions in paragraphs (a)(1) through (5) that would constitute a conflict of interest. Paragraph (a)(1) identifies (as one specific prohibition) a Financing to a Licensee's Associate, as defined in § 107.50, unless the Small Business being financed is only an Associate because another the Licensee's Associate investment fund holds a 10% or greater interest in the Small Business, the Associate investment fund previously invested in the Small Business at the same time and on the same terms and conditions, and the Associate investment fund is providing a follow-on financing to the Small Business at the same time and on the same terms and conditions as the Licensee.

Based on market feedback and an analysis of conflict-of-interest approval requests from Licensees, the current safe harbor provisions for follow-on financings to small business portfolio companies are resulting in delays providing capital to small businesses. This potentially hurts the small businesses and increases the burden on Licensees and SBA. SBA proposes introducing a safe harbor for financing a portfolio concern by an Associate when an outside third-party participates in the equity financing of the Licensee's portfolio concern.

Paragraph (d) identifies that Financings with Associates also constitutes a conflict of interest requiring SBA prior approval but provides exceptions under paragraph (d)(3). Paragraph (d)((3)(iii) identifies exceptions for SBICs with outstanding Participating Securities. Since no operating Licensees remain in SBA's portfolio, SBA proposes to remove this exception. Paragraph (d)(3)(iv) identifies exceptions involving Non-leveraged Licensees. SBA proposes to revise this exception to incorporate the new Non-leveraged Licensee term and simplify this regulation.

Paragraph (c)(2) discusses “prepayments” and states: “You [Licensee] must permit voluntary prepayment of Loans and Debt Securities by the Small Business. You must obtain SBA's prior written approval of any restrictions on the ability of the Small Business to prepay other than the imposition of a reasonable prepayment penalty under paragraph (c)(3) of this section.

SBA is considering whether it should make changes to § 107.830(c)(2) regarding prepayment restrictions for Loans and Debt Securities. Currently, any restriction on the ability of a small business to prepay (other than the imposition of a reasonable prepayment penalty) requires SBA's prior written approval. Recently, SBA has become concerned that certain terms in unitranche or multi-lender transactions that require voluntary prepayments to be distributed on a pro rata basis to all lenders in a transaction could be considered a prepayment restriction. Generally, SBA does not view a financing term that requires a portfolio concern to make prepayment distributions on a pro rata basis to all lenders in a transaction to be considered a prepayment restriction. To ensure that there is a consistent understanding of the appropriate treatment of such provisions, SBA is soliciting comments from the public on whether § 107.830(c)(2) should be modified to clarify pro rata distributions of prepayments in unitranche or multi-lender transactions (Loan and Debt Securities) do not require SBA's prior written approval.

Furthermore, SBA is considering providing safe harbor from pre-payment restrictions for SAFEs and convertible notes.

This regulation identifies limitations on the ability a Licensee to take “Control” as defined in Section 107.50, over a Small Business. In general, the regulations permit Licensees to take Control for up to 7 years. Although buyout funds often take control of a small business at first Financing, SBA believes that Accrual SBICs should limit ownership at first Financing to less than 50%. SBA is proposing to add this restriction to Accrual SBICs to ensure that such SBICs are performing growth and venture capital Financings and not buyout transactions. SBA recognizes that after financing a Portfolio Concern, the Licensee may need to own a higher percentage of the Small Business Concern to help protect its initial investment. SBA is proposing this restriction only at the initial Financing. SBA proposes that the less-than-50% ownership requirement restriction at Initial Financing would not apply to Financings of a re-lender or re-investor performed under § 107.720(a)(2). SBA recognizes that the relender/reinvestor may be a private equity or venture capital fund that is underserved based on the ownership and management or its geographic location. Regardless, if a Licensee is one of the first investors into the fund, serving as the anchor investor, initially it may own more than 50% of the fund. SBA does not want to discourage this practice, since such anchor investors have been cited as playing an important role in establishing Impact Funds that may be directed to critical underserved areas and attracting other investors into the fund. (See Harvard Business School: “Anchors Aweigh: Analysis of Anchor Limited Partner Investors in Impact Investment Funds”, by Shawn Cole, T. Robert Zochowski, Fanele Mashwama, and Heather McPherson, 2020. Final-Anchors-Aweigh.pdf ( hbs.edu )). SBA is seeking public comment.

This regulation identifies exceptions to the regulations for Licensees without Leverage. SBA proposes to incorporate the term Non-leveraged Licensee as proposed in II.A.

This regulation identifies general requirements to be eligible for Leverage. Paragraph (c) references § 107.210 concerning minimum private capital requirements. SBA proposes to amend paragraph (c) to incorporate Public Law 115-133 by adding an exception to the $5 million minimum Regulatory Capital requirement if the SBIC was licensed because they are headquartered in an Underlicensed State. As identified in § 107.1150, such Licensees will be limited to Leverage up to 100% of Regulatory Capital until they raise $5 million in Regulatory Capital.

This regulation identifies the fees and charges associated with SBA guaranteed Leverage. Currently the title identifies Annual Charges as “additional charges”. SBA proposes to change the title to clarify that the additional charge refer to the Annal Charge as discussed in § 107.50.

Paragraph (d)(1) discusses the Annual Charge required for Debentures, noting that it only applies to Debentures issued on or after October 1, 1996, and that it does not apply to Leverage issued prior to that date. Since all Debentures outstanding were issued on or after October 1, 1996, SBA proposes to remove this language.

SBA further proposes to set the minimum Annual Charge to 0.5% or 50 basis points. The fiscally responsible administration of the program requires a minimum Annual Charge on outstanding leverage be established to address the long-term variances in losses. The historical losses vary greatly as a result of national economic health and private equity and venture fund vintage year performance. As a consequence, SBA experiences many years in which there are zero or minimal SBIC transfers to liquidation status and a few years in which there are numerous failures with resulting losses to SBA.

The change will protect the government from significant losses, increase the prospects of preserving a zero or negative subsidy cost across program cohorts, enhance the long-term ability of SBA to provide guarantees to SBICs, license more applicants, and indirectly provide greater patient capital to qualifying small businesses.

Current § 107.1150 identifies the maximum amount of a Leverage for a section 301(c) Licensee. SBA approves Leverage commitments for those Licensees that were licensed under the now repealed Section 301(d) for Specialized SBICs. SBA proposes to correct the language to apply to all Leveraged Licensees.

Paragraph (a) sets forth the maximum Leverage for an “Individual Licensee.” SBA proposes to clarify that per the proposed definition of “Leverage,” the maximum Leverage includes both the principal and accrued interest associated with the Accrual Debenture. SBA also proposes to add that if a Licensee is headquartered in an Underlicensed State and has less than $5 million in Regulatory Capital, they are limited to one tier of Leverage.

Paragraph (b) sets the maximum Leverage for multiple licensees under Common Control, as defined under § 107.50. SBA proposes to clarify that similar to the requirements for an “Individual Licensee,” the interest associated with the Accrual Debenture will be used to calculate the maximum Leverage across all Licensees under Common Control.

This regulation currently requires SBICs with outstanding Leverage commitments to submit quarterly Form 468s within 30 days after the close of each quarter. SBA proposes to clarify that this requirement pertains to all Leveraged Licensees and to allow 45 days after each quarter, commensurate with portfolio valuation due dates as proposed under § 107.503 and § 107.650.

This regulation currently requires Leveraged Licensees to calculate their capital impairment percentage (“CIP”), identifies the maximum CIP allowable, and requires them to report to SBA if they have a condition of capital impairment. Paragraph (a) currently identifies that this section only applies to leverage issued on or after April 25, 1994, and identifies alternate requirements for Leverage issued prior to that date. Since all Leverage currently held by operating SBICs was issued after April 25, 1994, SBA is removing obsolete language in this paragraph. Section 107.1850 applies to all Leveraged Licensees with outstanding Leverage.

Paragraph (e) requires Licensees to calculate their CIP and notify SBA if they have a condition of capital impairment. Paragraph (f) gives SBA the right to redetermine the CIP at any time. SBA is proposing to change this requirement such that SBA will calculate the Licensee's CIP each quarter and notify the SBIC if they are capitally impaired. Since SBA is calculating the CIP, SBA also proposes to remove paragraph (f).

This regulation defines how to compute a Licensee's CIP. Since SBA is proposing to calculate the CIP and notify Licensees if they have a condition of Capital Impairment, SBA proposes to make related changes to this regulation.

This regulation defines how to compute an Early Stage SBIC's CIP. Since SBA is proposing to calculate the CIP and notify Licensees if they have a condition of Capital Impairment, SBA proposes to make related changes to this regulation.

For more than twenty years, Licensee Leverage default rates have averaged less than 16%. While this is a relatively small percentage of Licensees, these Licensees introduce risk to the sustainability of the SBIC program and SBA. In an effort to proactively identify and manage risk, SBA proposes to introduce Enhanced Monitoring. A Licensee can be added to Enhanced Monitoring status for a series of actions, bottom quartile performance relative to the Licensee's stated benchmark for more than four consecutive quarters, or reporting failures defined in SBIC program policies and procedures. While on Enhanced Monitoring status, the Licensee will be required to file Form 1031 on a more frequent basis, and upon request, conduct portfolio review meetings with the SBA. The Licensee will be notified of their Enhanced Monitoring status upon determination. Once the events that warranted Enhanced Monitoring are addressed to SBA's satisfaction, Licensees will be notified that they are removed from Enhanced Monitoring. A series of performance metrics will be reviewed collectively to assess a holistic picture of performance. Of those metrics, TVPI or DPI metrics in the bottom quartile for four consecutive quarters relative to the Licensee's primary benchmark for the applicable vintage year can result in a Licensee being added to the Enhanced Monitoring status.

In 13 CFR part 121, SBA sets forth size standards and defines a business's size to include the size of the affiliates of the business, subject to certain exceptions. One of these exceptions, § 121.103(b)(5)(vi), applies only to financial, management, and assistance under the Act and is intended to exclude Traditional Investment Companies from affiliation coverage. The term Traditional Investment Companies generally includes issuers that would be “investment companies,” as defined under the Investment Company Act of 1940 (the “1940 Act”). It also includes all 3(c)(1) private funds “not registered under the 1940 Act because they are beneficially owned by less than 100 persons, if the company's sales literature or organizational documents indicate that its principal purpose is investment in securities rather than the operation of commercial enterprises.” This exception to the SBA affiliation requirement was provided to allow SBIC Financings with other private equity, private credit, and venture capital funds since co-investment and syndication between such funds is typical and increases the amount of private capital available for small businesses. Under its modernization and improvement efforts (see I.D.), SBA received comments suggesting that this exception be expanded to include private funds that are exempt from registration requirements under 3(c)(7) of the 1940 Act. SBA's regulations and determinations are not determinative as to whether a licensed Traditional Investment Company must comply with the 1940 Act. SBA invites public comment.

The Office of Management and Budget has determined that this proposed rule constitutes a “significant regulatory action” under Executive Order 12866. SBA has drafted a Regulatory Impact Analysis for the public's information below. SBA requests comments on the data and methods used to estimate the impact of this regulatory action. Each section begins with a core question.

This proposed rule is intended to reduce barriers to program participation for funds investing in (i) underserved communities and geographies, (ii) capital intensive investments, and (iii) technologies critical to national security and economic development. In this proposed rule, SBA would introduce an additional type of SBICs (“Accrual” SBICs) to increase program investment diversification and patient capital financing for small businesses and modernize rules to lower financial barriers to program participation. The new Accrual Debenture allows more flexibility in financing to increase participation of SBICs capable of addressing identified capital access gaps and vulnerability in the U.S. small business segment. Additionally, this proposed rule introduces a Qualified Line of Credit that does not require SBA approval while enabling greater access to a capital call line to fund commitments. The aforementioned benefits and attractiveness of the proposed Accrual Debenture will also reduce some of the previously perceived disadvantages to being an SBIC, as opposed to the non-SBIC private market. The proposed revisions to § 107.720 should improve the SBIC program's investment diversification and create more program entry points for new fund managers. This proposed rule also reduces barriers by revising reporting requirements that may allow increased use of valuation policies that are consistent with GAAP. This proposed rule will help SBA implement Executive Order (“E.O.”) 13985, Advancing Racial Equity and Support for Underserved Communities Through the Federal Government by reducing financial and time barriers to participate in the SBIC program and modernizing the program's license offerings to align with a more diversified set of funds investing in underserved small businesses. The proposed rule would also incorporate the statutory requirements under Public Law 115-333, titled “Spurring Business in Communities Act of 2017”, enacted on December 19, 2018.

The Agency believes it is necessary to reduce barriers to participation and diversify its patient capital and long-term loan program for long-term program stability and mission effectiveness. This will simultaneously diversify the sources and types of financing available to underserved small businesses and small businesses manufacturing products and technologies critical to national security and U.S. economic competitiveness. The Agency also believes that to be effective in delivery, it needs to streamline and reduce regulatory burdens to facilitate robust participation in its patient capital and long-term loan program which are responsible for enabling access to capital for underserved U.S. small businesses across the country.

By offering an alternative to a semi-annual interest payment Debenture structure for all SBIC licensees not taking a control-position in small businesses, and to licensees with over 75% of capital earmarked for long-term equity investment in small businesses to help them grow and scale, SBA strives to increase equity funding available to underserved small business owners and unlock equity as a source of funding for many small business owners while still maintaining an expected zero subsidy cost in the program. This alternative structure accommodates a longer horizon for investments in small businesses that might require more patient capital. SBA has confidence this goal will be achieved while continuing to maintain a zero-subsidy based on extensive analysis of the performance of private funds over the last 20 years from Pitchbook and as supported by the 2021 Knight Diversity of Asset Manager Research Series   1 which found that, “diverse-owned firms have low levels of representation across each asset class; however, they exhibit returns that are not significantly different than non-diverse-owned firms.” SBA is revising its Debenture and license regulations in response to continuing requests by SBA's participating SBIC licensees and the public. SBA believes that revising its Debenture and license regulations will result in expansion of access to capital for those who cannot obtain adequate patient capital from traditional sources of funding, while decreasing time and cost associated with applying for an SBIC license. Greater access to capital is bolstered by the revisions enabling SBA to offer a debenture with terms and regulations aligned to the cash flows of a broader base of private funds as well as a reduction in cost burden to apply for and participate in the SBIC Program.

SBA does not anticipate significant additional costs or impact on the subsidy to operate the SBIC program under these proposed regulations. Since the SBA has existing authority to license and provide funding to equity-oriented and debt-oriented private funds, there is no request for additional funding.

Currently SBICs distribute about $1.5 billion or more per year in profit distributions to Limited Partners. SBA's regulations permit SBICs to distribute profits to Limited Partners without any corresponding repayment of SBA Leverage. SBA is proposing that SBICs first pay all accrued interest and annual charges, then repay its Leverage on a pro rata basis (in step) with its Limited Partners. Based on analysis of average cash flows regarding private funds, our expectation is that this will improve the likelihood that SBA will be repaid on the same schedule as Limited Partners regardless of the investment strategy of the SBIC fund. SBA invites public comment.

Under these proposed regulations, the SBA anticipates SBIC program administrative costs to decline over time due to streamlining of regulatory filing and reduction in duplicative data reporting across multiple filings. Furthermore, the proposed regulations include changes which reduce bureaucratic processes, such as approving the SBIC's total commitment at licensing, reducing SBA approvals for certain conflicts of interest by creating additional safe harbors, and approving GAAP compliant valuations for Non-leveraged licensees. SBA believes such changes will help SBA improve its response times and enable personnel to focus on customer relationships and monitoring its funds. In revising the SBIC Debenture offering into two categories of Debentures, “Debenture” and “Accrual Debenture” available to eligible SBIC licensees under 13 CFR 107.50, SBA anticipates de minimis impact on the subsidy for the SBIC program. Currently, as part of its licensing process, SBA reviews approximately 70 license requests annually and declines 10 to 15 percent, or 8 to 10 requests, due to poor performance, negative diligence and/or regulatory conflict issues. These 70 applications represent the total annual license applications for non-levered and Debenture SBICs combined. Two-thirds of these applications are submitted by entities with existing SBIC licensees requesting a license for a subsequent licensed SBIC fund. The approximate total number of licenses approved annually in the SBIC program is 25. Additionally, federally regulated private equity funds must comply with the requirements from relevant Federal regulating entities. Private equity funds must also abide by the terms of their investor agreements, such as a limited partnership agreement, and fulfill their fiduciary obligation to their investors. Because of these requirements, the SBA anticipates these licensed SBIC funds will continue making investment decisions based on their fiduciary responsibility and terms of their investor agreements which limits risk to the SBA. Regulated SBIC licensees must comply with the business plan and investor agreements submitted to SBA while operating an SBIC license. Licensees will benefit by no longer being required to submit 1031 financing reports within 30-days of financing pursuant to § 107.640, instead filing at the end of each quarter, unless the licensee is subject to Enhanced Monitoring, as previously mentioned. This will reduce paperwork and the reporting burden on SBIC licensees. As a result of this revision, SBA expects a decrease in the time for small businesses to access capital at critical moments which will in turn help more small businesses grow and scale. Furthermore, this will decrease SBA's administrative costs.

SBA does not anticipate significant additional costs or impact on the subsidy to operate the SBIC program under the proposed regulations at 13 CFR 107.50 regarding the accrual license and accrual Debenture. One Debenture structure limits accessibility to SBA's patient equity and long-term private loan program, with an outsized impact on underserved small business owners who may struggle to access traditional sources of capital. SBA anticipates that providing clear and streamlined regulatory guidance, regulatory fees aligned with the size and scale of SBIC applicants and licensees, and a second Debenture structure to capital access gaps will result in an increase in the number of and diversity of participating SBIC licensees and will result in more underserved small business owners obtaining access to patient equity capital or long-term loans and invites public comment on this matter.

SBA considered eliminating additional regulatory burdens, such as shifting entirely to FASB GAAP-compliant valuation reports and determined that the proposed rules strike the right balance in responsibly streamlining regulations without substantially increasing the risk of waste, fraud, or abuse of the programs or otherwise threatening the integrity of the SBIC program or taxpayer dollars. Possible alternatives included eliminating more regulatory burdens, but such a course would require more time for SBA to consider the impact of these eliminations. After considering feedback from stakeholders, SBA qualitatively determined that benefits of a timely issuance of a rule with the included regulatory relief and measures to implement Executive Order 13985 outweighed the benefits of a delay to give the agency more time to consider further eliminations of regulatory burdens. Regarding Debenture instrument structure and license type, SBA has implemented several variations of its SBIC Debentures to increase program alignment and accessibility for new patient capital funds in the past as discussed above, and SBA has determined from these past experiences the simplest rules proposed herein were the least burdensome.

This action meets applicable standards set forth in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden. The action does not have preemptive effect or retroactive effect.

This proposed 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.

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

1. Did the agency use the best available techniques to quantify anticipated present and future costs when responding to E.O. 12866 ( e.g., identifying changing future compliance costs that might result from technological innovation or anticipated behavioral changes)?

A description of the need for this regulatory action and benefits and costs associated with this action, including possible distributional impacts that relate to Executive Order 13563, are included above in the Regulatory Impact Analysis under Executive Order 12866.

2. Public participation: Did the agency: (a) Afford the public a meaningful opportunity to comment through the internet on any proposed regulation, with a comment period that should generally consist of not less than 60 days; (b) provide for an “open exchange” of information among Government officials, experts, stakeholders, and the public; (c) provide timely online access to the rulemaking docket on Regulations.gov; and (d) seek the views of those who are likely to be affected by rulemaking, even before issuing a notice of proposed rulemaking?

The proposed rule will have a 60-day comment period and will be posted on www.regulations.gov to allow the public to comment meaningfully on its provisions.

SBA has determined that this proposed rule would impose additional reporting and recordkeeping requirements under the Paperwork Reduction Act. Generally, this rule proposes changes to two information collections used in the SBIC program: (1) SBA Form 468 “SBIC Financial Reports” to include GAAP financial performance metrics, the number of jobs sustained and created, and voluntary demographic information at the SBIC management level; and, (2) SBA Form 1031 “Portfolio Financing Report” to decrease the current frequency of reporting on a per-financing basis as-of the date of a financing's close to quarterly reporting of all SBIC financings within a given quarter, no less than 30 days after the calendar year quarter-end.

The title, summary description of the information collection, and the proposed changes to SBA Form 468 and SBA Form 1031 are discussed below with an estimate of the revised annual burden. Included in the estimates are time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing each collection of information.

Title: Portfolio Financing Report, SBA Form 468 (OMB Control Number 3245-0063).

Description of Respondents: Small Business Investment Companies.

Estimated Number of Respondents: 406.

Estimated Annual Responses: 1,002.

Estimated Annual Hour Burden: 24,708.

Summary: To obtain the information needed to carry out its oversight responsibilities under the Small Business Investment Act of 1958 (the “Act”), SBA requires SBICs to submit financial statements and supplementary information on SBA Form 468. SBA uses this information to monitor SBIC financial condition and regulatory compliance, for credit analysis when considering SBIC leverage applications, and to evaluate financial risk and economic impact for individual SBICs and the program as a whole.

Section 310(d)(1)(C)(i) of the Act requires SBICs to submit audited financial statements to SBA at least annually. SBA regulations at 13 CFR 107.630 requires the use of SBA Form 468 when submitting the financial statements and supporting documentation. The information collected is used to determine the creditworthiness of an SBIC when considering its leverage application and to monitor its financial condition after assistance is provided. The information is also used to evaluate an SBIC's compliance with certain regulations, such as the activity requirements in 13 CFR 107.590 and the portfolio diversification requirements in 13 CFR 107.740.

To date, SBA's Form 468 reporting requirements have been tailored to satisfy SBA's specific regulatory and credit risk analytical requirements using SBA's guidelines on accounting principles and valuations. Many SBIC investors request GAAP financial information from SBICs, and SBA understands that all or substantially all SBICs currently prepare data under GAAP principles in addition to under SBA's accounting and valuation guidelines applicable to the SBA Form 468. Therefore, SBA anticipates the addition of GAAP financials in general to have a de minimis impact on calculating burden, as this information would be readily available to SBICs as part of the normal course of business.

Specifically, SBA will be requesting from SBICs on SBA Form 468 the following metrics that SBICs already calculate using GAAP-audited financial data for reports to their private investors: (1) Net Total Value to Paid In Capital (TVPI)—the total distributions, including both cash and distributed securities (valued as of the distribution date) plus the net asset value of a private fund's portfolio net of carried interest and expenses, divided by the capital that has been paid in by investors; (2) Net Distributions to Paid In Capital (DPI)—total distributions, including both cash and distributed securities (valued as of distribution date), a private fund has returned to investors net of fund expenses and carried interest, divided by the amount of money investors have paid into the fund; (3) Multiple on Invested Capital (MOIC)—the total gross realized and unrealized value generated by a private fund's portfolio, divided by the total amount of capital invested into the portfolio concerns by the fund; and, (4) Net Internal Rate of Return (IRR)—the rate at which the private investor cashflows and the unrealized net asset value minus any fund expenses and carried interest are discounted so that the net present value of cashflows equals zero.

Similarly, under this proposed rule, SBA seeks to obtain GAAP financial data related to valuations in SBA Form 468 supplemental valuation reports, which are currently requested semiannually. Under this proposed rule, the reporting frequency would increase from semiannually to quarterly to supplement the valuations data SBICs must already report on SBA Form 468 Short Form for quarterly reporting. Many SBIC investors request portfolio company valuations from SBICs using GAAP principles, and SBA understands that all or substantially all SBICs currently prepare such data under GAAP principles in addition to under SBA's valuation guidelines applicable to the SBA Form 468. Therefore, SBA anticipates the addition of GAAP financials in general to have minimal impact on calculating increase to burden, as this information should already be available to SBICs as part of the normal course of business.

Additionally, this proposed rule would add three new reporting requirements to the SBA Form 468. First, SBA will request the number of jobs sustained and the number of new jobs created per each portfolio company. Currently SBA request the number of employees per financing on SBA Form 1031 with updates per follow-on financings. Under this proposed rule, SBA seeks to ask for the number of jobs at the time of initial financing ( i.e., jobs sustained) with annual updates of new jobs created (or lost) to obtain numbers of net new jobs created as a result of SBIC financings. Second, under this proposed rule, SBA seeks to request annual management contact and optional demographic information at the SBIC management level. SBA seeks the mandatory updates to management contact information in order to maintain and improve customer relationship between Licensees and SBA Operations Analysts. SBA seeks the voluntary information for reporting purposes to assess the current SBIC program as related to efforts undertaken in this proposed rule to promote reducing barriers to program participation for new funds and promoting the diversification of SBIC investments. Third, SBA proposed to require Leveraged SBICs licensed on or after October 1, 2023, to provide a distribution waterfall that repays SBA the principal balance on outstanding Leverage on at least a pro rata basis with private investors. In order to provide consistency on the distribution calculations, SBA seeks to collect the information in a new “Distribution Schedule” from Leveraged SBICs licensed on or after October 1, 2023. These new reporting requirements to the SBA Form 468 seek information that SBICs would have readily available under the normal course of business and therefore should have a de minimis impact on burden per SBIC.

The current annual burden for SBA Form 468 is estimated at 24,708 hours. Based on the current size of the SBIC program, SBA estimates the new reporting requirements to increase the annual hourly burden by 1,950 hours for a total estimated annual burden of 26,658 hours.

Title: Portfolio Financing Report, SBA Form 1031 (OMB Control Number 3245-0078).

Description of Respondents: Small Business Investment Companies.

Estimated Number of Respondents: 316.

Estimated Annual Responses: 2,695.

Estimated Annual Hour Burden: 728.

Summary: To obtain the information needed to carry out its program evaluation and oversight responsibilities, SBA requires SBICs to provide information on SBA Form 1031 each time financing is extended to a small business concern. SBA uses this information to evaluate how SBICs fill market financing gaps and contribute to economic growth and monitor the regulatory compliance of individual SBIC. Currently, SBA regulations require all SBICs to submit a Portfolio Financing Report using SBA Form 1031 for each financing that an SBIC provides to a Small Business Concern within 30 days after closing an investment. Under this proposed rule, the reporting deadline for SBICs (except those subject to Enhanced Monitoring) would change to 30 days after the end of the calendar year quarter (March, June, September, and December) following the closing date of a financing that an SBIC provides to a Small Business Concern, rather than 30 days after the date of each financing. Therefore, there would be no change to the annual burden estimated at 728 hours.

In addition to the reporting and recordkeeping changes proposed under this rule, in an effort to ease burden, remove redundant or no longer necessary data elements, and improve overall SBIC customer experience, SBA will be submitting for OMB review and approval revisions to both information collections. SBA invites comments on: (1) whether the proposed changes to the SBA Form 468 and SBA Form 1031 adequately provide information for the assessment of SBIC program performance, including whether the information will have practical utility; (2) the accuracy of SBA's estimate of the burden of the proposed collections of information; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and, (4) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques, when appropriate, and other forms of information technology.

Please send comments by the closing date for comment for this proposed rule to the address set forth above in the ADDRESSES section and to Desk Officer for the Small Business Administration, Office of Management and Budget, New Executive Office Building, Room 10202, Washington, DC 20503.

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires administrative agencies to consider the effect of their actions on small businesses, small organizations, and small governmental jurisdictions. According to the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, when an agency issues a rulemaking, it must prepare a regulatory flexibility analysis to address the impact of the rule on small entities. However, 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 proposed rule likely will not impact a substantial number of small entities relative to the population of existing private market funds and private market asset management companies. Based on U.S. capital inflows to private markets funds, SBIC Licensees represent only about 1.4% of approximately 21,000 U.S. private equity, credit and venture funds launched in the last calendar year. 2 This rulemaking will likely affect only a limited population of these entities, specifically a limited population of existing and potential SBIC Licensees. Small entities affected by this proposed rule are a unique class comprised of SBIC Licensees. As of March 31, 2022, 294 SBIC Licensees were in operation. 3 SBA estimated that approximately 98 percent of these Licensees were small businesses based on NAICS subsector code 523 (Securities, Commodity Contracts, and Other Financial Investments and Related Activities) with annual receipts less than $41.5 million. Of these 294 SBICs, 57 were Non-Leveraged Licensees. The proposed rule distinguishes between Leveraged and Non-Leveraged Licensees in applicability of some of its changes and other proposed changes apply to all SBICs.

The proposed rule applies to all SBICs, 98 percent of which SBA estimates are small businesses. SBA estimates that the proposed rule may affect all of these small businesses. If SBICs are considered as a separate category from the other entities operating in the private equity, credit, and venture funds sector, then the rule does affect a substantial number of small businesses. However, the estimated burden of this proposed rule, detailed below, of a maximum of approximately $823 per SBIC before consideration of the offsetting cost savings of this proposed rule, would likely not constitute a significant economic impact on these small businesses, even where the significance threshold is as low as one percent of revenue impacted.

The proposed rule increases the frequency of filing Form 468 from semiannually to quarterly and requests more information on Form 468. SBA does not expect that these changes related to Form 468 will impose a significant burden because much of the required information is kept in the normal course of business. SBA also notes that the changes related to Form 468 are offset by reductions in other recordkeeping and compliance costs. The first proposed offset is the facilitation of non-leveraged SBICs' use of valuation policies that meet GAAP, which decreases costs of reporting, recordkeeping, and compliance. The proposed rule's second offset is the “Qualified Line of Credit” that provides an exemption from the SBA prior approval requirement for some lines of credit, thus reducing those SBICs' compliance costs.

Importantly, this proposed rulemaking does not directly impact small businesses receiving investments, nor any investors or small banks participating in the SBIC Licensee. This proposed rulemaking regulates the relevant SBIC Licensees. The courts have held that the RFA does not require a regulatory flexibility analysis for entities not directly regulated by the agency's proposed rulemaking. Thus, SBA is not required to conduct a reflexibility flexibility analysis on potential downstream benefits or costs to those entities.

Even so, this proposed rulemaking also does not have a significant economic impact on those small entities directly regulated under this rulemaking. SBA expects the changes in this proposed rule to increase program participation, access to capital, and diversity of investment strategies. The proposed rule does not impose significant new compliance requirements to SBIC program participants. The proposed rule introduces some measures to strengthen risk controls that may impose some reporting and compliance requirements to some program participants. However, these reporting and compliance requirements comprise nominal changes to frequency and content, particularly compared to existing industry standards apart from the SBIC program. The current annual burden for SBA Form 468 is estimated at 24,708 hours. Based on the current size of the SBIC program, SBA estimates the new reporting requirements to increase the annual hourly burden by 1,950 hours for a total estimated annual burden of 26,658 hours. The current annual burden for SBA Form 1031 is estimated at 728 hours and because the deadline for reporting would only change to the quarter after the date of financing, rather than 30 days after the date of each financing, there would be no change.

This proposed rule also defines a new class of Debentures, called accrual Debentures, that align with cash flows of equity-focused strategies. SBA expects benefits to program participants from this ability to align cash flows but is not able to quantify these benefits.

While SBA is unable to quantify the benefits and costs from these various changes, it reasonably expects these changes to not have significant impacts to the small entities that are program participants.

Based on the foregoing, the Administrator of the SBA hereby certifies that this rulemaking will not have a significant economic impact on a substantial number of small entities. The SBA invites comments from the public on this certification.

Accordingly, for the reasons stated in the preamble, SBA proposes to amend 13 CFR parts 107 and 121 as follows:

The additions and revisions read as follows:

The revision reads as follows:

The revisions and addition read as follows:

The revisions read as follows:

The revisions read as follows:

Section 251(a) of the National Housing Act (NHA) (12 U.S.C. 1715z-16(a)) authorizes HUD to insure ARMs and provides that adjustments to the interest rate shall correspond to a specified interest rate index approved in regulations by the Secretary, information on which must be readily accessible to mortgagors from generally available published sources. For HECMs, Section 255(d) of the NHA (12 U.S.C. 1715z-20(d)) authorizes FHA to insure variable rate HECMs and imposes additional eligibility requirements on HECMs, which include requirements for HECM ARMs.

HUD initially provided for mortgage insurance of ARMs for single family forward mortgages under 24 CFR part 203 and for part 234 condominium mortgages in 1984. 1 As provided in the statute at that time, the interest rate on ARMs had to be adjusted annually, and there was a 1 percent cap on annual adjustments and an overall cap of 5 percent above the initial interest rate over the term of the mortgage. The index originally used by HUD was the U.S. Constant Maturity Treasury (CMT). In 2001 and 2003, statutory changes to Section 251 of the NHA, 12 U.S.C. 1715z-16 allowed HUD to insure ARMs that have fixed interest rates for 3 years or more and are not subject to interest rate caps if the interest rate remains fixed for more than 3 years. 2 In 2004, HUD issued a rule (“the 2004 rule”) implementing these statutory changes and providing mortgage insurance for forward ARMs with interest rates first adjustable in 1 year, 3 years, 5 years, 7 years, and 10 years. 3

Under the 2004 rule, 1, 3, and 5-year ARMs were capped, for each adjustment, in either direction at one percentage point from the interest rate in effect for the period immediately preceding the adjustment. For the life of the mortgage, the overall 5 percent cap in either direction remained. For 7 and 10-year ARMs, HUD raised the per-adjustment cap to 2 percent of the rate in effect for the immediately preceding period, and the life-of-mortgage cap to 6 percent. In all cases, changes that exceeded these amounts could not be carried over for inclusion in an adjustment for the subsequent year. In 2005, HUD revised the regulation to allow for annual adjustments of 2 percent change in either direction, and a life-of-mortgage cap of 6 percent in either direction for 5-year ARMs in 2005, conforming 5-year ARMs to HUD's 7 and 10-year ARM products. 4

In 2007 (“the 2007 rule”), HUD added LIBOR, along with the CMT, as an acceptable index for ARM adjustments for its ARM products. 5 For forward mortgages, the applicability of these indices is codified at 24 CFR 203.49. The cap on 1 and 3-year ARMs (no more than 1 percent in either direction per single adjustment, with a 5 percent from initial contract rate cap over the life of the loan) is codified at § 203.49(f)(1). The caps for the 5, 7 and 10-year ARMs (2 percent in either direction per adjustment, with a 6 percent from initial contract rate cap for the life of the mortgage) are codified at § 203.49(f)(2). HUD also created model note and mortgage documents for forward ARMs and revised those model documents over the years. The 2015 Model ARM Note  6 contains a provision for the substitution of an index by the note holder based on “comparable information,” should the index specified in the note become unavailable.

In 1989, the Home Equity Conversion Mortgage program rule (the HECM rule) provided for ARMs with both capped and uncapped interest rate adjustments. 7 For capped HECM ARMs, the HECM rule retained the 5 percentage point life-of-mortgage limit on interest rate increases and decreases in § 203.49, but increased the annual limit on rate increases and decreases from 1 percentage point to 2 percentage points. The HECM rule also provided for a HECM ARM that sets a maximum interest rate that could be charged without a cap on monthly or annual increases or decreases.

In the 2007 rule, in which LIBOR was added for forward mortgages, HUD also added LIBOR as an acceptable index for HECM ARM adjustments in current §§ 206.3 (definitions) and 206.21 (interest rate). 8 HUD's model HECM ARM note and mortgage documents have been revised over the years, but the 2015 version contains provisions for the substitution of a Secretary-prescribed index, should the index specified in the note become unavailable. 9

For the capped option at § 206.21(b)(1), the interest rate cap structure is the same as provided in forward mortgages under § 203.49(a), (b), (d), and (f), except that under § 203.49(d), the reference to first debt service payment means the closing in the HECM ARM context, and under § 203.49(f)(1), the cap on adjustments for one- and three-year mortgages is 2 percentage points in the HECM ARM context. Section 206.21(b)(1)(ii) applies the LIBOR and CMT index options in the same manner as forward ARMs at § 203.49(b) for both the capped and uncapped options. In addition, the uncapped option at § 206.21(b)(2) includes options to adjust based on the one-month CMT or one-month LIBOR index. Section 206.21(b)(1)(iii) also includes ARM interest rate adjustment options for HECMs in the same manner as forward mortgages at § 203.49(d).

On March 11, 2021, in Mortgagee Letter 2021-08, HUD removed LIBOR as an approved index and approved the SOFR index for annually adjustable HECM ARMs closed on or after May 3, 2021. 10 A mortgagee may set rates using CMT or SOFR for annually adjustable HECM ARMs and CMT only for monthly adjustable HECM ARMs. Also, among other changes to the ARM requirements in the Mortgagee Letter, HUD published revised model mortgage documents with “fallback” language intended to address future interest rate index transition events. This language was modeled after the Alternative Reference Rates Committee's (ARRC)  11 published fallback language for residential ARMs. 12

The financial industry is transitioning from use of the LIBOR index given its increasing unreliability and speculative nature. As noted by the Financial Stability Oversight Council, the scarcity of underlying transactions makes LIBOR potentially unsustainable, as many banks have grown uncomfortable in providing submissions based on expert judgment and may eventually choose to stop submitting altogether. 13 The relatively small number of transactions underpinning LIBOR has been driven by changing market structure, regulatory capital, and liquidity requirements as well as changes in bank risk appetite for short-term funding, thereby creating uncertainty as to the integrity of the index.

In July of 2017, the U.K. Financial Conduct Authority (FCA), the financial regulator of LIBOR, announced that it would no longer persuade or compel contributing banks to submit rates used to calculate LIBOR after December 31, 2021, further heightening the uncertainty of LIBOR. 14 On November 30, 2020, the Federal Reserve Board announced that regulators had proposed clear end dates for the USD LIBOR immediately following the December 31, 2021 publication for the one week and two month USD LIBOR settings, and immediately following the June 30, 2023 publication for other USD LIBOR tenors. 15 On March 5, 2021, the ICE Benchmark Administration Limited (IBA) published the feedback it received to a December, 2020, consultation, and announced it would cease publication of the one month and one year USD LIBOR immediately following the LIBOR publication on June 30, 2023. 16

With the uncertainty and upcoming phase-out of LIBOR, mortgagees have been working to transition to a new replacement interest rate index for existing ARM contracts. The ARRC, a group of private market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York to ensure the transition from USD LIBOR to a reliable reference rate, recommended the selection of SOFR for use in new USD contracts. 17 SOFR is published by the Federal Reserve Bank of New York in cooperation with the Office of Financial Research, an independent bureau with the U.S. Department of the Treasury, and “. . . is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase agreement (repo) market.”  18 HUD anticipates that a spread-adjusted SOFR will be published to minimize the impact of the transition on legacy ARMs and other LIBOR-based contracts.

According to the ARRC, “SOFR is suitable to be used across a broad range of financial products, including but not limited to, derivatives (listed, cleared, and bilateral-OTC), and many variable rate cash products that have historically referenced LIBOR.”  19

As part of the Consolidated Appropriations Act, 2022, 20 Congress passed the Adjustable Interest Rate (LIBOR) Act of 2021 (LIBOR Act)  21 to, in part, create a clear and uniform process, on a nationwide basis, for replacing LIBOR in existing contracts where the terms do not provide for the use of a clearly defined or practicable replacement benchmark rate, without affecting the ability of parties to use any appropriate benchmark rate in a new contract. 22 Generally, for LIBOR-based ARMs without language providing for a specific replacement index, the default replacement index will be a spread-adjusted SOFR as provided for under the LIBOR Act.

The LIBOR Act establishes that this spread-adjusted replacement index will replace LIBOR for existing contracts on the Replacement Date, specified in the LIBOR Act as the first London banking day after June 30, 2023, unless the Federal Reserve Board specifies another date (the “Replacement Date”). 23 The LIBOR Act also established a one-year linear basis to transition the tenor spread adjustment from LIBOR to the SOFR spread-adjusted index. 24 For FHA-insured LIBOR-based ARMs, the LIBOR Act authorizes HUD to approve the spread-adjusted SOFR index, or another benchmark replacement index selected by HUD, as a replacement to LIBOR for existing ARMs starting on the Replacement Date. 25

On October 5, 2021, HUD published an advanced notice of proposed rulemaking (ANPR) to seek input from the public on the transition away from LIBOR. 26 HUD sought comment on how to address a Secretary-approved replacement index for existing loans and provide for a transition date consistent with the cessation of the LIBOR index. HUD also sought comment on replacing the LIBOR index with the SOFR interest rate index, with a compatible spread adjustment to minimize the impact of the replacement index for existing ARMs. The comment period closed on December 6, 2021. HUD received nine comments on the ANPR. Comments were mostly supportive of transitioning away from LIBOR and multiple commenters specifically suggested the use of SOFR as a replacement index. Commenters also provided suggestions on how to smoothly transition off LIBOR. HUD has considered these comments in drafting this proposed rule.

HUD proposes three changes. First, HUD proposes to transition from LIBOR to a spread-adjusted SOFR index for existing forward and HECM ARMs, and to replace LIBOR with SOFR as a Secretary-approved index for new ARMs. Second, HUD proposes to clarify its regulations regarding the Monthly Adjustable Interest Rate HECMs at § 206.21(b)(2). Third, HUD proposes to establish a five percentage point lifetime cap on the adjustment of the HECM monthly ARM interest rate.

This proposed rule addresses both the transition from LIBOR to SOFR for new forward ARM originations and the transition from LIBOR to a spread-adjusted SOFR index for existing forward and HECM ARMs. This proposed rule would also update the HECM ARM regulation consistent with changes already made through Mortgagee Letter 2021-08 regarding new originations.

HUD is proposing to remove LIBOR and approve SOFR as a Secretary-approved interest rate index for FHA-insured ARMs. CMT would continue to be a Secretary-approved interest rate, and this rule would provide that both CMT and SOFR may be used for periodic adjustments for newly-originated forward ARMs.

As discussed above, HUD, through Mortgagee Letter 2021-08, has already removed LIBOR and approved SOFR as a Secretary-approved interest rate index for HECM ARMs closed on or after May 3, 2021. This proposed rule would align forward ARM indices with the change made by Mortgagee Letter 2021-08. HUD is also proposing to update § 206.21(b)(1)(ii)(A) so that HUD's HECM ARM regulations are consistent with the changes made by Mortgagee Letter 2021-08. These changes include establishing zero as the minimum for the index value used to determine the mortgage interest rate for all HECMs to prevent against below-zero interest rates in a negative interest rate environment.

This rule proposes to use the 30-day average SOFR tenor adjusted to a constant maturity of one year. However, HUD anticipates that it may decide to approve additional SOFR tenors besides the 30-day average when additional SOFR tenors are published or more information about existing tenors is made available. Therefore, for both forward and HECM mortgages, HUD is also proposing that HUD may approve alternative SOFR tenors for new originations through notice.

For existing forward and HECM ARMs using LIBOR, HUD proposes to require that, on the Replacement Date, ARMs currently using LIBOR for their annual or monthly adjustments, as applicable, transition to the spread-adjusted SOFR index as specified in the LIBOR Act. This spread-adjusted SOFR would be the only Secretary-approved replacement index for transitioning existing forward and HECM LIBOR-based ARMs. HUD also proposes requiring that mortgagees provide notice to the borrower of the replacement in accordance with the terms of the loan documents.

Before the Replacement Date, the loan documents for these mortgages govern the terms of the loan and, as long as the LIBOR index is available, mortgagees may not have flexibility to substitute a new index without a modification of the existing loan documents or executing new loan documents. However, the LIBOR Act specifies that, on the Replacement Date, mortgagees will no longer be required to use LIBOR and must instead use a replacement index.

HUD anticipates that possible fluctuations in the interest rate from the transition to the spread-adjusted SOFR would be tempered by FHA's existing per-adjustment or life of mortgage caps set forth in the mortgage documents or FHA regulations. 27 Additionally, using the tenor spread adjustment as provided for in the LIBOR Act would further help to mitigate impacts due to the transition because this spread adjustment is intended to create as little disruption as possible during the transition. Furthermore, the applicable SOFR tenors will be identified by the Federal Reserve Board prior to the Replacement Date and HUD believes that the spread-adjusted SOFR will provide a comparable interest rate consistent with the rate that would have been generated by the LIBOR index.

HUD also proposes that the Secretary will publish through notice any additional requirements for transition of existing LIBOR-based ARMs to address technical aspects of the transition process, newly published SOFR tenors, and any developments arising from the transition.

When HUD issued its HECM final rule in January 2017, HUD removed cross references to 24 CFR part 203 and added specific language to discuss the annual adjustments for HECM ARMs, but did not include the same level of specific structure for monthly adjustments. 28 HUD is proposing to restructure § 206.21(b)(2) to clarify the requirements applicable to monthly adjustments to align with those provided for annual adjustments.

HUD proposes a limit on the adjustment of the HECM ARM monthly interest rate in either direction of no more than five percentage points from the initial contract interest rate. This change would align with similar ARM interest rate caps that are currently used for annual interest rate HECMs and forward ARMs in the mortgage industry. This proposal would reduce risk to the borrower and the Mutual Mortgage Insurance Fund (MMIF) by reducing potential loan balance growth.

In accordance with HUD's regulations on rulemaking at 24 CFR part 10, it is HUD's policy that the public comment period for proposed rules should be 60 days. In the case of this proposed rule, however, HUD has determined there is good cause to reduce the public comment period to 30 days.

HUD's October 5, 2021, ANPR sought 60 days of public comment on alternate indexes and best methods of transitioning off LIBOR. HUD received nine comments in response to HUD's ANPR that were generally supportive of the course of action HUD now proposes in this rule.

After HUD published its ANPR, Congress passed and the President signed into law the LIBOR Act, which provides for a clear and uniform nationwide process for replacing LIBOR in existing contracts. The LIBOR Act answered many of the questions that were uncertain at the time when HUD published its ANPR.

HUD believes the LIBOR Act, which HUD's proposed rule would implement, creates such an overwhelming industry standard that few if any questions remain regarding how HUD should proceed. HUD also believes that the comments received in response to its ANPR indicate that 30 days is sufficient time for commenters to consider and respond to this proposed rule.

HUD also believes that, with the discontinuation of LIBOR due for June 30, 2023, a 30-day comment period would aid HUD in moving toward a final rule as quickly as possible. Providing more time between the final rule and the discontinuation of LIBOR would ease the transition off LIBOR by ensuring that the regulatory structure and necessary guidance is in place to transition existing forward and HECM ARMs to a spread-adjusted replacement index, and to allow for the origination of new forward ARMs on a replacement index by June 30, 2023.

Given the above justifications, HUD believes that good cause exists to reduce the public comment period to 30 days. All comments received during the 30-day public comment period will be considered in the development of the final rule.

Under Executive Order 12866 (Regulatory Planning and Review), a determination must be made whether a regulatory action is significant and, therefore, subject to review by the Office of Management and Budget (OMB) in accordance with the requirements of the Order. Executive Order 13563 (Improving Regulations and Regulatory Review) directs executive agencies to analyze regulations that are “outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned. Executive Order 13563 also directs that, where relevant, feasible, and consistent with regulatory objectives, and to the extent permitted by law, agencies are to identify and consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public.

The current rules providing for the use of LIBOR as an index for interest rate adjustments for ARMs in HUD's forward and reverse mortgage insurance programs are becoming obsolete as LIBOR is in the process of being phased out. HUD is required by statute to approve by regulation interest rate indices for its forward ARM products. HUD must also amend by regulation its permitted interest rate indices for HECM ARM products and permit lenders to transition from LIBOR to a replacement index for existing HECM ARMs. Therefore, this rule is necessary to prevent HUD's rules on ARMs from becoming obsolete as well as to avoid the risk of financial harm for all ARM lenders and borrowers, and the larger ARM market, and the MMIF.

HUD does not expect the rule to have an economic impact as a result of the transition to the alternative rate. For newly endorsed forward ARMs, SOFR will become an available index in addition to the one-year CMT index. HUD has already removed LIBOR and approved SOFR for new annually adjustable HECM ARM originations. As of the Effective Date or prior to the cessation of LIBOR, existing LIBOR indexed FHA-insured ARMs may transition to a spread-adjusted SOFR to make it a comparable rate for existing LIBOR-based ARMs. Transition to the spread-adjusted SOFR will align FHA-insured ARMs with other LIBOR contracts covered by the LIBOR Act.

For existing mortgages that transition to spread-adjusted SOFR, we do not anticipate a significant economic impact. For all existing FHA-insured ARMs, the per-adjustment and lifetime caps on total adjustments will continue to apply, minimizing the impact to borrowers or mortgagees as a result of the transition to SOFR.

This rule was not subject to OMB review. This rule is not a “significant regulatory action” as defined in Section 3(f) of Executive Order 12866, and is not an economically significant regulatory action.

Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4; approved March 22, 1995) (UMRA) establishes requirements for federal agencies to assess the effects of their regulatory actions on state, local, and tribal governments, and on the private sector. This proposed rule would not impose any federal mandates on any state, local, or tribal governments, or on the private sector, within the meaning of the UMRA.

This proposed rule consists of “[s]tatutorily required and/or discretionary establishment and review of interest rates, mortgage limits, building cost limits, prototype costs, fair market rent schedules, HUD-determined prevailing wage rates, income limits and exclusions with regard to eligibility for or calculation of HUD housing assistance or rental assistance, and similar rate and cost determinations and related external administrative or fiscal requirements or procedures which do not constitute a development decision that affects the physical condition of specific project areas or building sites.” Accordingly, under 24 CFR 50.19(c)(6), this proposed rule is categorically excluded from environmental review under the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq. ) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. This rule would provide for the removal of LIBOR as an allowable index rate for adjustments for new FHA-insured forward ARMs and establish SOFR as a new index along with the CMT for new forward ARMs, aligning it with the available indices for annually adjustable HECM ARMs. There would be a Secretary-approved spread-adjusted SOFR for existing FHA-insured ARMs transitioning from LIBOR.

The change of this proposed rule requires mortgagees to, where appropriate, utilize a new approved index. Mortgagees are already required to substitute an index under the terms of their existing loan documents when the index used becomes unavailable. Additionally, this proposed rule establishes a new index for origination of new forward ARMs, which mortgagees regularly provide when originating a loan. Therefore, the changes in this proposed rule should not have a significant economic impact on mortgagees. If there is an economic effect on mortgagees, it would fall equally on all mortgagees who originate or service ARMs. Further, HUD anticipates that allowing an additional index for newly originated ARMs would have a net positive economic impact on borrowers and mortgagees by providing additional market opportunities, decreasing the cost of credit associated with these ARMs.

Therefore, the undersigned certifies that the rule will not have a significant economic impact on a substantial number of small entities. Notwithstanding HUD's determination that this rule will not have a significant effect on a substantial number of small entities, HUD specifically invites comments regarding any less burdensome alternatives to this rule that will meet HUD's objectives as described in the preamble to this rule.

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either: (1) imposes substantial direct compliance costs on State and local governments and is not required by statute, or (2) preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This proposed rule does not have federalism implications and does not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.

The information collection requirements contained in this proposed rule are currently approved by OMB and have been given OMB Control Number 2502-0322 and OMB Control Number 2502-0524 and 2502-0611. In accordance with the Paperwork Reduction Act, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.

For the reasons stated in the preamble, HUD proposes to amend 24 CFR parts 203 and 206 as follows:

The proposed changes are designed to explicitly ground the joint-employer standard in established common-law agency principles and provide relevant guidance to parties covered by the Act regarding their rights and responsibilities when more than one statutory employer possesses the authority to control or exercises the power to control particular employees' essential terms and conditions of employment.

On September 4, 1992, EPA promulgated 40 CFR part 55, 1 which established requirements to control air pollution from OCS sources in order to attain and maintain Federal and state ambient air quality standards and to comply with the provisions of part C of title I of the CAA. The regulations at 40 CFR part 55 apply to all OCS sources except those located in the Gulf of Mexico west of 87.5 degrees longitude. See 40 CFR 55.3(a). Section 328 of the CAA requires that for such sources located within 25 miles of a state's seaward boundary, the requirements shall be the same as would be applicable if the sources were located in the COA. Because the OCS requirements are based on onshore requirements, and onshore requirements may change, Section 328(a)(1) requires that EPA update the OCS requirements as necessary to maintain consistency with onshore requirements.

Pursuant to 40 CFR 55.12, consistency reviews will occur: (1) at least annually where an OCS activity is occurring within 25 miles of a State seaward boundary; (2) upon receipt of a Notice of Intent (NOI) under 40 CFR 55.4; or (3) when a state or local agency submits a rule to EPA to be considered for incorporation by reference in 40 CFR part 55. This proposed action is being taken in response to the submittal received by EPA on August 5, 2022, of a NOI, from US Wind, Inc., for the proposed installation of an up to 2-gigawatt offshore wind energy facility located approximately 10 nautical miles off the coast of Maryland. Public comments received in writing within 30 days of publication of this document will be considered by EPA before publishing a final rule.

Section 328(a) of the CAA requires that EPA establish requirements to control air pollution from OCS sources located within 25 miles of States' seaward boundaries that are the same as onshore requirements. To comply with this statutory mandate, EPA must incorporate applicable onshore rules into 40 CFR part 55 as they exist onshore. This limits EPA's flexibility in deciding which requirements will be incorporated into 40 CFR part 55 and prevents EPA from making substantive changes to the requirements it incorporates. As a result, EPA may be incorporating rules into 40 CFR part 55 that do not conform to all of EPA's state implementation plan (SIP) guidance or certain requirements of the CAA. Consistency updates may result in the inclusion of state or local rules or regulations into 40 CFR part 55, even though the same rules may ultimately be disapproved for inclusion as part of the SIP. Inclusion in the OCS rule does not imply that a rule meets the requirements of the CAA for SIP approval, nor does it imply that the rule will be approved by EPA for inclusion in the SIP.

EPA reviewed Maryland's rules for inclusion in 40 CFR part 55 to ensure that they are rationally related to the attainment or maintenance of Federal or state ambient air quality standards and compliance with part C of title I of the CAA, that they are not designed expressly to prevent exploration and development of the OCS, and that they are potentially applicable to OCS sources. See 40 CFR 55.1. EPA has also evaluated the rules to ensure they are not arbitrary or capricious. See 40 CFR 55.12(e). In addition, EPA has excluded administrative or procedural rules, and requirements that regulate toxics which are not related to the attainment and maintenance of Federal and state ambient air quality standards. 2

EPA last did a consistency update for Maryland on August 16, 2019 (84 FR 34065). In that action, EPA incorporated by reference into 40 CFR part 55 all of Maryland's regulations that EPA believed were relevant to the OCS requirements. For this action, EPA has reviewed changes that Maryland has made to its underlying regulatory programs. This action will have no effect on any provisions that were not subject to changes by Maryland and were also previously incorporated by reference into 40 CFR part 55 through EPA's August 16, 2019 rule. The rules that EPA proposes to incorporate are applicable provisions of the Code of Maryland Regulations (COMAR).

The intended effect of proposing approval of the OCS requirements for the Maryland Department of the Environment (MDE) is to regulate emissions from OCS sources in accordance with the requirements for onshore sources. The Maryland regulatory changes EPA proposes to incorporate are: (1) Chapter 8, Control of Incinerators—COMAR 26.11.08; (2) Chapter 17, Nonattainment Provisions for Major New Sources and Major Modifications General—COMAR 26.11.17; and (3) Chapter 20, Mobile Sources—COMAR 26.11.20. EPA is soliciting public comments on the issues discussed in this document. These comments will be considered before taking final action.

In this proposed rule, EPA is proposing to include in a final EPA rule regulatory text that includes incorporation by reference. In accordance with the requirements of 1 CFR 51.5, EPA is proposing to incorporate by reference the Code of Maryland Regulations air rules that are applicable to OCS sources and which are currently in effect. These regulations are described in Section III (“Proposed Action”) of this preamble. EPA has made, and will continue to make, these materials available through www.regulations.gov and at the EPA Region III Office. Please contact the person identified in the FOR FURTHER INFORMATION CONTACT section of this preamble for more information.

Under the Clean Air Act, the Administrator is required to establish requirements to control air pollution from OCS sources located within 25 miles of states' seaward boundaries that are the same as onshore air pollution control requirements. To comply with this statutory mandate, the EPA must incorporate applicable onshore rules into 40 CFR part 55 as they exist onshore. See 42 U.S.C. 7627(a)(1); 40 CFR 55.12. Thus, in promulgating OCS consistency updates, EPA's role is to maintain consistency between OCS regulations and the regulations of onshore areas, provided that they meet the criteria of the CAA. Accordingly, this action simply updates the existing OCS requirements that have been revised since the last consistency review to make them consistent with requirements onshore, without the exercise of any policy direction by EPA. For that reason, this proposed action:

• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);

• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq. );

• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. );

• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);

• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);

• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);

• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);

• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and

• Does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).

This proposed rulemaking incorporating by reference sections of COMAR does not apply on any Indian reservation land as defined in 18 U.S.C. 1151 or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, this rule incorporating by reference sections of COMAR does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).

This action does not impose any new information collection burden under the PRA. Office of Management and Budget (OMB) has previously approved the information collection activities contained in the existing regulations at 40 CFR part 55 and, by extension, this update to part 55, and has assigned OMB control number 2060-0249. This action does not impose a new information burden under PRA because this action only updates the state rules that are incorporated by reference into 40 CFR part 55, appendix A. 3

EPA is proposing to incorporate the rules potentially applicable to sources for which the State of Maryland will be the COA that have been revised since the last consistency review. The rules that EPA proposes to incorporate are applicable provisions of the Code of Maryland Regulations.

For the reasons set out in the preamble, title 40 of the Code of Federal Regulations, part 55, is proposed to be amended as follows.

In the “Rules and Regulations” section of this issue of the Federal Register , the EPA is authorizing changes to the North Dakota program as a direct final rule. The EPA did not make a proposal prior to the direct final rule because we believe this action is not controversial and do not expect comments that oppose it. We have explained the reasons for this authorization in the preamble to the direct final rule.

Unless the EPA receives written comments that oppose the authorization during the comment period, the direct final rule will become effective on the date it establishes, and we will not take further action on this proposal. If EPA receives comments that oppose the authorization, we will withdraw the direct final rule and it will not take immediate effect. We will then respond to public comments in a later final rule based on this proposal. You may not have another opportunity for comment. If you want to comment on this action, you must do so at this time.

You may submit your comments and materials concerning the status of, or threats to, the southern population of bog turtle, Pedernales River Springs salamander, ghost orchid, or tall western penstemon, or their habitats, by one of the methods listed above in ADDRESSES . We request that you send comments only by the methods described in ADDRESSES . Please include sufficient information with your submission (such as scientific journal articles or other publications) to allow us to verify any scientific or commercial information you include.

If you submit information via https://www.regulations.gov, your entire submission—including any personal identifying information—will be posted on the website. If your submission is made via a hardcopy that includes personal identifying information, you may request at the top of your document that we withhold this information from public review. However, we cannot guarantee that we will be able to do so. We will post all hardcopy submissions on https://www.regulations.gov.

Comments and materials we receive, as well as supporting documentation we used in preparing these findings, will be available for public inspection on https://www.regulations.gov.

Section 4 of the Act (16 U.S.C. 1533) and its implementing regulations in title 50 of the Code of Federal Regulations (50 CFR part 424) set forth the procedures for adding species to, removing species from, or reclassifying species on the Federal Lists of Endangered and Threatened Wildlife and Plants (Lists or List) in 50 CFR part 17. Section 4(b)(3)(A) of the Act requires that we make a finding on whether a petition to add a species to the List ( i.e., “list” a species), remove a species from the List ( i.e., “delist” a species), or change a listed species' status from endangered to threatened or from threatened to endangered ( i.e., “reclassify” a species) presents substantial scientific or commercial information indicating that the petitioned action may be warranted. To the maximum extent practicable, we are to make this finding within 90 days of our receipt of the petition and publish the finding promptly in the Federal Register .

Our regulations establish that substantial scientific or commercial information with regard to a 90-day petition finding refers to credible scientific or commercial information in support of the petition's claims such that a reasonable person conducting an impartial scientific review would conclude that the action proposed in the petition may be warranted (50 CFR 424.14(h)(1)(i)). A positive 90-day petition finding does not indicate that the petitioned action is warranted; the finding indicates only that the petitioned action may be warranted and that a full review should occur.

A species may be determined to be an endangered species or a threatened species because of one or more of the five factors described in section 4(a)(1) of the Act (16 U.S.C. 1533(a)(1)). The five factors are:

(a) The present or threatened destruction, modification, or curtailment of its habitat or range (Factor A);

(b) Overutilization for commercial, recreational, scientific, or educational purposes (Factor B);

(c) Disease or predation (Factor C);

(d) The inadequacy of existing regulatory mechanisms (Factor D); and

(e) Other natural or manmade factors affecting its continued existence (Factor E).

These factors represent broad categories of natural or human-caused actions or conditions that could have an effect on a species' continued existence. In evaluating these actions and conditions, we look for those that may have a negative effect on individuals of the species, as well as other actions or conditions that may ameliorate any negative effects or may have positive effects.

We use the term “threat” to refer in general to actions or conditions that are known to, or are reasonably likely to, affect individuals of a species negatively. The term “threat” includes actions or conditions that have a direct impact on individuals (direct impacts), as well as those that affect individuals through alteration of their habitat or required resources (stressors). The term “threat” may encompass—either together or separately—the source of the action or condition, or the action or condition itself. However, the mere identification of any threat(s) may not be sufficient to compel a finding that the information in the petition is substantial information indicating that the petitioned action may be warranted. The information presented in the petition must include evidence sufficient to suggest that these threats may be affecting the species to the point that the species may meet the definition of an endangered species or threatened species under the Act.

If we find that a petition presents such information, our subsequent status review will evaluate all identified threats by considering the individual-, population-, and species-level effects and the expected response by the species. We will evaluate individual threats and their expected effects on the species, then analyze the cumulative effect of the threats on the species as a whole. We also consider the cumulative effect of the threats in light of those actions and conditions that are expected to have positive effects on the species—such as any existing regulatory mechanisms or conservation efforts that may ameliorate threats. It is only after conducting this cumulative analysis of threats and the actions that may ameliorate them, and the expected effect on the species now and in the foreseeable future, that we can determine whether the species meets the definition of an endangered species or threatened species under the Act.

If we find that a petition presents substantial scientific or commercial information indicating that the petitioned action may be warranted, the Act requires that we promptly commence a review of the status of the species, and we will subsequently complete a status review in accordance with our prioritization methodology for 12-month findings (81 FR 49248, July 27, 2016).

We note that designating critical habitat is not a petitionable action under the Act. Petitions to designate critical habitat (for species without existing critical habitat) are reviewed under the Administrative Procedure Act and are not addressed in this finding (see 50 CFR 424.14(j)). To the maximum extent prudent and determinable, any proposed critical habitat will be addressed concurrently with a proposed rule to list a species, if applicable.

The petition findings contained in this document are listed in the table below, and the basis for each finding, along with supporting information, is available on https://www.regulations.gov under the appropriate docket number.

Bog turtle (southern population of Glyptemys muhlenbergii ); Georgia, North Carolina, South Carolina, Tennessee, Virginia.

On January 13, 2022, we received a petition from the Center for Biological Diversity (CBD), requesting that the southern population of the bog turtle ( Glyptemys muhlenbergii ) be listed as a threatened or an endangered species and critical habitat be designated for this species under the Act. On April 7, 2022, we received an additional petition from William Schultz requesting to join the CBD petition and that we list the southern population as threatened under the Act. Both petitions clearly identified themselves as such and included the requisite identification information for the petitioners, required at 50 CFR 424.14(c). This finding addresses these petitions.

In 1997, we listed the northern distinct population segment (DPS) of bog turtle (62 FR 59605, November 4, 1997). We concluded that the southern population of bog turtle did not meet the definition of a threatened or endangered species; however, we listed the southern population as a threatened species due to similarity of appearance to the northern population.

After reviewing the current information provided by the petitioners, we have determined that substantial new information exists indicating the southern population of bog turtle may warrant listing under the Act. The petitioners provided credible information indicating that there are potential threats to the species within the southern population due to loss and degradation of wetland habitat. The petitioners also presented information suggesting that threats to the species include development, vehicles and roads, overutilization ( i.e., poaching and collection for the pet trade), disease and predation, invasive species, climate change, succession and lack of wetland management, and small population size and other biological factors as well as information suggesting that existing regulatory mechanisms may be inadequate to address these potential threats. We will fully evaluate these potential threats during our 12-month status review for the species.

We reviewed the petitions, sources cited in the petitions, and other readily available information. Based on our review of the petitions and readily available information, we find that the petitions present substantial scientific or commercial information indicating the petitioned entity may qualify as a DPS and that listing the southern population of bog turtle ( Glyptemys muhlenbergii ) as a threatened or endangered species may be warranted due to loss and degradation of wetland habitat (Factor A). The petitioners also presented information suggesting that development, vehicles and roads, overutilization ( i.e., collection and poaching), disease and predation, invasive species, climate change, succession and lack of wetlands management, small population size and other biological factors may be threats to the southern population of bog turtle and regulatory mechanisms may be inadequate to address these potential threats (CBD 2022, pp. 30-49; Schultz 2022, pp. 3-7). We will fully evaluate these potential threats during our 12-month status review, pursuant to the Act's requirement to review the best scientific and commercial information available when making that finding.

The basis for our finding on these petitions and other information regarding our overview of the petitions can be found as an appendix at https://www.regulations.gov under Docket No. FWS-R4-ES-2022-0042 under the Supporting Documents section.

Pedernales River Springs salamander ( Eurycea species 1.); Texas.

On September 20, 2021, we received a petition dated the same, from Save our Springs Alliance and Wimberley Valley Watershed Association, requesting that Pedernales River Springs salamander be emergency-listed as an endangered species or a threatened species and critical habitat be designated for this species under the Act. The Act does not provide for a process to petition for emergency listing; therefore, we are evaluating this petition under the normal process of determining if it presents substantial scientific or commercial information indicating that the petitioned action may be warranted. The petition clearly identified itself as such and included the requisite identification information for the petitioner, required at 50 CFR 424.14(c). This finding addresses the petition.

The petitioner provided credible information indicating there are potential threats to the Pedernales River Springs salamander due to water quantity and quality degradation, physical modification of surface habitat, disease, predation, and limited range. The petitioner also provided credible information that the existing regulatory mechanisms may be inadequate to address these potential threats (Factor D). While we found that the petition provided documentation of one example of salamanders being stolen from a fish hatchery, there is no credible information to support overutilization impacts to the Pedernales River Springs salamander such that the species may warrant listing.

Based on our review of the petition and sources cited in the petition, we find that the petition presents substantial scientific or commercial information indicating the petitioned action may be warranted for the Pedernales River Springs salamander due to potential threats associated with the following: Water quantity and quality degradation and physical modification of surface habitat (Factor A); development activities leading to the introduction of predators and increased risk of disease (Factor C); and vulnerability due to the limited range of the species (Factor E).

The basis for our finding on this petition, and other information regarding our review of the petition, can be found as an appendix at https://www.regulations.gov under Docket No. FWS-R2-ES-2022-0014 under the Supporting Documents section.

Ghost orchid ( Dendrophylax lindenii ); Florida and Cuba.

On January 24, 2022, we received a petition from The Institute for Regional Conservation, the National Parks Conservation Association, and CBD requesting that the ghost orchid be listed as a threatened species or an endangered species and critical habitat be designated for this species under the Act. The petition clearly identified itself as such and included the requisite identification information for the petitioner, required at 50 CFR 424.14(c). This finding addresses the petition.

The petitioner provided credible information indicating past and current threats to individuals of the species within multiple subpopulations due to habitat destruction and alteration through hydrological change (Factor A) and other natural or manmade factors such as hurricanes (Factor E). The petition also provided information about threats from recreation and competition from invasive plants (Factor A); poaching and overutilization of recreational areas (Factor B); pest insects (Factor C); sea level rise (Factor E); and overall declining subpopulation numbers (Factor E), although these claims were not evaluated for this finding. The petition also claimed that the existing regulatory mechanisms may be inadequate to address these potential threats (Factor D). We found that the petition provided documentation of potential threats currently occurring within the range of the ghost orchid, and these threats are likely to impact not only individual orchids but also multiple subpopulations, particularly with regard to changes in hydrology.

Based on our review of the petition and sources cited in the petition, we find that the petition presents substantial scientific or commercial information indicating the petitioned action may be warranted for the ghost orchid due to potential threats associated with habitat destruction and alteration through hydrological change. The petitioners also presented additional information regarding threats due to recreation and competition from invasive plants; poaching and overutilization of recreational areas; pest insects; and sea level rise and hurricanes. We will fully evaluate these other potential threats during our 12-month status review pursuant to the Act's requirement to review the best available scientific information when making that finding.

The basis for our finding on this petition, and other information regarding our review of the petition, can be found as an appendix at https://www.regulations.gov under Docket No. FWS-R4-ES-2022-0041 under the Supporting Documents section.

Tall western penstemon ( Penstemon hesperius ) is an herbaceous perennial flowering plant found in wetlands in Washington County, Oregon, and Clark County, Washington.

On December 4, 2020, we received a petition dated December 3, 2020, from CBD and the Native Plant Society of Oregon, requesting that tall western penstemon be listed as a threatened species or an endangered species and critical habitat be designated for this species under the Act. The petition clearly identified itself as such and included the requisite identification information for the petitioner, required at 50 CFR 424.14(c). This finding addresses the petition.

Tall western penstemon is a valid recognized taxon (Hitchcock and Cronquist 2018, p. 461) with a limited range in Washington County, Oregon, and Clark County, Washington. The species is currently known from five sites, all of which occur on protected public lands. One small population appears to have been extirpated in 2009 as part of a road-widening project (Maffit 2012, p. 49). Although some additional populations may still exist outside of protected sites, any such populations would be vulnerable to ongoing development. The full historical range of the species is unknown, although substantially more suitable habitat likely occurred prior to large-scale habitat alteration for agriculture and urbanization in the Portland-Vancouver Metropolitan Area. Although the narrow range and limited number of populations of tall western penstemon on their own do not necessarily indicate that the species may be at risk of extinction now or in the foreseeable future, the petition presents substantial information indicating that the species faces ongoing potential risks associated with habitat alteration and conversion (Factor A), invasive species (Factor A), genetic isolation (Factor E), and climate change (Factor E).

We reviewed the petition, sources cited in the petition, and other readily available information. Based on our review of the petition regarding habitat loss or alteration due to wetland development and conversion to agriculture (Factor A), habitat alteration by invasive species (Factor A), effects of climate change (Factor E), and the possible inadequacy of existing regulatory mechanisms to address these threats (Factor D), we find that the petition presents substantial scientific or commercial information indicating that listing the tall western penstemon as a threatened or endangered species may be warranted. We will fully evaluate these potential threats during our 12-month status review, pursuant to the Act's requirement to review the best available scientific information when making that finding.

The basis for our finding on this petition, and other information regarding our review of the petition, can be found as an appendix at https://www.regulations.gov under Docket No. FWS-R1-ES-2022-0071 under the Supporting Documents section.

On the basis of our evaluation of the information presented in the petitions under section 4(b)(3)(A) of the Act, we have determined that the petitions summarized above for the southern population of bog turtle, Pedernales River Springs salamander, ghost orchid, and tall western penstemon present substantial scientific or commercial information indicating that the petitioned actions may be warranted. We are, therefore, initiating status reviews of these species to determine whether the actions are warranted under the Act. At the conclusion of the status reviews, we will issue findings, in accordance with section 4(b)(3)(B) of the Act, as to whether the petitioned actions are not warranted, warranted, or warranted but precluded by pending proposals to determine whether any species is an endangered species or a threatened species.

The primary authors of this document are staff members of the Ecological Services Program, U.S. Fish and Wildlife Service.

The authority for these actions is the Endangered Species Act of 1973, as amended (16 U.S.C. 1531 et seq. ).

Please refer to the 2019 not-warranted 12-month finding (84 FR 69707; December 19, 2019) and supporting documents available at https://www.regulations.gov under Docket No. FWS-R1-ES-2019-0096 for more detailed information about the Oregon coast DPS of red tree vole's taxonomy, life history, habitat and food requirements, and geographic range and distribution. Please also refer to our 2011 warranted-but-precluded 12-month finding (76 FR 63720; October 13, 2011) on a petition to list the north Oregon coast DPS of red tree vole for a detailed evaluation of this DPS under our DPS policy. Our DPS policy published in the Federal Register on February 7, 1996 (61 FR 4722).

Red tree voles ( Arborimus longicaudus ) are small, mouse-sized rodents that live in conifer forests and spend almost all their time in the tree canopy. They are one of the few animals that can persist on a diet of conifer needles, their principal food. Red tree voles are endemic to the humid, coniferous forests of western Oregon (generally west of the crest of the Cascade Range) and northwestern California (north of the Klamath River). The north Oregon coast DPS of red tree vole comprises that portion of the Oregon Coast Range from the Columbia River south to the Siuslaw River. Red tree voles demonstrate strong selection for nesting in older conifer forests.

On June 18, 2007, we received a petition from Center for Biological Diversity, Oregon Chapter of the Sierra Club, Audubon Society of Portland, Cascadia Wildlands Project, and OregonWild to list the dusky tree vole ( Arborimus longicaudus silvicola ) as endangered or threatened throughout its range under the Act (16 U.S.C. 1531 et seq. ). The petitioners also gave the Service two other listing options to consider if we determined that the subspecies was not a valid listable entity: (1) List the north Oregon coast population of the red tree vole ( A. longicaudus ) as a DPS, or (2) List the red tree vole throughout all its range because it is endangered or threatened in a significant portion of its range.

On October 28, 2008, we published a 90-day finding in the Federal Register (73 FR 63919) concluding that the petition presented substantial information indicating that listing the north Oregon coast DPS of the red tree vole may be warranted, and we initiated a status review. During that review, the best available scientific and commercial data led us to conclude that the dusky tree vole is not a valid subspecies for the purpose of our analysis, and we, therefore, focused our analysis on the north Oregon coast population of the red tree vole.

On October 13, 2011, we published in the Federal Register (76 FR 63720) a 12- month finding in which we stated that listing the north Oregon coast population of the red tree vole as a DPS was warranted primarily due to habitat loss. However, listing was precluded at that time by higher priority actions, and the DPS of the red tree vole was added to our candidate species list.

From 2012 through 2016, we addressed the status of the north Oregon coast DPS of the red tree vole annually in our candidate notice of review, with the determination that listing was warranted but precluded (see 77 FR 69994, November 21, 2012; 78 FR 70104, November 22, 2013; 79 FR 72450, December 5, 2014; 80 FR 80584, December 24, 2015; 81 FR 87246, December 2, 2016). Our 2019 candidate notice of review (84 FR 54732; October 10, 2019) retained that determination but also stated that we were working on a thorough review of all available data for the DPS.

On December 19, 2019, after completing a species status assessment, we published in the Federal Register (84 FR 69707) a 12-month finding determining that the north Oregon coast DPS of the red tree vole was not warranted for listing as endangered or threatened under the Act.

The petitioners filed a complaint in March 2021, challenging our December 19, 2019, not-warranted finding. We reached a settlement agreement with the petitioners, which was approved by the court on May 23, 2022, to reconsider our not-warranted finding and to develop a new 12-month finding as to whether the north Oregon coast DPS of the red tree vole warrants listing as an endangered or threatened species.

In accordance with the settlement agreement mentioned above, we are withdrawing our December 19, 2019, 12-month finding determining that the north Oregon coast DPS of the red tree vole is not warranted for listing as endangered or threatened under the Act (84 FR 69707). The withdrawal returns the north Oregon coast DPS of red tree vole to our candidate list, and the status of the DPS under the Act has, therefore, reverted to that of a candidate species for the purposes of consultation under section 7 of the Act.

We are initiating a new status review of the north Oregon coast DPS of the red tree vole to determine whether this DPS meets the definition of an endangered or threatened species under the Act, or whether the DPS is not warranted for listing. Under the settlement agreement, we will submit to the Federal Register a new 12-month finding on the status of the DPS by January 31, 2024.

We are requesting the submission of any further information pertaining to the north Oregon coast DPS of red tree vole that has become available since, or was not considered in, the 2019 status review. While we will accept new information on the red tree vole at any time, we request that new information be submitted no later than the date specified above under DATES to provide adequate time to incorporate it into our status review. We are particularly interested in the following types of information pertaining to the north Oregon coast DPS of red tree vole:

(1) Distribution, ecology, and life history of the DPS, including habitat needs and requirements for reproduction, growth, nutrition, and dispersal;

(2) Positive and negative survey information on the DPS;

(3) Potential stressors to the DPS or its habitat, including the threat of catastrophic wildfire;

(4) Ongoing and planned activities or projects in the areas occupied by the DPS, and possible impacts of these activities on the DPS;

(5) Whether there are any areas outside the area currently known to be occupied by the DPS that may be important to its conservation; and

(6) Past, current, and future conservation actions or management practices that may benefit the DPS or its habitat.

We will consider new information submitted to us in our new 12-month finding for the north coast DPS of the red tree vole. You may submit new information and materials by one of the methods listed in ADDRESSES . We request that you send comments only by the methods described in ADDRESSES .

Before including your address, phone number, email address, or other personal identifying information in your submission, be advised that your entire submission—including your personal identifying information—may be made publicly available at any time. Although you can ask us in your submission to withhold from public review your personal identifying information, we cannot guarantee that we will be able to do so.

The primary authors of this notice are staff members of the Pacific Regional Office, U.S. Fish and Wildlife Service.

The authority for this action is the Endangered Species Act of 1973, as amended (16 U.S.C. 1531 et seq. ).