[Title 13 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2005 Edition]
[From the U.S. Government Printing Office]



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          13

                         Revised as of January 1, 2005


          Business Credit and Assistance
          
          


________________________

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2005
          With Ancillaries
                    Published by:
                    Office of the Federal Register
                    National Archives and Records
                    Administration
                    A Special Edition of the Federal Register

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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 13:
          Chapter I--Small Business Administration                   3
          Chapter III--Economic Development Administration, 
          Department of Commerce                                   581
          Chapter IV--Emergency Steel Guarantee Loan Board         637
          Chapter V--Emergency Oil and Gas Guaranteed Loan 
          Board                                                    661
  Finding Aids:
      Material Approved for Incorporation by Reference........     687
      Table of CFR Titles and Chapters........................     689
      Alphabetical List of Agencies Appearing in the CFR......     707
      List of CFR Sections Affected...........................     717

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                     ----------------------------

                     Cite this Code:  CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 13 CFR 101.100 
                       refers to title 13, part 
                       101, section 100.

                     ----------------------------

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                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
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    To determine whether a Code volume has been amended since its 
revision date (in this case, January 1, 2005), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
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Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

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Code a note has been inserted to reflect the future effective date. In 
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inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

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Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
volumes. For the period beginning January 1, 2001, a ``List of CFR 
Sections Affected'' is published at the end of each CFR volume.

INCORPORATION BY REFERENCE

    What is incorporation by reference? Incorporation by reference was 
established by statute and allows Federal agencies to meet the 
requirement to publish regulations in the Federal Register by referring 
to materials already published elsewhere. For an incorporation to be 
valid, the Director of the Federal Register must approve it. The legal 
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if it were published in full in the Federal Register (5 U.S.C. 552(a)). 
This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
    Properly approved incorporations by reference in this volume are 
listed in the Finding Aids at the end of this volume.
    What if the material incorporated by reference cannot be found? If 
you have any problem locating or obtaining a copy of material listed in 
the Finding Aids of this volume as an approved incorporation by 
reference, please contact the agency that issued the regulation 
containing that incorporation. If, after contacting the agency, you find 
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Register, National Archives and Records Administration, Washington DC 
20408, or call 202-741-6010.

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the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

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REPUBLICATION OF MATERIAL

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                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

January 1, 2005.

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                               THIS TITLE

    Title 13--Business Credit and Assistance is composed of one volume. 
This volume contains chapter I--Small Business Administration, chapter 
III--Economic Development Administration Department of Commerce, chapter 
IV--Emergency Steel Guartantee Board, and chapter V--Emergency Oil and 
Gas Guarantee Board. The contents of this volume represent all current 
regulations codified under this title of the CFR as of January 1, 2005.

    For this volume, Carol A. Conroy was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of 
Frances D. McDonald, assisted by Alomha S. Morris.


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                TITLE 13--BUSINESS CREDIT AND ASSISTANCE




  --------------------------------------------------------------------
                                                                    Part

chapter i--Small Business Administration....................         101

chapter iii--Economic Development Administration, Department 
  of Commerce...............................................         300

chapter iv--Emergency Steel Guarantee Loan Board, Department 
  of Commerce...............................................         400

chapter v--Emergency Oil and Gas Guaranteed Loan Board, 
  Department of Commerce....................................         500

Cross Reference: For regulations of the Securities and Exchange 
  Commission, see 17 CFR, Chapter II.


Abbreviations Used in This Chapter:
    SBA = Small Business Administration. SBID = The Small Business 
  Investment Division of SBA. RFC = Reconstruction Finance Corporation.

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                CHAPTER I--SMALL BUSINESS ADMINISTRATION


  --------------------------------------------------------------------


  Editorial Note: The Small Business Administration has asked the 
Director of the Federal Register to inform users of this chapter that 
parts 143, 145, and 146 are common rule regulations that cannot be 
amended by the Small Business Administration unilaterally.
Part                                                                Page
101             Administration..............................           5
102             Record disclosure and privacy...............          10
103             Standards for conducting business with SBA..          22
105             Standards of conduct and employee 
                    restrictions and responsibilities.......          24
107             Small business investment companies.........          28
108             New Markets Venture Capital (``NMVC'') 
                    Program.................................          97
112             Nondiscrimination in federally assisted 
                    programs of SBA--effectuation of Title 
                    VI of the Civil Rights Act of 1964......         140
113             Nondiscrimination in financial assistance 
                    programs of SBA--effectuation of 
                    policies of Federal Government and SBA 
                    Administrator...........................         146
114             Administrative claims under the Federal Tort 
                    Claims Act and representation and 
                    indemnification of SBA employees........         171
115             Surety bond guarantee.......................         175
117             Nondiscrimination in federally assisted 
                    programs or activities of SBA--
                    effectuation of the Age Discrimination 
                    Act of 1975, as amended.................         192
119             Program for investment in Microentrepreneurs 
                    (``PRIME'' or (``The Act'').............         203
120             Business loans..............................         210
121             Small business size regulations.............         281
123             Disaster loan program.......................         337
124             8(a) Business Development/Small 
                    Disadvantaged Business status 
                    determinations..........................         356
125             Government contracting programs.............         417
126             HUBZone program.............................         441
130             Small business development centers..........         460
134             Rules of procedure governing cases before 
                    the Office of Hearings and Appeals......         472
136             Enforcement of nondiscrimination on the 
                    basis of handicap in programs or 
                    actitities conducted by the Small 
                    Business Administration.................         492

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140             Debt collection through offset..............         500
142             Program Fraud Civil Remedies Act regulations         502
143             Uniform administrative requirements for 
                    grants and cooperative agreements to 
                    State and local governments.............         512
145             Governmentwide debarment and suspension 
                    (nonprocurement)........................         539
146             New restrictions on lobbying................         562
147             Governmentwide requirements for drug-free 
                    workplace (nonprocurement)..............         574

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PART 101--ADMINISTRATION--Table of Contents


                           Subpart A--Overview

Sec.
101.100  What is the purpose of SBA?
101.101  Who manages SBA?
101.102  Where is SBA's Headquarters located?
101.103  Where are SBA's field offices located?
101.104  What are the functions of SBA's field offices?
101.105  Who may use SBA's official seal and for what purposes?
101.106  Does Federal law apply to SBA programs and activities?
101.107  What SBA forms are approved for public use?
101.108  Has SBA waived any of the public participation exemptions of 
          the Administrative Procedure Act?
101.109  Do SBA regulations include the section headings?

                Subpart B--Employment of Private Counsel

101.200  When does SBA hire private counsel?
101.201  What are the minimum terms of private counsel's employment?

                      Subpart C--Inspector General

101.300  What is the Inspector General's authority to conduct audits, 
          investigations, and inspections?
101.301  Who should receive information or allegations of waste, fraud, 
          and abuse?
101.302  What is the scope of the Inspector General's authority?
101.303  How are Inspector General subpoenas served?

                Subpart D--Intergovernmental Partnership

101.400  What is the purpose of this subpart?
101.401  What programs and activities of SBA are subject to this 
          subpart?
101.402  What procedures apply to the selection of SBA programs and 
          activities?
101.403  What are the notice and comment procedures?
101.404  How does the Administrator receive comments?
101.405  How does the Administrator respond to comments?
101.406  What are the Administrator's responsibilities in interstate 
          situations?
101.407  May the Administrator waive these regulations?

    Authority: 5 U.S.C. 552 and App. 3, secs. 2, 4(a), 6(a), and 
9(a)(1)(T); 15 U.S.C. 633, 634, 687; 31 U.S.C. 6506; 44 U.S.C. 3512; 
E.O. 12372 (July 14, 1982), 47 FR 30959, 3 CFR, 1982 Comp., p. 197, as 
amended by E.O. 12416 (April 8, 1983), 48 FR 15887, 3 CFR, 1983 Comp., 
p. 186.

    Source: 61 FR 2394, Jan. 26, 1996, unless otherwise noted.



                           Subpart A--Overview



Sec. 101.100  What is the purpose of SBA?

    The U.S. Small Business Administration (SBA) aids, counsels, 
assists, and protects the interests of small business concerns, and 
advocates on their behalf within the Government. It also helps victims 
of disasters. It provides financial assistance, contractual assistance, 
and business development assistance. For a more detailed description of 
the functions of SBA see The United States Government Manual, a special 
publication of the Federal Register, which is available from 
Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954.



Sec. 101.101  Who manages SBA?

    (a) An Administrator, appointed by the President with the advice and 
consent of the Senate, manages SBA. The Administrator--
    (1) Is responsible to the President and Congress for exercising 
direction, authority, and control over SBA.
    (2) Determines and approves all policies covering SBA's programs to 
aid, counsel, assist, and protect the interests of the nation's small 
businesses.
    (3) Employs or appoints employees necessary to implement the Small 
Business Act, as amended, the Small Business Investment Act, as amended, 
and other laws and directives.
    (4) Delegates certain activities, by issuing regulations or 
otherwise, to Headquarters and field positions.
    (b) A Deputy Administrator, appointed by the President with the 
advice and consent of the Senate, serves as Acting Administrator during 
the absence or disability of the Administrator or in the event of a 
vacancy in the Office of the Administrator.



Sec. 101.102  Where is SBA's Headquarters located?

    The Headquarters of SBA is at 409 3rd Street, SW., Washington, DC 
20416.

[[Page 6]]



Sec. 101.103  Where are SBA's field offices located?

    A list of SBA's field offices with addresses, phone numbers and 
jurisdictions served is periodically published in the Federal Register. 
You can also obtain the address and phone number of an SBA office to 
serve you by calling 1-800-8-ASK-SBA or 1-800-827-5722.



Sec. 101.104  What are the functions of SBA's field offices?

    (a) Regional offices. Regional offices are managed by a Regional 
Administrator who is responsible to the Administrator and to the 
Associate Administrator for Field Operations. They are located in major 
cities and have geographical boundaries which cover multi-state areas. 
Regional offices exercise limited authority over field activities within 
their region.
    (b) District offices. District offices are managed by a District 
Director and are located in cities within a region. District offices are 
responsible to Headquarters, the Associate Administrator for Field 
Operations, and to a regional office. Within their delegated authority, 
district offices have authority for--
    (1) Conducting all program delivery activities within the district 
boundaries;
    (2) Supervising all branch offices located within the district 
boundaries; and
    (3) Providing subordinate branch offices with the technical 
capability necessary to execute assigned programs.
    (c) Branch offices. Branch offices are managed by a Branch Manager 
and are located in cities within a district. Branch offices are 
responsible to the district office within whose boundaries it is 
located. Branch offices execute one or more elements of the business or 
disaster loan programs and have limited authority for program execution.
    (d) Disaster area offices. Disaster area offices are managed by Area 
Directors and are located in cities within defined geographical areas. 
Disaster area offices are responsible to Headquarters and provide loan 
services to victims of declared disasters. Temporary disaster offices 
are often established in areas where disasters have occurred.
    (e) Responsibilities. Each field office has responsibilities within 
a defined geographical area as periodically set forth in the Federal 
Register.



Sec. 101.105  Who may use SBA's official seal and for what purposes?

    (a) The SBA's seal shall be in a manner and form set forth as 
follows:
[GRAPHIC] [TIFF OMITTED] TC08SE91.003

    (b) The Administrator, Deputy Administrator, General Counsel, 
Assistant Administrator for Administration, Assistant Administrator for 
Hearings and Appeals, Associate Administrator for Minority Enterprise 
Development, Regional Administrators, District Directors, Branch 
Managers, the Inspector General, and Disaster Area Directors are 
authorized to--
    (1) Certify and authenticate originals and copies of any books, 
records, papers, or other documents on file within SBA, or extracts 
taken from them.
    (2) Certify the nonexistence of records.
    (3) Affix the Seal of SBA to all such certifications for those 
purposes authorized by 28 U.S.C. 1733.



Sec. 101.106  Does Federal law apply to SBA programs and activities?

    (a) SBA makes loans and provides other services that are authorized 
and executed under Federal programs to achieve national purposes.
    (b) The following are construed and enforced in accordance with 
Federal law--
    (1) Instruments evidencing loans;

[[Page 7]]

    (2) Security interests in real or personal property payable to or 
held by SBA or the Administrator such as promissory notes, bonds, 
guarantee agreements, mortgages, and deeds of trust;
    (3) Other evidences of debt or security;
    (4) Contracts or agreements to which SBA is a party, unless 
expressly provided otherwise.
    (c) To the extent feasible, SBA uses local or state procedures, 
especially for recordation and notification purposes, in implementing 
and facilitating SBA's loan programs. This use of local or state 
procedures is not a waiver by SBA of any Federal immunity from any local 
or state control, penalty, tax, or liability.
    (d) No person, corporation, or organization that applies for and 
receives any benefit or assistance from SBA, or that offers any 
assurance or security upon which SBA relies for the granting of such 
benefit or assistance, is entitled to claim or assert any local or state 
law to defeat the obligation incurred in obtaining or assuring such 
Federal benefit or assistance.



Sec. 101.107  What SBA forms are approved for public use?

    (a) SBA uses forms approved by the Office of Management and Budget 
(OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.), as amended. You may obtain approved forms for use by the public 
when applying for or obtaining SBA assistance, or when providing 
services for SBA, from any field office (see Sec. 101.103). You may also 
use forms which you have prepared yourself, or have obtained from 
another source, if those forms are identical in every respect to the 
forms approved by OMB for the same purpose.
    (b) Any member of the public who has reason to believe any SBA 
office or agent is in violation of the Public Protection Clause of the 
Paperwork Reduction Act (44 U.S.C. 3512 and see 5 CFR 1320.6) should 
notify SBA. Direct such comments to the Assistant Administrator for 
Administration at 409 3rd Street, SW., Washington, DC 20416.



Sec. 101.108  Has SBA waived any of the public participation exemptions of 
the Administrative Procedure Act?

    Yes. Despite these exemptions, SBA will follow the public 
participation requirements of the Administrative Procedure Act, 5 U.S.C. 
553, in rulemakings relating to public property, loans, grants, 
benefits, or contracts.



Sec. 101.109  Do SBA regulations include the section headings?

    Yes. All SBA regulations must be interpreted as including the 
section headings.



                Subpart B--Employment of Private Counsel



Sec. 101.200  When does SBA hire private counsel?

    (a) Business loans. SBA may hire private counsel to represent it in 
regard to business loans when the volume of activity in an area is not 
sufficient to require a full-time SBA employee, or the area is too 
remote for economical use of a full-time SBA employee.
    (b) Disaster loans. SBA may hire private counsel in regard to 
disaster loans when the disaster presents an emergency and a volume of 
activity that cannot be promptly and economically serviced by available 
SBA employees.



Sec. 101.201  What are the minimum terms of private counsel's employment?

    (a) Private counsel must perform all requested work in compliance 
with SBA's regulations, policies, and instructions, and take such action 
as is legally required under the Small Business Act, the Small Business 
Investment Act, and other laws applicable to SBA.
    (b) Private counsel must adhere to the highest standards of 
professional conduct and maintain confidentiality appropriate to the 
attorney-client relationship.
    (c) Private counsel acts under the supervision of the SBA General 
Counsel (and designees).
    (d) Private counsel usually is compensated at an hourly rate as 
approved by SBA. Contingency fee agreements may be used if approved by 
the General Counsel.

[[Page 8]]

    (e) Either party may terminate the employment upon written notice.



                      Subpart C--Inspector General



Sec. 101.300  What is the Inspector General's authority to conduct audits, investigations, and inspections?

    The Inspector General Act of 1978, as amended (5 U.S.C. App. 3) 
authorizes SBA's Inspector General to provide policy direction for, and 
to conduct, supervise, and coordinate such audits, investigations, and 
inspections relating to the programs and operations of SBA as appears 
necessary or desirable.



Sec. 101.301  Who should receive information or allegations of waste, fraud, and abuse?

    The Office of Inspector General should receive all information or 
allegations of waste, fraud, or abuse regarding SBA programs and 
operations.



Sec. 101.302  What is the scope of the Inspector General's authority?

    To obtain the necessary information and evidence, the Inspector 
General (and designees) have the right to:
    (a) Have access to all records, reports, audits, reviews, documents, 
papers, recommendations, and other materials available to SBA and 
relating to SBA's programs and operations;
    (b) Require by subpoena the production of all information, 
documents, reports, answers, records, accounts, papers, and other data 
and documentary evidence;
    (c) Administer oaths and affirmations or take affidavits; and
    (d) Request information or assistance from any Federal, state, or 
local government agency or unit.



Sec. 101.303  How are Inspector General subpoenas served?

    (a) Service of subpoenas may be effected by any of the following 
means--
    (1) If by mail, a copy of the subpoena must be addressed to the 
person, partnership, corporation, or unincorporated association to be 
served at a residence or usual dwelling place, or a principal office or 
place of business, and mailed first class by registered or certified 
mail (postage prepaid, return receipt requested), or by a commercial or 
U.S. Postal Service overnight or express delivery service.
    (2) If by personal delivery, a copy of the subpoena must be 
delivered to the person to be served, or to a member of the partnership 
to be served, or to an executive officer or a director of the 
corporation or unincorporated association to be served, or to a person 
authorized by appointment or by law to receive process for the person or 
entity named in the subpoena.
    (3) If by delivery to an address, a copy of the subpoena must be 
left at the principal office or place of business of the person, 
partnership, corporation, or unincorporated association to be served, or 
at the residence or usual dwelling place of the person, member of the 
partnership, or officer or director of the corporation or unincorporated 
association to be served, with someone of suitable age and discretion.
    (b) Proof of service--
    (1) When service is by registered, certified, overnight, or express 
mail, it is complete upon delivery of the document by the Postal Service 
or commercial service.
    (2) The return Postal Service receipt for a document that was 
registered or certified and mailed, the signed receipt for a document 
delivered by an overnight or express delivery service, or the Return of 
Service completed by the individual serving the subpoena by personal 
delivery shall be proof of service.



                Subpart D--Intergovernmental Partnership



Sec. 101.400  What is the purpose of this subpart?

    (a) This subpart implements section 401 of the Intergovernmental 
Cooperation Act (31 U.S.C. 6506 et seq.) which promotes 
intergovernmental partnership and strengthens Federalism by relying on 
state processes and state, area-wide, regional, and local coordination 
for the review of proposed Federal financial assistance and direct 
Federal development.
    (b) While guiding SBA's management, this subpart does not create any 
right or benefit enforceable at law.

[[Page 9]]



Sec. 101.401  What programs and activities of SBA are subject to this 
subpart?

    SBA publishes in the Federal Register a list of programs and 
activities subject to this subpart.



Sec. 101.402  What procedures apply to the selection of SBA programs and activities?

    (a) A state may--
    (1) Select any program or activity published in the Federal Register 
under Sec. 101.401 for intergovernmental review (providing it consults 
with local elected officials before doing so) and then notify the 
Administrator of the programs and activities selected; and
    (2) Notify the Administrator of changes in its selections at any 
time. For each change, the state submits to the Administrator an 
assurance that it consulted with local elected officials regarding the 
change.
    (b) SBA may establish deadlines by which states must inform the 
Administrator of changes in their program selections.
    (c) After receiving notice of a state's selections, the 
Administrator uses a state's process as soon as feasible depending on 
individual programs and activities.
    (d) ``State'' means any of the 50 States, the District of Columbia, 
the Commonwealth of Puerto Rico, the Commonwealth of the Northern 
Mariana Islands, Guam, American Samoa, the U.S. Virgin Islands, or the 
Trust Territory of the Pacific Islands.



Sec. 101.403  What are the notice and comment procedures?

    (a) The Administrator provides notice to directly affected state, 
area-wide, regional, and local entities in a state of proposed SBA 
financial assistance or direct SBA development if--
    (1) The state has not adopted a process under Executive Order 12372 
(3 CFR, 1982 Comp., p. 197), as amended by Executive Order 12416 (3 CFR, 
1983 Comp., p. 186); or
    (2) The assistance or development involves a program or activity not 
selected for the state process.
    (b) Notice may be made by publication in the Federal Register or 
other means as SBA deems appropriate.
    (c) Except in unusual circumstances the Administrator gives state 
processes or directly affected state, area-wide, regional, and local 
officials and entities at least 60 days to comment on proposed SBA 
financial assistance or direct SBA development.
    (d) In cases where SBA delegates the review, coordination, and 
communication authority under this subpart, this section also applies.



Sec. 101.404  How does the Administrator receive comments?

    (a) The Administrator follows the procedures of Sec. 101.405 if--
    (1) A state office or official is designated to act as a single 
point of contact between a state process and all Federal agencies; and
    (2) That office or official transmits a state process recommendation 
for a program selected under Sec. 101.402(a).
    (b)(1) The single point of contact is not obligated to transmit 
comments from state, area-wide, regional, or local officials and 
entities where there is no state process recommendation.
    (2) If a state process recommendation is transmitted by a single 
point of contact, all comments from state, area-wide, regional, and 
local officials and entities that differ from it must also be 
transmitted.
    (c) If a state has not established a process, or is unable to submit 
a state process recommendation, state, area-wide, regional, and local 
officials and entities may submit comments to SBA.
    (d) If a program or activity is not selected for a state process, 
state, area-wide, regional, and local officials and entities may submit 
comments to SBA. In addition, if a state process recommendation for a 
non-selected program or activity is transmitted to SBA by the single 
point of contact, the Administrator follows the procedures of 
Sec. 101.405.
    (e) The Administrator considers comments which do not constitute a 
state process recommendation submitted under this subpart and for which 
the Administrator is not required to apply the procedures of 
Sec. 101.405 when such comments are provided by a single point of 
contact directly to SBA by a commenting party.

[[Page 10]]



Sec. 101.405  How does the Administrator respond to comments?

    (a) If a state process provides a recommendation to SBA through its 
single point of contact, the Administrator:
    (1) Accepts the recommendation; or
    (2) Reaches a mutually agreeable solution with the state process; or
    (3) Provides the single point of contact with a written explanation 
of the decision in a form the Administrator deems appropriate. The 
Administrator may also supplement the written explanation by telephone 
or other means.
    (b) In any explanation under paragraph (a)(3) of this section, the 
Administrator informs the single point of contact that--
    (1) SBA will not implement its decision for at least 10 days after 
the single point of contact receives the explanation; or
    (2) Because of unusual circumstances the waiting period of at least 
10 days is not feasible.
    (c) For purposes of computing the waiting period under paragraph 
(b)(1) of this section, a single point of contact is presumed to have 
received written notification 5 days after the date of mailing.



Sec. 101.406  What are the Administrator's responsibilities in interstate situations?

    The Administrator is responsible for--
    (a) Identifying proposed SBA financial assistance and direct SBA 
development that have an impact on interstate areas;
    (b) Notifying appropriate officials and entities in states which 
have adopted a process and selected an SBA program or activity;
    (c) Making efforts to identify and notify the affected state, area-
wide, regional, and local officials and entities in states that have not 
adopted a process or selected an SBA program or activity;
    (d) Using the procedures of Sec. 101.405 if a recommendation of a 
designated area-wide agency is transmitted by a single point of contact 
in cases in which the review, coordination, and communication with SBA 
has been delegated; and
    (e) Using the procedures of Sec. 101.405 if a state process provides 
a state recommendation to SBA through a single point of contact.



Sec. 101.407  May the Administrator waive these regulations?

    The Administrator may waive any provision of Secs. 101.400 through 
and including 101.406 in an emergency.



PART 102--RECORD DISCLOSURE AND PRIVACY--Table of Contents


                  Subpart A--Disclosure of Information

Sec.
102.1  General provisions.
102.2  Public reading rooms.
102.3  Requirements pertaining to the submission of requests.
102.4  Timing of responses to requests.
102.5  Responses to requests.
102.6  Fees.
102.7  Business information.
102.8  Appeals.
102.9  Public Index.
102.10  What happens if I subpoena records or testimony of employees in 
          connection with a civil lawsuit, criminal proceeding or 
          administrative proceeding to which SBA is not a party?

                       Subpart B--The Privacy Act

102.20  What privacy rights does this subpart regulate?
102.21  How will SBA maintain records?
102.22  When will SBA disclose records?
102.23  Are there special rules about personnel and equal employment 
          opportunity files?
102.24  What is a record?
102.25  What is a system of records?
102.26  What does this subpart mean by ``person to whom a record 
          pertains'' or ``you''?
102.27  What records are partially exempt from the provisions of the 
          Privacy Act?
102.28  What about information compiled for a civil action?
102.29  Who administers SBA's responsibilities under the Privacy Act?
102.30  How can I write to the Privacy Act Officer?
102.31  Who appoints Systems Managers?
102.32  What do Systems Managers do?
102.33  How can I write to a Systems Manager?
102.34  How can I see records kept on me?
102.35  How long will it take SBA to respond to my request?
102.36  How will SBA respond to my request?
102.37  How may I appeal a decision to deny me access to my records?

[[Page 11]]

102.38  To whom should my appeal be addressed?
102.39  By when must I appeal to the Privacy Act Officer?
102.40  When will SBA respond to my appeal?
102.41  How will SBA respond to my appeal?
102.42  How can I get SBA to amend a record kept on me?
102.43  What should my petition say?
102.44  For what reasons will SBA amend my record?
102.45  Will SBA ask me for more information after I make my request?
102.46  When will SBA respond to my request?
102.47  How will SBA respond to my request?
102.48  How do I appeal a refusal to amend a record kept on me?
102.49  To whom should I address my appeal?
102.50  By when must I submit my appeal?
102.51  By what standards will the Privacy Act Officer review my appeal?
102.52  When will SBA respond to my appeal?
102.53  How will SBA respond to my appeal?
102.54  How can I obtain judicial review of an SBA Privacy Act decision?
102.55  What must SBA tell the individuals from whom it collects 
          information?
102.56  Will SBA release my name or address?
102.57  Do I have to give SBA my SSN?
102.58  When will SBA show personnel records to a representative?
102.59  What fees will SBA charge me for my records?
102.60  May I be informed of disclosures made of my records?
102.61  Are there Matching Program procedures?

    Authority: 5 U.S.C. 552 and 552a; 31 U.S.C. 1 et seq. and 67 et 
seq.; 44 U.S.C. 3501 et seq.; E.O. 12600, 3 CFR, 1987 Comp., p. 235.

    Source: 61 FR 2673, Jan. 29, 1996, unless otherwise noted.



                  Subpart A--Disclosure of Information

    Source: 68 FR 59092, Oct. 14, 2003, unless otherwise noted.



Sec. 102.1  General provisions.

    This subpart describes the procedures that the U.S. Small Business 
Administration (SBA) follows for responding to requests made under the 
Freedom of Information Act (FOIA) (5 U.S.C. 552).



Sec. 102.2  Public reading rooms.

    (a) SBA maintains a public reading room in the Headquarters 
Reference Library at 409 3rd St., SW., Suite 5000, Washington, DC 20416 
where you may read and copy the following:
    (1) Final SBA opinions and orders issued by the Office of Hearings 
and Appeals in adjudicating a case,
    (2) Official non-privileged policy statements, opinions, or 
interpretations,
    (3) Standard operating procedures affecting members of the public,
    (4) Records SBA has released in response to previous FOIA requests 
which, because of their subject matter, SBA determines are likely to be 
requested again, and
    (5) An index of the records referred to under paragraph (a)(4) of 
this section.
    (b) The records described in paragraph (a) of this section are 
available in the SBA Online Reading Room at http://www.sba.gov/library/.
    (c) Reading room records created on or after November 1, 1996 are 
available electronically.



Sec. 102.3  Requirements pertaining to the submission of requests.

    (a) You may make a request for SBA records by writing directly to 
the program or field office that maintains the records, or to the 
Freedom of Information/Privacy Acts (FOI/PA) Office by mail to 409 3rd 
St., SW., Washington, DC 20416 or fax to 202-205-7059 or e-mail to 
foia@sba.gov. The office receiving your request will forward it to the 
correct office. The correct office will consider your request to be 
complete only when you:
    (1) Describe the records sought in enough detail for an Agency 
employee to locate the records with a reasonable amount of effort;
    (2) Agree to pay applicable fees pursuant to Sec. 102.6, unless you 
seek a waiver of fees; and
    (3) Make an advance payment if either the correct office estimates 
the fees will exceed $250 or you owe for past FOIA fees. If you owe past 
due FOIA fees, you must pay the estimated amount, plus any past due 
charges and interest.
    (b) If you make a request on behalf of another person for 
information pertaining to that person, your request must include an 
authorization signed by the latter, allowing SBA to release such 
information to you.

[[Page 12]]

    (c) To make a Privacy Act request for records about yourself, you 
must follow the procedures detailed in Sec. 102.34(b) of Subpart B.



Sec. 102.4  Timing of responses to requests.

    (a) In general. Subject to paragraphs (b) and (c) of this section, 
once the correct office receives your complete request, that office must 
respond within 20 working days unless that office notifies you in 
writing that the time is extended by an additional 10 working days for 
one or more of the following reasons:
    (1) The need to search for and collect the requested records from 
field facilities or other establishments separate from the office 
processing the request;
    (2) The need to search for, collect, and appropriately examine a 
voluminous amount of separate and distinct records which are demanded in 
a single request; or
    (3) The need for consultation, which shall be conducted with all 
practicable speed, with another agency having substantial interest in 
the determination of the request or among two or more components of the 
agency having substantial subject matter interest therein.
    (b) Additional time. Where an extension of more than ten working 
days will be necessary due to exceptional circumstances, the correct 
office will give the requester an opportunity to modify the request so 
it may be processed within the usual time limits in paragraph (a) of 
this section, or to arrange an alternative time period for processing 
the request or a modified request.
    (c) Expedited processing. (1) SBA will give expedited processing to 
requests and appeals upon written request, if one of the following 
conditions is met:
    (i) You demonstrate someone's life or physical safety will be in 
imminent danger if SBA does not expedite its response to your request; 
or
    (ii) You are a news media representative (as defined in 
Sec. 102.6(b)(8)) who demonstrates an urgent need to inform the public 
about an actual or alleged Federal government activity.
    (2) You must provide a written statement, certified to be true and 
correct to the best of your knowledge and belief, explaining in detail 
one of these circumstances of ``compelling need'' and submit it to the 
correct office. Within 10 working days of its receipt of such a 
statement, or sooner, if SBA concludes that circumstances warrant, that 
office will notify you of its decision whether or not to grant expedited 
processing. If expedited processing is granted, the request shall be 
given priority and processed as soon as practicable. If an expedited 
processing request is denied, an appeal may be submitted which will be 
acted on expeditiously.
    (d) Multiple requests. Where an office believes that multiple 
requests submitted by a requester, or by a group of collaborating 
requesters, constitute a single request that would otherwise involve 
unusual circumstances, and the requests involve clearly related matters, 
they will be aggregated for processing.



Sec. 102.5  Responses to requests.

    Within the time limits described in Sec. 102.4, SBA will respond to 
your request in writing. SBA's response will do one or more of the 
following:
    (a) Advise you that SBA is releasing the requested documents;
    (b) Explain why SBA has decided not to give you all or some of the 
records requested, citing specific FOIA exemptions where applicable and 
noting the number of pages withheld (except where noting the number of 
pages withheld would harm an interest protected by an exemption), and 
explain how to appeal that decision;
    (c) Provide a cost estimate or bill you for the actual fee, less any 
advance payment you have made. SBA will not provide any records until 
payment in full is received; and/or
    (d) Advise you that SBA will refer your request for records 
generated by another Federal agency to that agency for proper 
processing.



Sec. 102.6  Fees.

    (a) In general. SBA will charge fees for processing requests as 
outlined in this section. Fees must be paid by check or money order made 
payable to SBA.

[[Page 13]]

    (b) Definitions and applicable fees. For purposes of this section:
    (1) Direct costs means those expenses that SBA actually incurs in 
searching for and duplicating (and, in the case of commercial use 
requesters, reviewing) documents in response to an FOIA request. Direct 
costs include the salary of the employee performing the work and the 
cost of operating duplication machinery.
    (2) Search means the process of looking for and retrieving records 
responsive to a request. It includes page-by-page or line-by-line 
identification of information within records and also includes 
reasonable efforts to locate and retrieve information from records 
maintained in electronic form or format. SBA may charge search fees even 
if they fail to locate records or if records located are determined to 
be exempt from disclosure. Search fees are $30 per hour.
    (3) Duplication means the making of a copy of a record. Copies can 
take the form of paper, microfilm, audiovisual materials, or electronic 
records (for example, magnetic tape or disk), among others. SBA will 
charge $.10 per page for photocopy duplication and the actual cost for 
other methods. SBA will honor a requester's specified preference of form 
or format of disclosure if the record is readily reproducible with 
reasonable efforts in the requested form or format by the office 
responding to the request.
    (4) Review refers to the examination of documents responsive to a 
request in order to determine whether any portion of it is exempt from 
disclosure. It includes processing any record for disclosure, e.g., all 
necessary redaction and preparation for disclosure. It also includes 
time spent considering any formal objection to disclosure made by a 
business submitter under Sec. 102.7, but does not include time spent 
resolving general legal or policy issues regarding the application of 
exemptions. Review costs are recoverable even if a record is ultimately 
not disclosed. Only commercial use requesters are assessed review costs. 
Review costs are $30 per hour.
    (5) A commercial use request refers to a request from or on behalf 
of a person who seeks information for a use or purpose that furthers his 
or her commercial, trade or profit interests, which can include 
furthering those interests through litigation. When it appears the 
requester will put the requested records to a commercial use, either 
because of the nature of the request itself or where SBA has reasonable 
cause to doubt a requester's stated use, SBA will seek additional 
clarification. SBA will charge commercial use requesters the full direct 
costs of searching for, reviewing for release, and duplicating the 
records sought.
    (6) Educational institution means a state-certified preschool, 
elementary or secondary school; an accredited college or university; an 
accredited institution of professional education; or any accredited or 
state-certified institution of vocational education that operates a 
program of scholarly research. An educational institution requester must 
show that the request is authorized by and is made under the auspices of 
a qualifying institution and that the records are not sought for a 
commercial use but are sought to further scholarly research. SBA will 
provide documents to requesters in this category for the cost of 
reproduction alone, excluding charges for the first 100 pages.
    (7) Noncommercial scientific institution means an institution that 
is not operated on a commercial basis, and that is operated solely for 
the purpose of conducting scientific research the results of which are 
not intended to promote any particular product or industry. A 
noncommercial scientific institution requester must show that the 
request is authorized by and is made under the auspices of a qualifying 
institution and that the records are not sought for a commercial use but 
are sought to further scientific research. SBA will charge noncommercial 
scientific institution requesters for the cost of reproduction alone 
after the first 100 pages.
    (8) A representative of the news media is a requester actively 
gathering information for one or more news media who:
    (i) Is employed by a news medium or
    (ii) Has a reasonable expectation of selling the information 
obtained to one or more news media. A news medium is an entity organized 
and operated to

[[Page 14]]

distribute information to the general public. A news medium may provide 
information by subscription and may target its dissemination to a narrow 
section of the general public so long as any member of the general 
public may purchase information from it. A request for records 
supporting the news dissemination function of the requester shall not be 
considered to be for commercial use. A news media requester must show 
that the request is authorized by and is made under the auspices of a 
qualifying news medium and that the records are not sought for a 
commercial use but are sought to further the dissemination of 
information to the general public. SBA will provide documents to 
representatives of the news media for the cost of reproduction alone, 
excluding charges for the first 100 pages.
    (9) A member of the general public is a requester who does not fit 
into any of the categories in paragraphs (b)(1) through (8) of this 
section. SBA will charge requesters in this category search time after 
the first two hours and duplication after the first 100 pages.
    (c) Other charges. SBA will recover the full costs of providing 
special services, such as certifying that records are true copies or 
sending copies by other than ordinary mail, to the extent that SBA 
elects to provide them.
    (d) Charging interest. SBA will charge interest on any unpaid bill 
starting on the 31st day following the date of billing. Interest charges 
will accrue at the maximum rate allowed under 31 U.S.C. 3717. If still 
unpaid by the 91st day after the billing date, SBA may notify consumer 
credit reporting agencies of the delinquency and/or take other 
appropriate action in accordance with law.
    (e) Fee waivers or reductions. SBA will furnish responsive records 
without charge or at a reduced charge when a requester can show that 
disclosure of the information is in the public interest because it is 
likely to contribute significantly to public understanding of the 
operations or activities of the government and is not primarily in the 
commercial interest of the requester.
    (1) You must submit a request for a fee waiver or reduction to the 
initial processing office.
    (2) On the basis of the information that you provide, the initial 
processing office will determine whether you meet the fee waiver 
requirements outlined in this section.



Sec. 102.7  Business information.

    (a) In general. Business information provided to SBA from a 
submitter will only be disclosed in accordance with this section.
    (b) Definitions. For purposes of this section:
    (1) Business information is commercial or financial information 
obtained by SBA from a submitter that may arguably be protected from 
disclosure under Exemption 4 of the FOIA.
    (2) Submitter is any person or entity who provides business 
information, directly or indirectly to SBA.
    (c) Designation of business information. Submitters of business 
information will use reasonable, good-faith efforts to designate, by 
appropriate markings, either at the time of submission or at a 
reasonable time thereafter, any portions of their submissions that they 
consider to be protected from disclosure under Exemption 4 of the FOIA. 
Designations will expire ten years after the date of the submission 
unless the submitter requests, and provides justification for, a longer 
designation period.
    (d) Notice to submitters. SBA will provide a submitter with written 
notice of a FOIA request or administrative appeal that seeks its 
business information whenever SBA intends to release that information. 
The notice will either describe the business information or include 
copies of the records in the form SBA proposes to release them. SBA will 
also advise the requester that the submitter is being given the 
opportunity to object to any proposed disclosure. When notification of a 
voluminous number of submitters is required, SBA may post or publish 
such a notice in a place reasonably likely to accomplish notice.
    (e) Opportunity to object to disclosure. SBA will give the submitter 
ten working days from the date of the written notice to submit a 
detailed written

[[Page 15]]

statement specifying all grounds upon which disclosure is opposed. A 
reasonable extension of time may be granted by the correct office upon 
good cause shown by the submitter. The submitter's statement must 
demonstrate why it believes information is a trade secret or commercial 
or financial information that is privileged or confidential. If a 
submitter fails to timely respond to the notice, such failure will be 
deemed a waiver by the submitter of any objection to the disclosure of 
the information. Information provided by a submitter under this 
paragraph may itself be subject to disclosure under the FOIA.
    (f) Notice of intent to disclose. SBA will consider a submitter's 
objections and specific grounds for nondisclosure in accordance with 
paragraph (e) of this section in deciding whether to disclose business 
information. If SBA decides to disclose business information despite the 
objection of a submitter, SBA will give the submitter written notice, 
advising the submitter what will be disclosed, and that such disclosure 
will occur within 10 working days from the date of the notice.



Sec. 102.8  Appeals.

    (a) If you are dissatisfied with SBA's response to your request, you 
may appeal an adverse determination denying your request, in any 
respect, to the Chief, FOI/PA Office, 409 Third St., SW., Washington, DC 
20416.
    (b) The Chief must receive your signed, written appeal within 60 
calendar days of the date of the SBA determination from which you are 
appealing.
    (c) You should include as much information as possible, i.e., 
identifying the records not disclosed, the reason(s) a fee should be 
waived, or the reason(s) a request should be expedited. You must 
identify the deciding official and his/her office location.
    (d) The Chief will decide your appeal unless the Chief originally 
made the determination you are appealing. In that case, the Assistant 
Administrator for Hearings and Appeals will decide your appeal.
    (e) If SBA upholds the initial adverse determination, SBA will tell 
you why the decision has been upheld and tell you how to obtain judicial 
review of the decision.



Sec. 102.9  Public Index.

    (a) The Public Index is a document that provides identifying 
information about official documents that SBA has issued.
    (b) SBA has administratively determined, as permitted by FOIA, that 
periodic publication and distribution of the Public Index is unnecessary 
and impracticable.
    (c) The Public Index is an appendix to SBA Standard Operating 
Procedure 40 03. You can obtain the latest edition of SOP 40 03 from 
SBA's Online Reading Room at http://www.sba.gov/library or by requesting 
it from any SBA office.



Sec. 102.10  What happens if I subpoena records or testimony of employees 
in connection with a civil lawsuit, criminal proceeding or administrative proceeding to which SBA is not a party?

    (a) The person to whom the subpoena is directed must consult with 
SBA counsel in the relevant SBA office, who will seek approval for 
compliance from the Associate General Counsel for Litigation. Except 
where the subpoena requires the testimony of an employee of the 
Inspector General's office, or records within the possession of the 
Inspector General, the Associate General Counsel may delegate the 
authorization for appropriate production of documents or testimony to 
local SBA counsel.
    (b) If SBA counsel approves compliance with the subpoena, SBA will 
comply.
    (c) If SBA counsel disapproves compliance with the subpoena, SBA 
will not comply, and will base such noncompliance on an appropriate 
legal basis such as privilege or a statute.
    (d) SBA counsel must provide a copy of any subpoena relating to a 
criminal matter to SBA's Inspector General prior to its return date.

[69 FR 21952, Apr. 23, 2004]

[[Page 16]]



                       Subpart B--The Privacy Act



Sec. 102.20  What privacy rights does this subpart regulate?

    This subpart establishes SBA's policy and procedures safeguarding an 
individual against an invasion of personal privacy.
    (a) Except as otherwise provided by law or regulation, SBA will 
permit you to do the following:
    (1) Determine what records pertaining to you are collected, 
maintained, used, or disseminated by SBA;
    (2) Object when records pertaining to you are obtained by SBA for a 
particular purpose and are proposed to be used or made available for 
another purpose without your consent; and
    (3) Gain access to information pertaining to you in records, have a 
copy made of all or any portion of those records, and correct or amend 
such records as appropriate.
    (b) SBA will collect, maintain, use, or disseminate any record of 
identifiable personal information in a manner that assures that such 
action is for a necessary and lawful purpose, that the information is 
current and accurate for its intended use, and that adequate safeguards 
are provided to prevent misuse of such information.
    (c) SBA will permit exemptions from the requirements of 5 U.S.C. 
552a (Privacy Act of 1974) (``PA'') only where an important public 
policy need for such exemption has been determined pursuant to or under 
specific statutory authority.



Sec. 102.21  How will SBA maintain records?

    SBA records will:
    (a) Contain only such information about an individual as is relevant 
and necessary to accomplish a purpose required of SBA by statute, 
regulation, or by Executive Order of the President.
    (b) Be comprised, to the maximum practical extent, of an 
individual's own statements when the information may result in an 
adverse determination about an individual's rights, benefits, or 
privileges under a Federal program.



Sec. 102.22  When will SBA disclose records?

    SBA will not disclose to anyone any record which is contained in a 
system of records, except that it will disclose a record:
    (a) To the person about whom the record is maintained, or to that 
person's agent, within the limits discussed in this subpart;
    (b) To those SBA employees who have a need for the record to perform 
their duties;
    (c) When required under 5 U.S.C. 552 (FOIA);
    (d) For a routine use of the record compatible with the purpose for 
which it was collected;
    (e) To the Bureau of the Census for purposes of planning or carrying 
out a census, survey, or related activity pursuant to Title 13, United 
States Code;
    (f) To a recipient who has provided the Agency with advance adequate 
written assurance that the record will be used solely as a statistical 
research or reporting record, where the record is transferred in a form 
that is not individually identifiable;
    (g) To the National Archives of the United States as a record which 
has sufficient historical or other value to warrant its continued 
preservation by the U.S. Government, or for evaluation by the 
Administrator of General Services or his or her designee to determine 
whether the record has such value;
    (h) To another agency or to an instrumentality of any governmental 
jurisdiction within or under the control of the United States for a 
civil or criminal law enforcement activity if:
    (1) The activity is authorized by law; and
    (2) The head of the agency or instrumentality has made a written 
request to the PA Officer specifying the particular portion desired and 
the law enforcement activity for which the record is sought;
    (i) To a person showing compelling circumstances affecting the 
health or safety of an individual. Upon disclosure, SBA will notify such 
individual at his or her last known address;

[[Page 17]]

    (j) To either House of Congress, or, to the extent of matters within 
its jurisdiction, any committee or subcommittee thereof, or any joint 
committee of Congress or subcommittee of any such joint committee;
    (k) To the Comptroller General, or any of his or her authorized 
representatives, in the course of the performance of the duties of the 
General Accounting Office;
    (l) Pursuant to the order of a court of competent jurisdiction; or
    (m) To a consumer reporting agency in accordance with 31 U.S.C. 
3711(f).



Sec. 102.23  Are there special rules about personnel and equal employment opportunity files?

    (a) The provisions of parts 293 and 297 of title 5 of the Code of 
Federal Regulations govern all SBA files which the Office of Personnel 
Management determines are personnel files.
    (b) The provisions of part 1611 of title 29 of the Code of Federal 
Regulations govern all Equal Employment Opportunity complaint files.



Sec. 102.24  What is a record?

    A record is information which SBA maintains on an individual and 
which includes either his name or an identifying symbol (such as a 
fingerprint, a social security number (``SSN''), or a photograph).



Sec. 102.25  What is a system of records?

    A system of records is one or more records which SBA routinely keeps 
for official purposes, and from which SBA can retrieve records by using 
a name or personal identifier.



Sec. 102.26  What does this subpart mean by ``person to whom a record pertains'' or ``you''?

    When this subpart refers to the ``person to whom a record pertains'' 
or uses the pronoun ``you'', it refers to a United States citizen or a 
lawfully admitted alien. It does not refer to a corporation, 
partnership, or sole proprietorship.



Sec. 102.27  What records are partially exempt from the provisions of the Privacy Act?

    (a) The following systems of records are exempt from certain 
provisions of the PA: Audit Reports (system of records SBA 
015), Litigation and Claims Files (SBA 070), Personnel Security 
Files (SBA 100), Security and Investigations Files 
(SBA 120), Office of Inspector General Referrals (SBA 
125), Investigations Division Management Information System 
(SBA 130), and Standards of Conduct Files (SBA 140).
    (b) The provisions of the PA from which these systems of records are 
exempt are subsections (c)(3) (Accounting of Certain Disclosures), (d) 
(Access to Records), (e)(1), 4G, H, and I (Agency Requirements), and (f) 
(Agency Rules).
    (c) The systems of records described in paragraph (a) of this 
section are exempt from the provisions of the Privacy Act described in 
paragraph (b) of this section in order to:
    (1) Prevent the subject of investigations from frustrating the 
investigatory process;
    (2) Protect investigatory material compiled for law enforcement 
purposes;
    (3) Fulfill commitments made to protect the confidentiality of 
sources and to maintain access to necessary sources of information; or
    (4) Prevent interference with law enforcement proceedings.
    (d) In addition to the foregoing exemptions in paragraphs (a) 
through (c) of this section, the systems of records described in 
paragraph (a) of this section numbered SBA 015, 100, 120, 125 and 130 
are fully exempt from the Privacy Act to the extent that they contain:
    (1) Information compiled to identify individual criminal offenders 
and alleged offenders and consisting only of identifying data and 
notations of arrests, confinement, release, and parole and probation 
status;
    (2) Information, including reports of informants and investigators, 
associated with an identifiable individual compiled to investigate 
criminal activity; or
    (3) Reports compiled at any stage of the process of enforcement of 
the criminal laws from arrest or indictment through release from 
supervision

[[Page 18]]

associated with an identifiable individual.
    (e) The systems of records described in paragraph (d) of this 
section are fully exempt from the PA to the extent described in that 
paragraph because they are records maintained by the Investigations 
Division of the Inspector General, which is a component of SBA which 
performs as its principal function activities pertaining to the 
enforcement of criminal laws within the meaning of 5 U.S.C. 552a(j)(2). 
They are exempt in order to:
    (1) Prevent the subjects of Office of Inspector General (OIG) 
investigations from using the PA to frustrate the investigative process;
    (2) Protect the identity of Federal employees who furnish a 
complaint or information to the OIG, consistent with section 7(b) of the 
Inspector General Act of 1978, 5 U.S.C. App. I;
    (3) Protect the confidentiality of other sources of information;
    (4) Avoid endangering confidential sources and law enforcement 
personnel;
    (5) Prevent interference with law enforcement proceedings;
    (6) Assure access to sources of confidential information, including 
that contained in Federal, State, and local criminal law enforcement 
information systems;
    (7) Prevent the disclosure of investigative techniques; or
    (8) Prevent the disclosure of classified information.



Sec. 102.28  What about information compiled for a civil action?

    No individual shall have access to any information compiled by SBA 
in reasonable anticipation of a civil action or proceeding. In the event 
of a question as to disclosure, the Systems Manager for the system of 
records involved will rely on the opinion of the General Counsel or 
designee, and will also consult with the PA Officer.



Sec. 102.29  Who administers SBA's responsibilities under the Privacy Act?

    The PA Officer has overall responsibility for administering the PA 
for SBA. A Systems Manager is responsible for administering the PA as to 
systems of records within an SBA Office.



Sec. 102.30  How can I write to the Privacy Act Officer?

    You can write to the PA Officer at 409 Third Street SW., Suite 5900, 
Washington, DC 20416.



Sec. 102.31  Who appoints Systems Managers?

    The senior official in each field office and each Headquarters 
program area designates himself or herself or appoints another as the 
Systems Manager for that office.



Sec. 102.32  What do Systems Managers do?

    Systems Managers have the following responsibilities, among others, 
for the offices for which they are appointed:
    (a) Acting as the initial contact person for individuals seeking 
access to or amendment of their records.
    (b) Responding to requests for information.
    (c) Discussing the availability of records with individuals.
    (d) Amending records in cases where amended information is not 
controversial and does not involve policy decisionmaking.
    (e) Informing individuals of any reproduction fees to be charged.
    (f) Assuring that their systems of records contain no record 
describing how any individual exercises rights guaranteed by the First 
Amendment unless expressly authorized by statute or by the individual 
about whom the record is maintained, or unless pertinent to and within 
the scope of an authorized law enforcement activity.



Sec. 102.33  How can I write to a Systems Manager?

    You can write to a Systems Manager by writing to the SBA Office 
which maintains the record you are seeking. If you do not know which 
office that is, or you do not know the address of that office, you can 
write to the PA Officer at 409 3rd Street SW., Suite 5900, Washington, 
DC 20416, who will forward your request to the proper Systems Manager.

[[Page 19]]



Sec. 102.34  How can I see records kept on me?

    (a) You may look at any information pertaining to yourself contained 
in any SBA system of records unless some law or regulation prohibits it.
    (b) In order to see this information, you must ask for it in 
writing, identifying what records you want. The writing should be 
addressed to the Systems Manager overseeing the system of records 
containing the record you wish to see.
    (c) The Systems Manager (or, when appropriate, the PA Officer) may 
ask for more specific information about the system of records in which 
the document you are seeking is kept, and may ask you for 
identification. The Systems Manager may ask you for your social security 
number but you are not obliged to present it and your request will not 
be denied simply because you do not provide it. The Systems Manager may, 
however, deny your request if he or she cannot determine that you are 
the person to whom the information pertains.



Sec. 102.35  How long will it take SBA to respond to my request?

    The Systems Manager will respond within 10 working days.



Sec. 102.36  How will SBA respond to my request?

    The Systems Manager will inform you that:
    (a) Your request is denied, in which case he or she will set forth 
the reasons for denial and your rights to appeal; or
    (b) Your request is granted and you may view your record, in which 
case he or she will set forth the time and date for you to review your 
record in the presence of an SBA employee; or
    (c) Your request is granted and, unless you object, SBA will mail 
you a copy of your record. SBA will mail you your record only if it 
determines that there are no other reasonable means for you to obtain 
access to your record.



Sec. 102.37  How may I appeal a decision to deny me access to my records?

    Your appeal should be in writing and should set forth any 
information you think would show that you should have access to your 
records.



Sec. 102.38  To whom should my appeal be addressed?

    (a) Denial of a personnel file. Address an appeal of a denial of a 
request for a personnel file to the Office of Personnel Management, 1900 
E Street NW., Washington, DC 20006.
    (b) Denial of an Equal Employment Opportunity Complaint File. 
Address an appeal of a denial of a request for an Equal Employment 
Opportunity Complaint File to the Equal Employment Opportunity 
Commission, 1801 L Street NW., Washington, DC 20036.
    (c) All other appeals. Appeal the denial of any other record to the 
PA Officer. See Sec. 102.30.



Sec. 102.39  By when must I appeal to the Privacy Act Officer?

    Your appeal must reach the PA Officer on or before 30 calendar days 
after the date the denial was issued. If your appeal is based on the 
failure of the Systems Manager to answer your request, your appeal must 
reach the PA Officer on or before 90 calendar days after the date by 
which the Systems Manager should have responded under Sec. 102.35.



Sec. 102.40  When will SBA respond to my appeal?

    The PA Officer will respond to you within 30 working days of the 
date when your appeal was received.



Sec. 102.41  How will SBA respond to my appeal?

    The PA Officer will inform you that:
    (a) Your request is denied, in which case the reasons for denial 
will be set forth along with your rights to judicial review of SBA's 
decision; or
    (b) Your request is granted and you may view your record, in which 
case the time and date for you to review your records in the presence of 
an SBA employee will be set forth; or
    (c) Your request is granted and, unless you object, SBA will mail 
you a copy of your record. SBA will mail you your record only if it 
determines that there are no other reasonable means for you to obtain 
access to your record.

[[Page 20]]



Sec. 102.42  How can I get SBA to amend a record kept on me?

    You can petition to have records kept on you amended by writing to 
the Systems Manager who oversees the system of records in which the 
record you wish amended is kept. If you are unable to determine who that 
Systems Manager is, you may send your petition to the PA Officer, who 
will forward it to the right Systems Manager. See Sec. 102.30.



Sec. 102.43  What should my petition say?

    Your petition should include the following:
    (a) In what system of records the record you want amended is kept.
    (b) What record you want amended.
    (c) What specific information in that record you want amended.
    (d) Why you want the record amended.
    (e) Any information you have, including copies of evidence, which 
you think will persuade the Systems Manager to amend the record.
    (f) What the record should say.



Sec. 102.44  For what reasons will SBA amend my record?

    SBA seeks to maintain only accurate, complete, and up-to-date 
records which are relevant to accomplish some purpose required by law, 
regulation, or Executive Order of the President. There are four grounds 
for amending a record. They are:
    (a) The record is not accurate.
    (b) The record is not relevant to any legitimate SBA concern.
    (c) The record is out-of-date. For example, there may have been 
events since the date of the record which have affected some of the 
information contained in the record.
    (d) The record is incomplete. There may be additional information 
relevant to the material contained in the record.



Sec. 102.45  Will SBA ask me for more information after I make my request?

    Perhaps, in which case the procedures of Sec. 102.34(c) shall apply.



Sec. 102.46  When will SBA respond to my request?

    The Systems Manager will acknowledge receipt of your request within 
10 working days and issue a written response within 30 working days.



Sec. 102.47  How will SBA respond to my request?

    The Systems Manager will:
    (a) Make the amendment you request, and send all individuals who had 
previously received a copy of that record a copy of the amended record; 
or
    (b) Amend the record, in a different manner, sending all individuals 
who had previously received a copy of that record a copy of the amended 
record and, in addition, telling you why your request was not granted in 
full and what appeal rights you have; or
    (c) Decline to amend the record, explaining why your request was not 
granted and telling you of your appeal rights.



Sec. 102.48  How do I appeal a refusal to amend a record kept on me?

    Your appeal should be in writing and include the following:
    (a) All of the information contained in your original request to 
amend the record;
    (b) Any response of the Systems Manager, including any reasons for 
denying your request; and
    (c) Any information you wish to submit in response to the Systems 
Manager's findings.



Sec. 102.49  To whom should I address my appeal?

    (a) Personnel file. Address your appeal to the Office of Personnel 
Management, 1900 E Street NW., Washington, DC 20006.
    (b) Equal Employment Opportunity Complaint File. Address your appeal 
to the Equal Employment Opportunity Commission, 1801 L Street NW., 
Washington, DC 20036.
    (c) All other appeals. Address your appeal to the PA Officer. See 
Sec. 102.30.



Sec. 102.50  By when must I submit my appeal?

    Your appeal must be received by the PA Officer within 30 calendar 
days of the date the Systems Manager declined

[[Page 21]]

to amend your records, or within 90 calendar days of the date the 
Systems Manager should have responded under Sec. 102.46 if the Systems 
Manager did not so respond.



Sec. 102.51  By what standards will the Privacy Act Officer review my appeal?

    The PA Officer will decide your appeal using the criteria of 
accuracy, relevance, timeliness, and completeness described in 
Sec. 102.44. The PA Officer will review all relevant information and may 
seek the views of other SBA personnel. The PA Officer may review 
information not available to or not used by the Systems Manager.



Sec. 102.52  When will SBA respond to my appeal?

    The PA Officer will respond to your appeal within 30 working days of 
its receipt, unless the Administrator determines that unusual 
circumstances exist, in which case the PA Officer will notify you of the 
presence of these unusual circumstances within 30 working days of the 
date upon which he or she received your appeal, and will respond to your 
appeal within 60 working days of the date of receipt.



Sec. 102.53  How will SBA respond to my appeal?

    The PA Officer will:
    (a) Make the amendment you request, sending all individuals who had 
previously received a copy of that record a copy of the amended record; 
or
    (b) Amend the record in a different manner; or decline to amend it 
at all:
    (1) Sending all individuals who had previously received a copy of 
that record a copy of the amended record;
    (2) Telling you why your request was not granted in full and that 
you can seek judicial review; and
    (3) Marking the areas of dispute, including your statement of 
disagreement in the file, and, if appropriate, a concise statement of 
why SBA refused to amend the record as you requested, sending this 
material to all individuals who had previously received a copy of that 
record.



Sec. 102.54  How can I obtain judicial review of an SBA Privacy Act decision?

    You may bring a civil action against SBA in a United States district 
court if the SBA:
    (a) Makes a final determination not to provide you with access to or 
to amend your record in accordance with your request;
    (b) Fails to maintain your records with such accuracy, relevance, 
timeliness and completeness as is necessary to assure fairness in any 
determination relating to the qualifications, character, rights, 
opportunities of, or benefits to you that may be made on the basis of 
such records, and consequently a determination is made which harms you; 
or
    (c) Fails to comply with any other provisions of the PA (5 U.S.C. 
552a) or the implementing regulations in this subpart, in such a way as 
to cause harm to you.



Sec. 102.55  What must SBA tell the individuals from whom it collects information?

    When SBA collects information from an individual, it must, either on 
the form which collects the information or on a separate form which the 
individual may keep, state:
    (a) Whether disclosure of the information is voluntary or mandatory;
    (b) By what authority SBA is collecting the information;
    (c) For what principal purpose or purposes SBA is collecting the 
information;
    (d) What routine uses might be made of that information; and
    (e) What will happen if the information isn't supplied.



Sec. 102.56  Will SBA release my name or address?

    No, unless compelled to by law.



Sec. 102.57  Do I have to give SBA my SSN?

    (a) No. You need not give SBA your SSN, even if SBA asks for it.
    (b) If SBA asks you for your SSN, it must tell you under what 
authority it seeks your SSN, and for what purpose.

[[Page 22]]

    (c) SBA cannot withhold a benefit solely because you refuse to tell 
it your SSN.



Sec. 102.58  When will SBA show personnel records to a representative?

    (a) If you go to where the records are kept, SBA will permit one 
person of your choosing to inspect the records with you.
    (b) If you want your representative to inspect the records without 
you, you must give SBA a written authorization.
    (c) SBA will mail a copy of the record to your representative if you 
direct SBA to do so in writing.
    (d) You may inspect the records of a minor if you present evidence 
that you are the custodial parent (including joint custodial parent) or 
legal guardian of that minor. An affidavit or declaration, signed by you 
under penalty of perjury, is normally sufficient evidence unless SBA has 
information to the contrary.
    (e) You may inspect the records of an adult incompetent if you 
present evidence that you are the legal guardian of that person. A 
guardianship order is sufficient evidence of your guardianship. Other 
evidence may be considered.



Sec. 102.59  What fees will SBA charge me for my records?

    SBA will charge you only for photocopying at the rate of 10 cents 
per page. SBA will not charge you for finding or reviewing your records. 
Fees less than $25 will be waived.



Sec. 102.60  May I be informed of disclosures made of my records?

    SBA will tell you what disclosures it made of your records if you 
ask, except that SBA will not tell you about disclosures it made to 
another federal agency or government entity for law enforcement 
purposes.



Sec. 102.61  Are there Matching Program procedures?

    (a) SBA will comply with the Computer Matching and Privacy 
Protection Act of 1988 (5 U.S.C. 552a, 552a notes). This Act establishes 
procedures federal agencies must use if they want to match their 
computer lists.
    (b) If SBA adopts any procedures to supplement its compliance with 
the Computer Matching and Privacy Protection Act of 1988 which are not 
mandated in that Act, SBA will publish those procedures in Standard 
Operating Procedure (SOP) 40 04. You can get a copy of SOP 40 04 at any 
SBA Office.
    (c) If SBA enters into an agreement with any federal agency, 
contractor of any federal agency, state or local government, or agency 
of any state or local government to disclose records for purposes of a 
computer matching program, SBA will make a copy of that agreement 
available to the general public. You can get a copy of any such 
agreement by writing to the Privacy Act Officer.



PART 103--STANDARDS FOR CONDUCTING BUSINESS WITH SBA--Table of Contents


Sec.
103.1  Key definitions.
103.2  Who may conduct business with SBA?
103.3  May SBA suspend or revoke an Agent's privilege?
103.4  What is ``good cause'' for suspension or revocation?
103.5  How does SBA regulate an Agent's fees and provision of service?

    Authority: Secs. 5, 13, 72 Stat. 385, 394 (15 U.S.C. 634, 642).

    Source: 61 FR 2681, Jan. 29, 1996, unless otherwise noted.



Sec. 103.1  Key definitions.

    (a) Agent means an authorized representative, including an attorney, 
accountant, consultant, packager, lender service provider, or any other 
person representing an applicant or participant by conducting business 
with SBA.
    (b) The term conduct business with SBA means:
    (1) Preparing or submitting on behalf of an applicant an application 
for financial assistance of any kind, assistance from the Investment 
Division of SBA, or assistance in procurement and technical matters;
    (2) Preparing or processing on behalf of a lender or a participant 
in any of SBA's programs an application for federal financial 
assistance;
    (3) Participating with or communicating in any way with officers or

[[Page 23]]

employees of SBA on an applicant's, participant's, or lender's behalf;
    (4) Acting as a lender service provider; and
    (5) Such other activity as SBA reasonably shall determine.
    (c) Applicant means any person, firm, concern, corporation, 
partnership, cooperative or other business enterprise applying for any 
type of assistance from SBA.
    (d) Lender Service Provider means an Agent who carries out lender 
functions in originating, disbursing, servicing, or liquidating a 
specific SBA business loan or loan portfolio for compensation from the 
lender. SBA determines whether or not one is a ``Lender Service 
Provider'' on a loan-by-loan basis.
    (e) Packager means an Agent who is employed and compensated by an 
Applicant or lender to prepare the Applicant's application for financial 
assistance from SBA. SBA determines whether or not one is a ``Packager'' 
on a loan-by-loan basis.
    (f) Referral Agent means a person or entity who identifies and 
refers an Applicant to a lender or a lender to an Applicant. The 
Referral Agent may be employed and compensated by either an Applicant or 
a lender.
    (g) Participant means a person or entity that is participating in 
any of the financial, investment, or business development programs 
authorized by the Small Business Act or Small Business Investment Act of 
1958.



Sec. 103.2  Who may conduct business with SBA?

    (a) If you are an Applicant, a Participant, a partner of an 
Applicant or Participant partnership, or serve as an officer of an 
Applicant, Participant corporation, or limited liability company, you 
may conduct business with SBA without a representative.
    (b) If you are an Agent, you may conduct business with SBA on behalf 
of an Applicant, Participant or lender, unless representation is 
otherwise prohibited by law or the regulations in this part or any other 
part in this chapter. For example, persons debarred under the SBA or 
Government-wide debarment regulations may not conduct business with SBA. 
SBA may request that any Agent supply written evidence of his or her 
authority to act on behalf of an Applicant, Participant, or lender as a 
condition of revealing any information about the Applicant's, 
Participant's, or lender's current or prior dealings with SBA.



Sec. 103.3  May SBA suspend or revoke an Agent's privilege?

    The Administrator of SBA or designee may, for good cause, suspend or 
revoke the privilege of any Agent to conduct business with SBA. Part 134 
of this chapter states the procedures for appealing the decision to 
suspend or revoke the privilege. The suspension or revocation remains in 
effect during the pendency of any administrative proceedings under part 
134 of this chapter.



Sec. 103.4  What is ``good cause'' for suspension or revocation?

    Any unlawful or unethical activity is good cause for suspension or 
revocation of the privilege to conduct business. This includes:
    (a) Attempting to influence any employee of SBA or a lender, by 
gifts, bribes or other unlawful or unethical activity, with respect to 
any matter involving SBA assistance.
    (b) Soliciting for the provision of services to an Applicant by 
another entity when there is an undisclosed business relationship 
between the two parties.
    (c) Violating ethical guidelines which govern the profession or 
business of the Agent or which are published at any time by SBA.
    (d) Implying or stating that the work to be performed for an 
Applicant will include use of political or other special influence with 
SBA. Examples include indicating that the entity is affiliated with or 
paid, endorsed or employed by SBA, advertising using the words Small 
Business Administration or SBA in a manner that implies SBA's 
endorsement or sponsorship, use of SBA's seal or symbol, and giving a 
``guaranty'' to an Applicant that the application will be approved.
    (e) Charging or proposing to charge any fee that does not bear a 
necessary and reasonable relationship to the services actually rendered 
or expenses actually incurred in connection with a

[[Page 24]]

matter before SBA or which is materially inconsistent with the 
provisions of an applicable compensation agreement or Lender Service 
Provider agreement. A fee based solely on a percentage of a loan or 
guarantee amount can be reasonable, depending on the circumstances of a 
case and the services actually rendered.
    (f) Engaging in any conduct indicating a lack of business integrity 
or business honesty, including debarment, criminal conviction, or civil 
judgment within the last seven years for fraud, embezzlement, theft, 
forgery, bribery, falsification or destruction of records, false 
statements, conspiracy, receiving stolen property, false claims, or 
obstruction of justice.
    (g) Acting as both a Lender Service Provider or Referral Agent and a 
Packager for an Applicant on the same SBA business loan and receiving 
compensation for such activity from both the Applicant and lender. A 
limited exception to this ``two master'' prohibition exists when an 
Agent acts as a Packager and is compensated by the Applicant for 
packaging services; also acts as a Referral Agent and is compensated by 
the lender for those activities; discloses the referral activities to 
the Applicant; and discloses the packaging activities to the lender.
    (h) Violating materially the terms of any compensation agreement or 
Lender Service Provider agreement provided for in Sec. 103.5.
    (i) Violating or assisting in the violation of any SBA regulations, 
policies, or procedures of which the Applicant has been made aware.



Sec. 103.5  How does SBA regulate an Agent's fees and provision of service?

    (a) Any Applicant, Agent, or Packager must execute and provide to 
SBA a compensation agreement, and any Lender Service Provider must 
execute and provide to SBA a Lender Service Provider agreement. Each 
agreement governs the compensation charged for services rendered or to 
be rendered to the Applicant or lender in any matter involving SBA 
assistance. SBA provides the form of compensation agreement and a 
suggested form of Lender Service Provider agreement to be used by 
Agents.
    (b) Compensation agreements must provide that in cases where SBA 
deems the compensation unreasonable, the Agent or Packager must: reduce 
the charge to an amount SBA deems reasonable, refund any sum in excess 
of the amount SBA deems reasonable to the Applicant, and refrain from 
charging or collecting, directly or indirectly, from the Applicant an 
amount in excess of the amount SBA deems reasonable.
    (c) Each Lender Service Provider must enter into a written agreement 
with each lender for whom it acts in that capacity. SBA will review all 
such agreements. Such agreements need not contain each and every 
provision found in the SBA's suggested form of agreement. However, each 
agreement must indicate that both parties agree not to engage in any 
sharing of secondary market premiums, that the services to be provided 
are accurately described, and that the agreement is otherwise consistent 
with SBA requirements. Subject to the prohibition on splitting premiums, 
lenders have reasonable discretion in setting compensation for Lender 
Service Providers. However, such compensation may not be directly 
charged to an Applicant or borrower.



PART 105--STANDARDS OF CONDUCT AND EMPLOYEE RESTRICTIONS AND RESPONSIBILITIES--Table of Contents


                          Standards of Conduct

Sec.
105.101  Cross-reference to employee ethical conduct standards and 
          financial disclosure regulations.

 Restrictions and Responsibilities Related to SBA Employees and Former 
                                Employees

105.201  Definitions.
105.202  Employment of former employee by person previously the 
          recipient of SBA Assistance.
105.203  SBA Assistance to person employing former SBA employee.
105.204  Assistance to SBA employees or members of their household.
105.205  Duty to report irregularities.
105.206  Applicable rules and directions.
105.207  Politically motivated activities with respect to the Minority 
          Small Business Program.
105.208  Penalties.

[[Page 25]]

           Restrictions on SBA Assistance to Other Individuals

105.301  Assistance to officers or employees of other Government 
          organizations.
105.302  Assistance to employees or members of quasi-Government 
          organizations.

                        Administrative Provisions

105.401  Standards of Conduct Committee.
105.402  Standards of Conduct Counselors.
105.403  Designated Agency Ethics Officials.

    Authority: 5 U.S.C. 7301; 15 U.S.C. 634, 637(a)(18) and (a)(19), 
642, and 645(a).

    Source: 61 FR 2399, Jan. 26, 1996, unless otherwise noted.

                          Standards of Conduct



Sec. 105.101  Cross-reference to employee ethical conduct standards and financial disclosure regulations.

    In addition to this part, Small Business Administration (SBA) 
employees should refer to the Uniform Standards of Ethical Conduct for 
Executive Branch employees at 5 CFR part 2635, the SBA Supplemental 
Standards of Ethical Conduct at 5 CFR chapter XLIV, and the Uniform 
Financial Disclosure regulation for Executive Branch employees at 5 CFR 
part 2634.

    Effective Date Note: At 69 FR 63922, Nov. 3, 2004, Sec. 105.101 was 
revised, effective Jan. 3, 2005. For the convenience of the user the 
revised text is set forth as follows:

Sec. 105.101  Cross-reference to employee ethical conduct standards and 
          financial disclosure regulations.

    In addition to this part, Small Business Administration (SBA) 
employees should refer to the Standards of Ethical Conduct for Employees 
of the Executive Branch at 5 CFR part 2635 and the regulations at 5 CFR 
part 2634 entitled, Executive Branch Financial Disclosure, Qualified 
Trusts and Certificates of Divestiture.

 Restrictions and Responsibilities Related to SBA Employees and Former 
                                Employees



Sec. 105.201  Definitions.

    (a) Employee means an officer or employee of the SBA regardless of 
grade, status or place of employment, including employees on leave with 
pay or on leave without pay other than those on extended military leave. 
Unless stated otherwise. Employee shall include those within the 
category of Special Government Employee.
    (b) Special Government Employee means an officer or employee of SBA, 
who is retained, appointed or employed to perform temporary duties on a 
full-time or intermittent basis, with or without compensation, for not 
to exceed 130 days during any period of 365 consecutive days.
    (c) Person means an individual, a corporation, a company, an 
association, a firm, a partnership, a society, a joint stock company, or 
any other organization or institution.
    (d) Household member means spouse and minor children of an employee, 
all blood relations of the employee and any spouse who resides in the 
same place of abode with the employee.
    (e) SBA Assistance means financial, contractual, grant, managerial 
or other aid, including size determinations, section 8(a) participation, 
licensing, certification, and other eligibility determinations made by 
SBA. The term also includes an express decision to compromise or defer 
possible litigation or other adverse action.



Sec. 105.202  Employment of former employee by person previously the recipient of SBA Assistance.

    (a) No former employee, who occupied a position involving discretion 
over, or who exercised discretion with respect to, the granting or 
administration of SBA Assistance may occupy a position as employee, 
partner, agent, attorney or other representative of a concern which has 
received this SBA Assistance for a period of two years following the 
date of granting or administering such SBA Assistance if--
    (1) The date of granting or administering such SBA Assistance was 
within the period of the employee's term of employment; or
    (2) The date of granting or administering such SBA Assistance was 
within one year following the termination of such employment.
    (b) Failure of a recipient of SBA Assistance to comply with these 
provisions may result, in the discretion of SBA, in the requirement for 
immediate repayment of SBA financial Assistance, the immediate 
termination of

[[Page 26]]

other SBA Assistance involved or other appropriate action.



Sec. 105.203  SBA Assistance to person employing former SBA employee.

    (a) SBA will not provide SBA Assistance to any person who has, as an 
employee, owner, partner, attorney, agent, owner of stock, officer, 
director, creditor or debtor, any individual who, within one year prior 
to the request for such SBA Assistance was an SBA employee, without the 
prior approval of the SBA Standards of Conduct Counselor. The Standards 
of Conduct Counselor will refer matters of a controversial nature to the 
Standards of Conduct Committee for final decision; otherwise, his or her 
decision is final.
    (b) In reviewing requests for approval, the Standards of Conduct 
Counselor will consider:
    (1) The relationship of the former employee with the applicant 
concern;
    (2) The nature of the SBA Assistance requested;
    (3) The position held by the former employee with SBA and its 
relationship to the SBA Assistance requested; and
    (4) Whether an apparent conflict of interest might exist if the SBA 
Assistance were granted.



Sec. 105.204  Assistance to SBA employees or members of their household.

    Without the prior written approval of the Standards of Conduct 
Committee, no SBA Assistance, other than Disaster loans under 
subparagraphs (1) and (2) of section 7(b) of the Small Business Act, 
shall be furnished to a person when the sole proprietor, partner, 
officer, director or significant stockholder of the person is an SBA 
employee or a household member.



Sec. 105.205  Duty to report irregularities.

    Every employee shall immediately report to the SBA Inspector General 
any acts of malfeasance or misfeasance or other irregularities, either 
actual or suspected, arising in connection with the performance by SBA 
of any of its official functions.



Sec. 105.206  Applicable rules and directions.

    Every employee shall follow all agency rules, regulations, operating 
procedures, instructions and other proper directions in the performance 
of his official functions.



Sec. 105.207  Politically motivated activities with respect to the Minority Small Business Program.

    (a) Any employee who has authority to take, direct others to take, 
recommend, or approve any action with respect to any program or activity 
conducted pursuant to section 8(a) or section 7(j) of the Small Business 
Act, shall not, with respect to any such action, exercise or threaten to 
exercise such authority on the basis of the political activity or 
affiliation of any party. Employees shall expeditiously report to the 
SBA Inspector General any such action for which such employee's 
participation has been solicited or directed.
    (b) Any employee who willfully and knowingly violates this section 
shall be subject to disciplinary action, which may consist of separation 
from service, reduction in grade, suspension, or reprimand.
    (c) This section shall not apply to any action taken as a penalty or 
other enforcement of a violation of any law, rule, or regulation 
prohibiting or restricting political activity.
    (d) The prohibitions in and remedial measures provided for under 
this section with regard to such prohibitions, shall be in addition to, 
and not in lieu of, any other prohibitions, measures or liabilities that 
may arise under any other provision of law.



Sec. 105.208  Penalties.

    Any employee guilty of violating any of the provisions in this part 
may be disciplined, including removal or suspension from SBA employment.

           Restrictions on SBA Assistance to Other Individuals



Sec. 105.301  Assistance to officers or employees of other Government organizations.

    (a) SBA must receive a written statement of no objection by the 
pertinent

[[Page 27]]

Department or military service before it gives any SBA Assistance, other 
than Disaster loans under subparagraphs (1) and (2) of section 7(b) of 
the Small Business Act, to a person when its sole proprietor, partner, 
officer, director or stockholder with a 10 percent or more interest, or 
a household member, is an employee of another Government Department or 
Agency having a grade of at least GS-13 or its equivalent.
    (b) The Standards of Conduct Committee must approve an SBA contract 
with an entity if a sole proprietor, general partner, officer, director, 
or stockholder with a 10 or more percent interest (or a household member 
of such individuals) is an employee of a Government Department or 
Agency. See also 48 CFR part 35, subpart 3.6.
    (c) The Standards of Conduct Committee must approve SBA Assistance, 
other than disaster loans under subparagraphs (1) and (2) of section 
7(b) of the Small Business Act, to a person if its sole proprietor, 
general partner, officer, director or stockholder with a 10 percent or 
more interest (or a household member of such individual) is a member of 
Congress or an appointed official or employee of the legislative or 
judicial branch of the Government.



Sec. 105.302  Assistance to employees or members of quasi-Government organizations.

    (a) The Standards of Conduct Committee must approve SBA Assistance, 
other than Disaster loans under subparagraphs (1) and (2) of section 
7(b) of the Small Business Act, to a person if its sole proprietor, 
general partner, officer, director or stockholder with a 10 percent or 
more interest (or a household member) is a member or employee of a Small 
Business Advisory Council or is a SCORE volunteer.
    (b) In reviewing requests for approval, factors the Standards of 
Conduct Committee may consider include whether the granting of the SBA 
Assistance might result in or create the appearance of giving 
preferential treatment, the loss of complete independence or 
impartiality, or adversely affect the confidence of the public in the 
integrity of the Government.

                        Administrative Provisions



Sec. 105.401  Standards of Conduct Committee.

    (a) The Standards of Conduct Committee will:
    (1) Advise and give direction to SBA management officials concerning 
the administration of this part and any other rules, regulations or 
directives dealing with conflicts of interest and ethical standards of 
SBA employees; and
    (2) Make decisions on specific requests when its approval is 
required.
    (b) The Standards of Conduct Committee will consist of:
    (1) The General Counsel or, in his or her absence, the Deputy 
General Counsel or, in his or her absence, the Acting General Counsel 
who shall act as Chairman of the Committee;
    (2) The Associate Deputy Administrator for Management and 
Administration, or in his or her absence, the Assistant Administrator 
for Administration; and
    (3) The Director of Human Resources, or in his or her absence, the 
Deputy Director of Human Resources.



Sec. 105.402  Standards of Conduct Counselors.

    (a) The SBA Standards of Conduct Counselor is the Designated Agency 
Ethics Official, as appointed by the Administrator. Assistant Standards 
of Conduct Counselors may be designated by the Standards of Conduct 
Counselor.
    (b) The Standards of Conduct Counselors and Assistants:
    (1) Provide general advice, assistance and guidance to employees 
concerning this part and the regulations referred to in Sec. 105.101;
    (2) Monitor the Standards of Conduct Program within their assigned 
areas and provide required reports thereon;
    (3) Review Confidential Financial Disclosure Reports as required 
under 5 CFR part 2634, subpart I, and provide an annual report on 
compliance with filing requirements to the SBA Standards of Conduct 
Counselor as of February 1 of each year; and
    (4) Provide Outside Employment decisions pursuant to 5 CFR 5401.104.
    (c) Each employee will be periodically informed of the name, address

[[Page 28]]

and telephone number of the Assistant Standards of Conduct Counselor to 
contact for advice and assistance.
    (d) Employee requests for advice or rulings should be directed to 
the appropriate Standards of Conduct Counselor for appropriate action.

[61 FR 2399, Jan. 26, 1996, as amended at 62 FR 48477, Sept. 16, 1997]

    Effective Date Note: At 69 FR 63922, Nov. 3, 2004, Sec. 105.402 was 
amended by revising paragraphs (b)(2) and (b)(3) and removing paragraph 
(b)(4), effective Jan. 3, 2005. For the convenience of the user the 
revised text is set forth as follows:

Sec. 105.402  Standards of Conduct Counselors.

                                * * * * *

    (b) * * *
    (2) Monitor the Standards of Conduct Program within their assigned 
areas and provide required reports thereon; and
    (3) Review Confidential Financial Disclosure reports as required 
under 5 CFR part 2634, subpart I, and provide an annual report on 
compliance with filing requirements to the SBA Standards of Conduct 
Counselor as of February 1 of each year.

                                * * * * *



Sec. 105.403  Designated Agency Ethics Officials.

    The Designated Agency Ethics Official and Alternates administer the 
program for Financial Disclosure Statements under 5 CFR 2634.201, 
receive and evaluate these statements, and provide advice and counsel 
regarding matters relating to the Ethics in Government Act of 1978 and 
its implementing regulations. The duties and responsibilities of the 
Designated Agency Ethics Official and Alternates are set forth in more 
detail in 5 CFR 2638.203, which is promulgated and amended by the Office 
of Government Ethics.

[62 FR 2399, Jan. 26, 1996, as amended at 62 FR 48477, Sept. 16, 1997]



PART 107--SMALL BUSINESS INVESTMENT COMPANIES--Table of Contents


                   Subpart A--Introduction to Part 107

Sec.
107.20  Legal basis and applicability of this part 107.
107.30  Amendments to Act and regulations.
107.40  How to read this part 107.

             Subpart B--Definition of Terms Used in Part 107

107.50  Definition of terms.

                Subpart C--Qualifying for an SBIC License

                           Organizing an SBIC

107.100  Organizing a Section 301(c) Licensee.
107.115  1940 Act and 1980 Act Companies.
107.120  Special rules for a Section 301(d) Licensee owned by another 
          Licensee.
107.130  Requirement for qualified management.
107.140  SBA approval of initial Management Expenses.
107.150  Management-ownership diversity requirement.
107.160  Special rules for Licensees formed as limited partnerships.

                          Capitalizing an SBIC

107.200  Adequate capital for Licensees.
107.210  Minimum capital requirements for Licensees.
107.230  Permitted sources of Private Capital for Licensees.
107.240  Limitations on including non-cash capital contributions in 
          Private Capital.
107.250  Exclusion of stock options issued by Licensee from Management 
          Expenses.

                      Applying for an SBIC License

107.300  License application form and fee.

  Subpart D--Changes in Ownership, Control, or Structure of Licensee; 
                           Transfer of License

               Changes in Control or Ownership of Licensee

107.400  Changes in ownership of 10 percent or more of Licensee but no 
          change of Control.
107.410  Changes in Control of Licensee (through change in ownership or 
          otherwise).
107.420  Prohibition on exercise of ownership or Control rights in 
          Licensee before SBA approval.
107.430  Notification to SBA of transactions that may change ownership 
          or Control.
107.440  Standards governing prior SBA approval for a proposed transfer 
          of Control.
107.450  Notification to SBA of pledge of Licensee's shares.

  Restrictions on Common Control or Ownership of Two or More Licensees

107.460  Restrictions on Common Control or ownership of two (or more) 
          Licensees.

[[Page 29]]

                     Change in Structure of Licensee

107.470  SBA approval of merger, consolidation, or reorganization of 
          Licensee.

                           Transfer of License

107.475  Transfer of license.

            Subpart E--Managing the Operations of a Licensee

                          General Requirements

107.500  Lawful operations under the Act.
107.501  Identification as a Licensee.
107.502  Representations to the public.
107.503  Licensee's adoption of an approved Valuation Policy.
107.504  Equipment and office requirements.
107.505  Facsimile requirement.
107.506  Safeguarding Licensee's assets/Internal controls.
107.507  Violations based on false filings and nonperformance of 
          agreements with SBA.
107.509  Employment of SBA officials.

                       Management and Compensation

107.510  SBA approval of Licensee's Investment Adviser/Manager.
107.520  Management Expenses of a Licensee.

                      Cash Management by a Licensee

107.530  Restrictions on investments of idle funds by leveraged 
          Licensees.

               Borrowing by Licensees From Non-SBA Sources

107.550  Prior approval of secured third-party debt of leveraged 
          Licensees.
107.560  Subordination of SBA's creditor position.
107.570  Restrictions on third-party debt of issuers of Participating 
          Securities.

           Voluntary Decrease in Licensee's Regulatory Capital

107.585  Voluntary decrease in Licensee's Regulatory Capital.

           Requirement To Conduct Active Investment Operations

107.590  Licensee's requirement to maintain active operations.

 Subpart F--Recordkeeping, Reporting, and Examination Requirements for 
                                Licensees

                Recordkeeping Requirements for Licensees

107.600  General requirement for Licensee to maintain and preserve 
          records.
107.610  Required certifications for Loans and Investments.
107.620  Requirements to obtain information from Portfolio Concerns.

                  Reporting Requirements for Licensees

107.630  Requirement for Licensees to file financial statements with SBA 
          (Form 468).
107.640  Requirement to file Portfolio Financing Reports (SBA Form 
          1031).
107.650  Requirement to report portfolio valuations to SBA.
107.660  Other items required to be filed by Licensee with SBA.
107.670  Application for exemption from civil penalty for late filing of 
          reports.
107.680  Reporting changes in Licensee not subject to prior SBA 
          approval.

       Examinations of Licensees by SBA for Regulatory Compliance

107.690  Examinations.
107.691  Responsibilities of Licensee during examination.
107.692  Examination fees.

          Subpart G--Financing of Small Businesses by Licensees

   Determining the Eligibility of a Small Business for SBIC Financing

107.700  Compliance with size standards in part 121 of this chapter as a 
          condition of Assistance.
107.710  Requirement to finance smaller enterprises.
107.720  Small Businesses that may be ineligible for financing.
107.730  Financings which constitute conflicts of interest.
107.740  Portfolio diversification (``overline'' limitation).
107.750  Conditions for financing a change of ownership of a Small 
          Business.
107.760  How a change in size or activity of a Portfolio Concern affects 
          the Licensee and the Portfolio Concern.

Structuring Licensee's Financing of Eligible Small Businesses: Types of 
                                Financing

107.800  Financings in the form of Equity Securities.
107.810  Financings in the form of Loans.
107.815  Financings in the form of Debt Securities.
107.820  Financings in the form of guarantees.
107.825  Purchasing securities from an underwriter or other third party.

 Structuring Licensee's Financing of an Eligible Small Business: Terms 
                       and Conditions of Financing

107.830  Minimum duration/term of financing.
107.835  Exceptions to minimum duration/term of Financing.
107.840  Maximum term of financing.

[[Page 30]]

107.845  Maximum rate of amortization on Loans and Debt Securities.
107.850  Restrictions on redemption of Equity Securities.
107.855  Interest rate ceiling and limitations on fees charged to small 
          businesses (``Cost of Money'').
107.860  Financing fees and expense reimbursements a Licensee may 
          receive from a small business.
107.865  Control of a small business by a Licensee.
107.880  Assets acquired in liquidation of Portfolio securities.

                  Limitations on Disposition of Assets

107.885  Disposition of assets to Licensee's Associates or to 
          competitors of Portfolio Concern.

                      Management Services and Fees

107.900  Management fees for services provided to a Small Business by 
          Licensee or its Associate.

      Subpart H--Non-leveraged Licensees-Exceptions to Regulations

107.1000  Licensees without leverage--exceptions to the regulations.

      Subpart I--SBA Financial Assistance for Licensees (Leverage)

              General Information About Obtaining Leverage

107.1100  Types of Leverage and application procedures.
107.1120  General eligibility requirements for Leverage.
107.1130  Leverage fees and additional charges payable by Licensee.
107.1140  Licensee's acceptance of SBA remedies under Secs. 107.1800 
          through 107.1820.

       Maximum Amount of Leverage for Which a Licensee Is Eligible

107.1150  Maximum amount of Leverage for a Section 301(c) Licensee.
107.1160  Maximum amount of Leverage for a Section 301(d) Licensee.
107.1170  Maximum amount of Participating Securities for any Licensee.

    Conditional Commitments by SBA To Reserve Leverage for a Licensee

107.1200  SBA's Leverage commitment to a Licensee--application 
          procedure, amount, and term.
107.1210  Payment of leverage fee upon receipt of commitment.
107.1220  Requirement for Licensee to file quarterly financial 
          statements.
107.1230  Draw-downs by Licensee under SBA's Leverage commitment.
107.1240  Funding of Licensee's draw request through sale to short-term 
          investor.

         Preferred Securities Leverage--Section 301(d) Licensees

107.1400  Dividends or partnership distributions on 4 percent Preferred 
          Securities.
107.1410  Requirement to redeem 4 percent Preferred Securities.
107.1420  Articles requirements for 4 percent Preferred Securities.
107.1430  Redeeming 4 percent Preferred Securities with proceeds of non-
          subsidized Debentures.
107.1440  Three percent preferred stock issued before November 21, 1989.
107.1450  Optional redemption of Preferred Securities.

                    Participating Securities Leverage

107.1500  General description of Participating Securities.
107.1505  Liquidity requirements for Licensees issuing Participating 
          Securities.
107.1510  How a Licensee computes Earmarked Profit (Loss).
107.1520  How a Licensee computes and allocates Prioritized Payments to 
          SBA.
107.1530  How a Licensee computes SBA's Profit Participation.
107.1540  Distributions by Licensee--Prioritized Payments and 
          Adjustments.
107.1550  Distributions by Licensee--permitted ``tax Distributions'' to 
          private investors and SBA.
107.1560  Distributions by Licensee--required Distributions to private 
          investors and SBA.
107.1570  Distributions by Licensee--optional Distribution to private 
          investors and SBA.
107.1575  Distributions on other than Payment Dates.
107.1580  Special rules for In-Kind Distributions by Licensees.
107.1585  Exchange of Debentures for Participating Securities.
107.1590  Special rules for companies licensed on or before March 31, 
          1993.

 Funding Leverage by Use of SBA-Guaranteed Trust Certificates (``TCs'')

107.1600  SBA authority to issue and guarantee Trust Certificates.
107.1610  Effect of prepayment or early redemption of Leverage on a 
          Trust Certificate.
107.1620  Functions of agents, including Central Registration Agent, 
          Selling Agent and Fiscal Agent.
107.1630  SBA regulation of Brokers and Dealers and disclosure to 
          purchasers of Leverage or Trust Certificates.
107.1640  SBA access to records of the CRA, Brokers, Dealers and Pool or 
          Trust assemblers.

[[Page 31]]

                              Miscellaneous

107.1700  Transfer by SBA of its interest in Licensee's Leverage 
          security.
107.1710  SBA authority to collect or compromise its claims.
107.1720  Characteristics of SBA's guarantee.

       Subpart J--Licensee's Noncompliance With Terms of Leverage

107.1800  Licensee's agreement to terms and conditions in Secs. 107.1810 
          and 107.1820.
107.1810  Events of default and SBA's remedies for Licensee's 
          noncompliance with terms of Debentures.
107.1820  Conditions affecting issuers of Preferred Securities and/or 
          Participating Securities.

              Computation of Licensee's Capital Impairment

107.1830  Licensee's Capital Impairment--definition and general 
          requirements.
107.1840  Computation of Licensee's Capital Impairment Percentage.
107.1850  Exceptions to Capital Impairment provisions for Licensees with 
          outstanding Participating Securities.

               Subpart K--Ending Operations as a Licensee

107.1900  Surrender of license.

                        Subpart L--Miscellaneous

107.1910  Non-waiver of SBA's rights or terms of Leverage security.
107.1920  Licensee's application for exemption from a regulation in this 
          part 107.
107.1930  Effect of changes in this part 107 on transactions previously 
          consummated.

    Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g, 
687m, and Pub. L. 106-554, 114 Stat. 2763.

    Source: 61 FR 3189, Jan. 31, 1996, unless otherwise noted.



                   Subpart A--Introduction to Part 107



Sec. 107.20  Legal basis and applicability of this part 107.

    (a) The regulations in this part implement Title III of the Small 
Business Investment Act of 1958, as amended. All Licensees must comply 
with all applicable regulations, accounting guidelines and valuation 
guidelines for Licensees.
    (b) Provisions of this part which are not mandated by the Act shall 
not supersede existing State law. A party claiming that a conflict 
exists shall submit an opinion of independent counsel, citing 
authorities, for SBA's resolution of the issues involved.



Sec. 107.30  Amendments to Act and regulations.

    A Licensee shall be subject to all existing and future provisions of 
the Act and parts 107 and 112 of title 13 of the Code of Federal 
Regulations.



Sec. 107.40  How to read this part 107.

    (a) Center Headings. All references in this part to SBA forms, and 
instructions for their preparation, are to the current issue of such 
forms. Center headings are descriptive and are used for convenience 
only. They have no regulatory effect.
    (b) Capitalizing defined terms. Terms defined in Sec. 107.50 are 
capitalized in this part 107.
    (c) The pronoun ``you'' as used in this part 107 means a Licensee or 
license applicant, as appropriate, unless otherwise noted.



             Subpart B--Definition of Terms Used in Part 107



Sec. 107.50  Definition of terms.

    Accumulated Prioritized Payments has the meaning set forth in 
Sec. 107.1520.
    Act means the Small Business Investment Act of 1958, as amended.
    Adjustments has the meaning set forth in Sec. 107.1520.
    Affiliate or Affiliates has the meaning set forth in Sec. 121.103 of 
this chapter.
    Articles mean articles of incorporation or charter for a Corporate 
Licensee and the partnership agreement or certificate for a Partnership 
Licensee.
    Assistance or Assisted means Financing of or management services 
rendered to a Small Business by a Licensee pursuant to the Act and these 
regulations.
    Associate of a Licensee means any of the following:
    (1)(i) An officer, director, employee or agent of a Corporate 
Licensee;
    (ii) A Control Person, employee or agent of a Partnership Licensee;
    (iii) An Investment Adviser/Manager of any Licensee, including any 
Person who contracts with a Control Person of

[[Page 32]]

a Partnership Licensee to be the Investment Adviser/Manager of such 
Licensee; or
    (iv) Any Person regularly serving a Licensee on retainer in the 
capacity of attorney at law.
    (2) Any Person who owns or controls, or who has entered into an 
agreement to own or control, directly or indirectly, at least 10 percent 
of any class of stock of a Corporate Licensee or a limited partner's 
interest of at least 10 percent of the partnership capital of a 
Partnership Licensee. However, a limited partner in a Partnership 
Licensee is not considered an Associate if such Person is an entity 
Institutional Investor whose investment in the Partnership, including 
commitments, represents no more than 33 percent of the partnership 
capital of the Licensee and no more than five percent of such Person's 
net worth.
    (3) Any officer, director, partner (other than a limited partner), 
manager, agent, or employee of any Associate described in paragraph (1) 
or (2) of this definition.
    (4) Any Person that directly or indirectly Controls, or is 
Controlled by, or is under Common Control with, a Licensee.
    (5) Any Person that directly or indirectly Controls, or is 
Controlled by, or is under Common Control with, any Person described in 
paragraphs (1) and (2) of this definition.
    (6) Any Close Relative of any Person described in paragraphs 
(1),(2), (4), and (5) of this definition.
    (7) Any Secondary Relative of any Person described in paragraphs 
(1), (2), (4), and (5) of this definition.
    (8) Any concern in which--
    (i) Any person described in paragraphs (1) through (6) of this 
definition is an officer; general partner, or managing member; or
    (ii) Any such Person(s) singly or collectively Control or own, 
directly or indirectly, an equity interest of at least 10 percent 
(excluding interests that such Person(s) own indirectly through 
ownership interests in the Licensee).
    (9) Any concern in which any Person(s) described in paragraph (7) of 
this definition singly or collectively own (including beneficial 
ownership) a majority equity interest, or otherwise have Control. As 
used in this paragraph (9), ``collectively'' means together with any 
Person(s) described in paragraphs (1) though (7) of this definition.
    (10) For the purposes of this definition, if any Associate 
relationship described in paragraphs (1) through (7) of this definition 
exists at any time within six months before or after the date that a 
Licensee provides Financing, then that Associate relationship is 
considered to exist on the date of the Financing.
    (11) If any Licensee has any ownership interest in another Licensee, 
the two Licensees are Associates of each other.
    Capital Impairment has the meaning set forth in Sec. 107.1830(c).
    Central Registration Agent or CRA means one or more agents appointed 
by SBA for the purpose of issuing TCs and performing the functions 
enumerated in Sec. 107.1620 and performing similar functions for 
Debentures and Participating Securities funded outside the pooling 
process.
    Charge means an annual fee on Leverage issued on or after October 1, 
1996 (except for Leverage issued pursuant to a commitment made by SBA 
before October 1, 1996), which is payable to SBA by Licensees, subject 
to the terms and conditions set forth in Sec. 107.1130(d).
    Close Relative of an individual means:
    (1) A current or former spouse;
    (2) A father, mother, guardian, brother, sister, son, daughter; or
    (3) A father-in-law, mother-in-law, brother-in-law, sister-in-law, 
son-in-law, or daughter-in-law.
    Combined Capital means the sum of Regulatory Capital and outstanding 
Leverage.
    Commitment means a written agreement between a Licensee and an 
eligible Small Business that obligates the Licensee to provide Financing 
(except a guarantee) to that Small Business in a fixed or determinable 
sum, by a fixed or determinable future date. In this context the term 
``agreement'' means that there has been agreement on the principal 
economic terms of the Financing. The agreement may include reasonable 
conditions precedent to the Licensee's obligation to fund the 
commitment, but these conditions must be outside the Licensee's control.

[[Page 33]]

    Common Control means a condition where two or more Persons, either 
through ownership, management, contract, or otherwise, are under the 
Control of one group or Person. Two or more Licensees are presumed to be 
under Common Control if they are Affiliates of each other by reason of 
common ownership or common officers, directors, or general partners; or 
if they are managed or their investments are significantly directed 
either by a common independent investment advisor or managerial 
contractor, or by two or more such advisors or contractors that are 
Affiliates of each other. This presumption may be rebutted by evidence 
satisfactory to SBA.
    Control means the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
Licensee or other concern, whether through the ownership of voting 
securities, by contract, or otherwise.
    Control Person means any Person that controls a Licensee, either 
directly or through an intervening entity. A Control Person includes:
    (1) A general partner of a Partnership Licensee;
    (2) Any Person serving as the general partner, officer, director, or 
manager (in the case of a limited liability company) of any entity that 
controls a Licensee, either directly or through an intervening entity;
    (3) Any Person that--
    (i) Controls or owns, directly or through an intervening entity, at 
least 10 percent of a Partnership Licensee or any entity described in 
paragraphs (1) or (2) of this definition; and
    (ii) Participates in the investment decisions of the general partner 
of such Partnership Licensee;
    (4) Any Person that controls or owns, directly or through an 
intervening entity, at least 50 percent of a Partnership Licensee or any 
entity described in paragraphs (1) or (2) of this definition.
    Corporate Licensee. See definition of Licensee in this section.
    Cost of Money has the meaning set forth in Sec. 107.855.
    Debenture Rate means the interest rate, as published from time to 
time in the Federal Register by SBA, for ten year debentures issued by 
Licensees and funded through public sales of certificates bearing SBA's 
guarantee. User or guarantee fees, if any, paid by a Licensee are not 
considered in determining the Debenture Rate.
    Debentures means debt obligations issued by Licensees pursuant to 
section 303(a) of the Act and held or guaranteed by SBA.
    Debt Securities has the meaning set forth in Sec. 107.815.
    Disadvantaged Business means a Small Business that is at least 50 
percent owned, and controlled and managed, on a day to day basis, by a 
person or persons whose participation in the free enterprise system is 
hampered because of social or economic disadvantages.
    Distributable Securities means equity securities that are determined 
by SBA (with the advice of a third party expert in the marketing of 
securities) to meet each of the following requirements:
    (1) The securities (which may include securities that are salable 
pursuant to the provisions of Rule 144 (17 CFR 230.144) under the 
Securities Act of 1933, as amended) are salable immediately without 
restriction under Federal and state securities laws;
    (2) The securities are of a class:
    (i) Which is listed and registered on a national securities 
exchange, or
    (ii) For which quotation information is disseminated in the National 
Association of Securities Dealers Automated Quotation System and as to 
which transaction reports and last sale data are disseminated pursuant 
to Rule 11Aa3-1 (17 CFR 240.11Aa3-1) under the Securities Exchange Act 
of 1934, as amended; and
    (3) The quantity of such securities to be distributed to SBA can be 
sold over a reasonable period of time without having an adverse impact 
upon the price of the security.
    Distribution means any transfer of cash or non-cash assets to SBA, 
its agent or Trustee, or to partners in a Partnership Licensee, or to 
shareholders in a Corporate Licensee. Capitalization of Retained 
Earnings Available for Distribution constitutes a Distribution to the 
Licensee's non-SBA partners or shareholders.

[[Page 34]]

    Earmarked Assets has the meaning set forth in Sec. 107.1510(b). (See 
also Sec. 107.1590.)
    Earmarked Profit (Loss) has the meaning set forth in Sec. 107.1510.
    Earned Prioritized Payments has the meaning set forth in 
Sec. 107.1520.
    Equity Capital Investments means investments in a Small Business in 
the form of common or preferred stock, limited partnership interests, 
options, warrants, or similar equity instruments, including subordinated 
debt with equity features if such debt provides only for interest 
payments contingent upon and limited to the extent of earnings. Equity 
Capital Investments must not require amortization. Equity Capital 
Investments may be guaranteed; however, neither Equity Capital 
Investments nor such guarantee may be collateralized or otherwise 
secured. Investments classified as Debt Securities (see Secs. 107.800 
and 107.815) are not precluded from qualifying as Equity Capital 
Investments.
    Equity Securities has the meaning set forth in Sec. 107.800.
    Financing or Financed means outstanding financial assistance 
provided to a Small Business by a Licensee, whether through:
    (1) Loans;
    (2) Debt Securities;
    (3) Equity Securities;
    (4) Guarantees; or
    (5) Purchases of securities of a Small Business through or from an 
underwriter (see Sec. 107.825).
    Guaranty Agreement means the contract entered into by SBA which is a 
guarantee backed by the full faith and credit of the United States 
Government as to timely payment of principal and interest on Debentures 
or the Redemption Price of and Prioritized Payments on Participating 
Securities and SBA's rights in connection with such guarantee.
    Includible Non-Cash Gains means those non-cash gains (as reported on 
SBA Form 468) that are realized in the form of Publicly Traded and 
Marketable securities or investment grade debt instruments. For purposes 
of this definition, investment grade debt instruments means those 
instruments that are rated ``BBB'' or ``Baa'', or better, by Standard & 
Poor's Corporation or Moody's Investors Service, respectively. Non-rated 
debt may be considered to be investment grade if Licensee obtains a 
written opinion from an investment banking firm acceptable to SBA 
stating that the non-rated debt instrument is equivalent in risk to the 
issuer's investment grade debt.
    Institutional Investor means:
    (1) Entities. Any of the following entities if the entity has a net 
worth (exclusive of unfunded commitments from investors) of at least $1 
million, or such higher amount as is specified in paragraph (1) of this 
definition. (See also Sec. 107.230(b)(4) for limitations on the amount 
of an Institutional Investor's commitment that may be included in 
Private Capital.)
    (i) A State or National bank, trust company, savings bank, or 
savings and loan association.
    (ii) An insurance company.
    (iii) A 1940 Act Investment Company or Business Development Company 
(each as defined in the Investment Company Act of 1940, as amended (15 
U.S.C. 8a-1 et seq.).
    (iv) A holding company of any entity described in paragraph (1)(i), 
(ii) or (iii) of this definition.
    (v) An employee benefit or pension plan established for the benefit 
of employees of the Federal government, any State or political 
subdivision of a State, or any agency or instrumentality of such 
government unit.
    (vi) An employee benefit or pension plan (as defined in the Employee 
Retirement Income Security Act of 1974, as amended (Pub. L. 93-406, 88 
Stat. 829), excluding plans established under section 401(k) of the 
Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended).
    (vii) A trust, foundation or endowment exempt from Federal income 
taxation under the Internal Revenue Code of 1986, as amended.
    (viii) A corporation, partnership or other entity with a net worth 
(exclusive of unfunded commitments from investors) of more than $10 
million.
    (ix) A State, a political subdivision of a State, or an agency or 
instrumentality of a State or its political subdivision.
    (x) An entity whose primary purpose is to manage and invest non-
Federal

[[Page 35]]

funds on behalf of at least three Institutional Investors described in 
paragraphs (1)(i) through (1)(ix) of this definition, each of whom must 
have at least a 10 percent ownership interest in the entity.
    (xi) Any other entity that SBA determines to be an Institutional 
Investor.
    (2) Individuals. (i) Any of the following individuals if he/she is 
also a permanent resident of the United States:
    (A) An individual who is an Accredited Investor (as defined in the 
Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose 
commitment to the Licensee is backed by a letter of credit from a State 
or National bank acceptable to SBA.
    (B) An individual whose personal net worth is at least $2 million 
and at least ten times the amount of his or her commitment to the 
Licensee. The individual's personal net worth must not include the value 
of any equity in his or her most valuable residence.
    (C) An individual whose personal net worth (determined in accordance 
with paragraph (2)(i)(B) of this definition) is at least $10 million.
    (ii) Any individual who is not a permanent resident of the United 
States but who otherwise satisfies paragraph (2)(i) of this definition 
provided such individual has irrevocably appointed an agent within the 
United States for the service of process.
    Investment Adviser/Manager means any Person who furnishes advice or 
assistance with respect to operations of a Licensee under a written 
contract executed in accordance with the provisions of Sec. 107.510.
    Lending Institution means a concern that is operating under 
regulations of a state or Federal licensing, supervising, or examining 
body, or whose shares are publicly traded and listed on a recognized 
stock exchange or NASDAQ and which has assets in excess of $500 million; 
and which, in either case, holds itself out to the public as engaged in 
the making of commercial and industrial loans and whose lending 
operations are not for the purpose of financing its own or an 
Associates's sales or business operations.
    Leverage means financial assistance provided to a Licensee by SBA, 
either through the purchase or guaranty of a Licensee's Debentures or 
Participating Securities, or the purchase of a Licensee's Preferred 
Securities, and any other SBA financial assistance evidenced by a 
security of the Licensee.
    Leverageable Capital means Regulatory Capital, excluding unfunded 
commitments.
    Licensee means either a corporation (Corporate Licensee), or a 
limited partnership organized pursuant to Sec. 107.160 (Partnership 
Licensee), to which a license has been granted pursuant to the Act. For 
certain purposes, the Entity General Partner of a Partnership Licensee 
is treated as if it were a Licensee (see Sec. 107.160(b)(2)).
    LMI Enterprise means:
    (1) A Small Business that has at least 50% of its employees or 
tangible assets located in LMI Zone(s) or in which at least 35% of the 
full-time employees have primary residences in LMI Zone(s), in either 
case determined as of the time of application for SBIC financing; or
    (2) A Small Business that does not meet the requirements of 
paragraph (1) of this definition as of the time of application for SBIC 
financing but that certifies at such time that it intends to meet the 
requirements within 180 days after the closing of the SBIC financing. A 
Small Business qualifying under this paragraph (2) will no longer be an 
LMI Enterprise as of the 180th day after the closing of the SBIC 
financing unless, on or before such date, at least 50% of its employees 
or tangible assets are located in LMI Zones or at least 35% of its full-
time employees have primary residences in LMI Zones.
    LMI Investment means a financing of an LMI Enterprise, made after 
September 30, 1999, in the form of equity securities or debt securities 
that are junior to all existing or future secured borrowings of the 
business. The debt securities may be guaranteed and may be secured by 
the assets of the LMI Enterprise, but the guarantee may not be 
collateralized or otherwise secured.
    LMI Zone means any area located within a HUBZone (as defined in 13 
CFR 126.103), an Urban Empowerment Zone or Urban Enterprise Community 
(as designated by the Secretary of the

[[Page 36]]

Department of Housing and Urban Development), a Rural Empowerment Zone 
or Rural Enterprise Community (as designated by the Secretary of the 
Department of Agriculture), an area of Low Income or Moderate Income (as 
recognized by the Federal Financial Institutions Examination Council), 
or a county with Persistent Poverty (as classified by the Economic 
Research Service of the Department of Agriculture).
    Loan has the meaning set forth in Sec. 107.810.
    Loans and Investments means Portfolio Securities, Assets Acquired in 
Liquidation of Portfolio Securities, Operating Concerns Acquired, and 
Notes and Other Securities Received, as set forth in the Statement of 
Financial Position of SBA Form 468.
    Management Expenses has the meaning set forth in Sec. 107.520.
    1940 Act Company means a Licensee which is registered under the 
Investment Company Act of 1940.
    1980 Act Company means a Licensee which is registered under the 
Small Business Investment Incentive Act of 1980.
    Original Issue Price means the price paid by the purchaser for 
securities at the time of issuance.
    Participating Securities means preferred stock, preferred limited 
partnership interests, or similar instruments issued by Licensees, 
including debentures having interest payable only to the extent of 
earnings, all of which are subject to the terms set forth in 
Secs. 107.1500 through 107.1590 and section 303(g) of the Act.
    Partnership Licensee. See definition of Licensee in this section.
    Payment Date means, for a Participating Securities issuer, each 
February 1, May 1, August 1, and November 1 during the term of a 
Participating Security.
    Person means a natural person or legal entity.
    Pool means an aggregation of SBA guaranteed Debentures or SBA 
guaranteed Participating Securities approved by SBA.
    Portfolio means the securities representing a Licensee's total 
outstanding Financing of Small Businesses. It does not include idle 
funds or assets acquired in liquidation of Portfolio securities.
    Portfolio Concern means a Small Business Assisted by a Licensee.
    Preferred Securities means nonvoting preferred stock or nonvoting 
limited partnership interests issued to SBA prior to October 1, 1996, by 
a Section 301(d) Licensee. Such securities were issued at par value in 
the case of preferred stock, or at face value in the case of preferred 
limited partnership interests.
    Prioritized Payments has the meaning set forth in Sec. 107.1520.
    Private Capital has the meaning set forth in Sec. 107.230.
    Profit Participation has the meaning set forth in 
Sec. 107.1500(c)(3).
    Publicly Traded and Marketable means securities that are salable 
without restriction or that are salable within 12 months pursuant to 
Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by 
the holder thereof (or in the case of an In-kind Distribution by the 
distributee thereof), and are of a class which is traded on a regulated 
stock exchange, or is listed in the Automated Quotation System of the 
National Association of Securities Dealers (NASDAQ), or has, at a 
minimum, at least two market makers as defined in the relevant sections 
of the Securities Exchange Act of 1934, as amended (15 U.S.C. 77b et 
seq.), and in all cases the quantity of which can be sold over a 
reasonable period of time without having an adverse impact upon the 
price of the stock.
    Qualified Non-private Funds has the meaning set forth in 
Sec. 107.230.
    Redemption Price means the amount required to be paid by the issuer, 
or successor to the issuer, of Preferred or Participating Securities to 
repurchase such securities from the holder. The Redemption Price shall 
be the Original Issue Price less any prepayments or prior redemptions.
    Regulatory Capital means:
    (1) General. Regulatory Capital means Private Capital, excluding 
non-cash assets contributed to a Licensee or a license applicant, and 
non-cash assets purchased by a license applicant, unless such assets 
have been converted to cash or have been approved by SBA for inclusion 
in Regulatory Capital. For

[[Page 37]]

purposes of this definition, sales of contributed non-cash assets with 
recourse or borrowing against such assets shall not constitute a 
conversion to cash.
    (2) Exclusion of questionable commitments. An investor's commitment 
to a Licensee is excluded from Regulatory Capital if SBA determines that 
the collectibility of the commitment is questionable.
    Retained Earnings Available for Distribution means Undistributed Net 
Realized Earnings less any Unrealized Depreciation on Loans and 
Investments (as reported on SBA Form 468), and represents the amount 
that a Licensee may distribute to investors (including SBA) as a profit 
Distribution, or transfer to Private Capital.
    SBA means the Small Business Administration, 409 Third Street, SW., 
Washington, DC 20416.
    Secondary Relative of an individual means:
    (1) A grandparent, grandchild, or any other ancestor or lineal 
descendent who is not a Close Relative;
    (2) An uncle, aunt, nephew, niece, or first cousin; or
    (3) A spouse of any person described in paragraph (1) or (2) of this 
definition.
    Section 301(c) Licensee has the meaning set forth in Sec. 107.100.
    Section 301(d) Licensee means a company licensed prior to October 1, 
1996 under section 301(d) of the Act as in effect on the date of 
licensing, that may provide Assistance only to Disadvantaged Businesses. 
A Section 301(d) Licensee may be organized as a for-profit corporation, 
as a non-profit corporation, or as a limited partnership.
    Short-term Financing means Financing with a term of less than one 
year in accordance with the regulations.
    SIC Manual means the latest issue of the Standard Industrial 
Classification Manual, prepared by the Office of Management and Budget, 
and available from the U.S. Government Printing Office, Superintendent 
of Documents, P.O. Box 371954, Pittsburgh, Pa., 15250-7954.
    Small Business means a small business concern as defined in section 
103(5) of the Act (including its Affiliates), which for purposes of size 
eligibility, meets the applicable criteria set forth in part 121 of this 
chapter.
    Smaller Enterprise has the meaning set forth in Sec. 107.710.
    Start-up Financing means an Equity Capital Investment in a Small 
Business that--
    (1) Has not had sales exceeding $3,000,000 or positive cash flow 
from operations in any of its last three full fiscal years; and
    (2) Was not formed to acquire any existing business, unless the 
acquired business satisfies paragraphs (1) and (2) of this definition.
    Temporary Debt has the meaning set forth in Sec. 107.570.
    Trust means the legal entity created for the purpose of holding 
guaranteed Debentures or Participating Securities and the guaranty 
agreement related thereto, receiving, holding and making any related 
payments, and accounting for such payments.
    Trust Certificate Rate means a fixed rate determined by the 
Secretary of the Treasury at the time Participating Securities or 
Debentures are pooled, taking into consideration the current average 
market yield on outstanding marketable obligations of the United States 
with maturities comparable to the maturities of the Trust Certificates 
being guaranteed by SBA, adjusted to the nearest one-eighth of one 
percent.
    Trust Certificates (TCs) means certificates issued by SBA, its agent 
or Trustee and representing ownership of all or a fractional part of a 
Trust or Pool of Debentures or Participating Securities.
    Trustee means the trustee or trustees of a Trust.
    Undistributed Net Realized Earnings means Undistributed Realized 
Earnings less Non-cash Gains/Income, each as reported on SBA Form 468.
    Unrealized Appreciation means the amount by which a Licensee's 
valuation of each of its Loans and Investments, as determined by its 
Board of Directors or General Partner(s) in accordance with Licensee's 
valuation policies, exceeds the cost basis thereof.
    Unrealized Depreciation means the amount by which a Licensee's 
valuation of each of its Loans and Investments, as determined by its 
Board of

[[Page 38]]

Directors or General Partner(s) in accordance with Licensee's valuation 
policies, is below the cost basis thereof.
    Unrealized Gain (Loss) on Securities Held means the sum of the 
Unrealized Appreciation and Unrealized Depreciation on all of a 
Licensee's Loans and Investments, less estimated future income tax 
expense or estimated realizable future income tax benefit, as 
appropriate.
    Venture Capital Financing has the meaning set forth in 
Sec. 107.1160.
    Wind-up Plan has the meaning set forth in Sec. 107.590.

[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996, as amended at 62 
FR 11759, Mar. 13, 1997; 63 FR 5865, Feb. 5, 1998; 64 FR 52645, Sept. 
30, 1999; 64 FR 70995, Dec. 20, 1999; 69 FR 8098, Feb. 23, 2004]



                Subpart C--Qualifying for an SBIC License

                           Organizing an SBIC



Sec. 107.100  Organizing a Section 301(c) Licensee.

    Section 301(c) Licensee means a company licensed under section 
301(c) of the Act. It may be organized as a for-profit corporation or as 
a limited partnership created in accordance with the special rules of 
Sec. 107.160.



Sec. 107.115  1940 Act and 1980 Act Companies.

    A 1940 Act or 1980 Act Company is eligible to apply for an SBIC 
license, and an existing Licensee is eligible to apply for SBA's 
approval to convert to a 1940 Act or 1980 Act Company. In either case, 
the 1940 Act or 1980 Act Company may elect to be taxed as a regulated 
investment company under section 851 of the Internal Revenue Code of 
1986, as amended (26 U.S.C. 851). However, a Licensee making such 
election may make Distributions only as permitted under the applicable 
sections of this part (see the definition of Retained Earnings Available 
for Distribution, Sec. 107.585, and Secs. 107.1540 through 107.1580).



Sec. 107.120  Special rules for a Section 301(d) Licensee owned by another Licensee.

    With SBA's prior written approval, a Section 301(d) Licensee may 
operate as the subsidiary of one or more Licensees (participant 
Licensees), subject to the following:
    (a) Each participant Licensee must own at least 20 percent of the 
voting securities of the Section 301(d) Licensee.
    (b) A participant Licensee must treat its entire capital 
contribution to the subsidiary as a reduction of its Leverageable 
Capital. The participant Licensee's remaining Leverageable Capital must 
be sufficient to support its outstanding Leverage.
    (c) A participant Licensee may not transfer its Leverage to a 
subsidiary Section 301(d) Licensee.

[63 FR 5865, Feb. 5, 1998]



Sec. 107.130  Requirement for qualified management.

    When applying for a license, you must show, to the satisfaction of 
SBA, that your current or proposed management is qualified and has the 
knowledge, experience, and capability necessary for investing in the 
types of businesses contemplated by the Act, these regulations and your 
business plan. You must designate at least one individual as the 
official responsible for contact with SBA.



Sec. 107.140  SBA approval of initial Management Expenses.

    If you plan to obtain Leverage, you must have your Management 
Expenses approved by SBA at the time of licensing. (See Sec. 107.520 for 
the definition of Management Expenses.)



Sec. 107.150  Management-ownership diversity requirement.

    (a) Diversity requirement. You must satisfy the requirements in 
paragraphs (b), (c) and (d) of this section:
    (1) In order to obtain an SBIC license (unless you do not plan to 
obtain Leverage),
    (2) If at the time you were licensed you did not plan to obtain 
Leverage, but you now wish to be eligible for Leverage, or
    (3) If SBA so requires as a condition of approval of your transfer 
of Control under Sec. 107.440.
    (b) Percentage ownership requirement. (1) Except as provided in 
paragraph (b)(2) of this section, no Person or

[[Page 39]]

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.
    (2) Exception. An investor that is a traditional investment company, 
as determined by SBA, may own and control more than 70 percent of your 
Regulatory Capital and your Leverageable Capital. For purposes of this 
section, a traditional investment company must be a professionally 
managed firm organized exclusively to pool capital from more than one 
source for the purpose of investing in businesses that are expected to 
generate substantial returns to the firm's investors. In determining 
whether a firm is a traditional investment company for purposes of this 
section, SBA will also consider:
    (i) Whether the managers of the firm are unrelated to and 
unaffiliated with the investors in the firm;
    (ii) Whether the managers of the firm are authorized and motivated 
to make investments that, in their independent judgment, are likely to 
produce significant returns to all investors in the firm;
    (iii) Whether the firm benefits from the use of the SBIC only 
through the financial performance of the SBIC; and
    (iv) Other related factors.
    (c) Non-affiliation requirement. (1) General rule. At least 30 
percent of your Regulatory Capital and Leverageable Capital must be 
owned and controlled by three Persons unaffiliated with your management 
and unaffiliated with each other, and whose investments are significant 
in dollar and percentage terms as determined by SBA. Such Persons must 
not be your Associates (except for their status as your shareholders, 
limited partners, or members) and must not Control, be Controlled by, or 
be under Common Control with any of your Associates. A single 
``acceptable'' Institutional Investor may be substituted for two or 
three of the three Persons who are otherwise required under this 
paragraph. The following Institutional Investors are ``acceptable'' for 
this purpose:
    (i) Entities whose overall activities are regulated and periodically 
examined by state, Federal or other governmental authorities 
satisfactory to SBA;
    (ii) Entities listed on the New York Stock Exchange;
    (iii) Entities that are publicly-traded and that meet both the 
minimum numerical listing standards and the corporate governance listing 
standards of the New York Stock Exchange;
    (iv) Public or private employee pension funds;
    (v) Trusts, foundations, or endowments, but only if exempt from 
Federal income taxation; and
    (vi) Other Institutional Investors satisfactory to SBA.
    (2) Look-through for traditional investment company investors. SBA, 
in its sole discretion, may consider the requirement in paragraph (c)(1) 
of this section to be satisfied if at least 30 percent of your 
Regulatory Capital and Leverageable Capital is owned and controlled 
indirectly, through a traditional investment company, by Persons 
unaffiliated with your management.
    (d) Voting requirement. (1) Except as provided in paragraph (d)(2) 
of this section, the investors required for you to satisfy diversity may 
not delegate their voting rights to any Person who is your Associate, or 
who Controls, is Controlled by, or is under Common Control with any of 
your Associates, without prior SBA approval.
    (2) Exception. Paragraph (d)(1) of this section does not apply to 
investors in publicly-traded Licensees, to proxies given to vote in 
accordance with specific instructions for single specified meetings, or 
to any delegation of voting rights to a Person who is neither a 
diversity investor in the Licensee nor affiliated with management of the 
Licensee.
    (e) Requirement to maintain diversity. If you were required to have 
management-ownership diversity at any time, you must maintain such 
diversity while you have outstanding Leverage or Earmarked Assets. To 
maintain management-ownership diversity, you may continue to satisfy the 
diversity requirement as in effect at the time it was first applicable 
to you or you may satisfy the management-ownership diversity requirement 
as currently in effect. If, at any time, you no longer

[[Page 40]]

have the required management-ownership diversity, you must:
    (1) Notify SBA within 10 days; and
    (2) Re-establish diversity within six months. For the consequences 
of failure to re-establish diversity, see Secs. 107.1810(g) and 
107.1820(f).

[65 FR 71055, Nov. 29, 2000]



Sec. 107.160  Special rules for Licensees formed as limited partnerships.

    A limited partnership organized under State law solely for the 
purpose of performing the functions and conducting the activities 
contemplated under the Act may apply for a license under section 301(c) 
or section 301 (d) of the Act (``Partnership Licensee'').
    (a) Number of Licensee's General Partners. If you are a Partnership 
Licensee, you must have as your general partner(s) at least two 
individuals, or at least one corporation, partnership, or limited 
liability company (LLC), or any combination of individuals, 
corporations, partnerships, or LLCs.
    (b) Entity General Partner of Licensee. A general partner which is a 
corporation, limited liability company or partnership (an ``Entity 
General Partner'') shall be organized under state law solely for the 
purpose of serving as the general partner of one or more Licensees.
    (1) SBA must approve any person who will serve as an officer, 
director, manager, or general partner of the Entity General Partner. 
This provision must be stated in an Entity General Partner's Certificate 
of Incorporation, member agreement, Limited Partnership Agreement or 
other similar governing instrument which must, in each case, accompany 
the license application.
    (2) An Entity General Partner is subject to the same examination and 
reporting requirements as a Licensee under section 310(b) of the Act. 
The restrictions and obligations imposed upon a Licensee by 
Secs. 107.1800 through 107.1820, and 107.30, 107.410 through 107.450, 
107.470, 107.475, 107.500, 107.510, 107.585, 107.600, 107.680, 107.690 
through 107.692, 107.865, and 107.1910 apply also to an Entity General 
Partner of a Licensee.
    (3) The general partner(s) of your Entity General Partner(s) will be 
considered your general partner.
    (4) If your Entity General Partner is a limited partnership, its 
limited partners may be considered your Control Person(s) if they meet 
the definition for Control Person in Sec. 107.50.
    (5) If your Entity General Partner is a limited partnership, it is 
subject to paragraph (a) of this section.
    (c) Other requirements for Partnership Licensees. If you are a 
Partnership Licensee:
    (1) You must have a minimum duration of ten years or two years 
following the maturity of your last-maturing Leverage security, 
whichever is longer. After 10 years, if all Leverage has been repaid or 
redeemed and all amounts due SBA, its agent, or Trustee have been paid, 
the Partnership Licensee may be terminated by a vote of your partners. 
(For purposes of this provision SBA is not considered a partner.);
    (2) None of your general partner(s) may be removed or replaced by 
your limited partners without prior written approval of SBA;
    (3) Any transferee of, or successor in interest to, your general 
partner shall have only the rights and liabilities of a limited partner 
pending SBA's written approval of such transfer or succession; and
    (4) You must incorporate all the provisions in this paragraph (c) in 
your Limited Partnership Agreement.
    (d) Obligations of a Control Person. All Control Persons are bound 
by the disciplinary provisions of sections 313 and 314 of the Act and by 
the conflict-of-interest rules under section 312 of the Act. The term 
Licensee, as used in Secs. 107.30, 107.460, and 107.680 includes all of 
the Licensee's Control Persons. The term Licensee as used in 
Sec. 107.670 includes only the Licensee's general partner(s). The 
conditions specified in Secs. 107.1800 through 107.1820 and 
Sec. 107.1910 apply to all general partners.
    (e) Liability of general partner for partnership debts to SBA. 
Subject to section 314 of the Act, your general partner is not liable 
solely by reason of its status as a general partner for repayment of any 
Leverage or debts you owe to SBA unless SBA, in the exercise of 
reasonable investment prudence, and with regard to your financial 
soundness, determines otherwise prior to the purchase or guaranty of 
your Leverage.

[[Page 41]]

    (f) Reorganization of Licensee. A corporate Licensee wishing to 
reorganize as a Partnership Licensee, or a Partnership Licensee wishing 
to reorganize as a Corporate Licensee, may apply to SBA for approval 
under Sec. 107.470.
    (g) Special Leverage requirement. Before your first issuance of 
Leverage, you must furnish SBA with evidence that you qualify as a 
partnership for tax purposes, either by a ruling from the Internal 
Revenue Service, or by an opinion of counsel.

                          Capitalizing an SBIC



Sec. 107.200  Adequate capital for Licensees.

    You must meet the requirements of this Sec. 107.200 to qualify for a 
license, to continue as a Licensee, and to receive Leverage.
    (a) You must have enough Regulatory Capital to provide reasonable 
assurance that:
    (1) You will operate soundly and profitably over the long term; and
    (2) You will be able to operate actively in accordance with your 
Articles and within the context of your business plan, as approved by 
SBA.
    (b) In SBA's sole discretion, you must be economically viable, 
taking into consideration actual and anticipated income and losses on 
your Loans and Investments, and the experience and qualifications of 
your owners and managers.



Sec. 107.210  Minimum capital requirements for Licensees.

    (a) Companies licensed on or after October 1, 1996. A company 
licensed on or after October 1, 1996 must have Leverageable Capital of 
at least $2,500,000 and must meet the applicable minimum Regulatory 
Capital requirement:
    (1) Licensees other than Participating Securities issuers. A 
Licensee that does not wish to be eligible to apply for Participating 
Securities must have Regulatory Capital of at least $5,000,000. As an 
exception to this general rule, SBA in its sole discretion and based on 
a showing of special circumstances and good cause may license an 
applicant with Regulatory Capital of at least $3,000,000, but only if 
the applicant:
    (i) Has satisfied all licensing standards and requirements except 
the minimum capital requirement, as determined solely by SBA;
    (ii) Has a viable business plan reasonably projecting profitable 
operations; and
    (iii) Has a reasonable timetable for achieving Regulatory Capital of 
at least $5,000,000.
    (2) Participating Securities issuers. A Licensee that wishes to be 
eligible to apply for Participating Securities must have Regulatory 
Capital of at least $10,000,000, unless it demonstrates to SBA's 
satisfaction that it can be financially viable over the long term with a 
lower amount. Under no circumstances can the Licensee have Regulatory 
Capital of less than $5,000,000.
    (b) Companies licensed before October 1, 1996. A company licensed 
before October 1, 1996 must meet the minimum capital requirements 
applicable to such company, as required by the regulations in effect on 
September 30, 1996. See Sec. 107.1120(c)(2) for Leverage eligibility 
requirements.

[63 FR 5866, Feb. 5, 1998]



Sec. 107.230  Permitted sources of Private Capital for Licensees.

    Private Capital means the contributed capital of a Licensee, plus 
unfunded binding commitments by Institutional Investors (including 
commitments evidenced by a promissory note) to contribute capital to a 
Licensee.
    (a) Contributed capital. For purposes of this section, contributed 
capital means the paid-in capital and paid-in surplus of a Corporate 
Licensee, or the partners' contributed capital of a Partnership 
Licensee, in either case subject to the limitations in paragraph (b) of 
this section.
    (b) Exclusions from Private Capital. Private Capital does not 
include:
    (1) Funds borrowed by a Licensee from any source.
    (2) Funds obtained through the issuance of Leverage.
    (3) Funds obtained directly or indirectly from any Federal, State, 
or local government agency or instrumentality, except for:
    (i) Funds invested by a public pension fund;

[[Page 42]]

    (ii) Funds obtained from the business revenues (excluding any 
governmental appropriation) of any federally chartered or government-
sponsored corporation established before October 1, 1987, to the extent 
that such revenues are reflected in the retained earnings of the 
corporation; and
    (iii) ``Qualified Non-private Funds'' as defined in paragraph (d) of 
this section.
    (4) Any portion of a commitment from an Institutional Investor with 
a net worth of less than $10 million that exceeds 10 percent of such 
Institutional Investor's net worth and is not backed by a letter of 
credit from a State or National bank acceptable to SBA.
    (c) Non-cash capital contributions. Capital contributions in a form 
other than cash are subject to the limitations in Sec. 107.240.
    (d) Qualified Non-private Funds. Private Capital includes 
``Qualified Non-private Funds'' as defined in this paragraph (d); 
however, investors of Qualified Non-private Funds must not control, 
directly or indirectly, a Licensee's management, or its board of 
directors or general partner(s). Qualified Non-private Funds are:
    (1) Funds directly or indirectly invested in any Licensee on or 
before August 16, 1982 by any Federal agency except SBA, under a statute 
explicitly mandating the inclusion of such funds in ``Private Capital'';
    (2) Funds directly or indirectly invested in any Licensee by any 
Federal agency under a statute that is enacted after September 4, 1992, 
explicitly mandating the inclusion of such funds in ``Private Capital'';
    (3) Funds invested in any Licensee or license applicant by one or 
more State or local government entities (including any guarantee 
extended by such entities) in an aggregate amount that does not exceed 
33 percent of Regulatory Capital; and
    (4) Funds invested in or committed in writing to any Section 301(d) 
Licensee prior to October 1, 1996, from the following sources:
    (i) A State financing agency, or similar agency or instrumentality, 
if the funds invested are derived from such agency's net income and not 
from appropriated State or local funds; and
    (ii) Grants made by a state or local government agency or 
instrumentality into a nonprofit corporation or institution exercising 
discretionary authority with respect to such funds, if SBA determines 
that such funds have taken on a private character and the nonprofit 
corporation or institution is not a mere conduit.
    (e) You may not accept any capital contribution made with funds 
borrowed by a Person seeking to own an equity interest (whether direct 
or indirect, beneficial or of record) of at least 10 percent of your 
Private Capital. This exclusion does not apply if:
    (1) Such Person's net worth is at least twice the amount borrowed; 
or
    (2) SBA gives its prior written approval of the capital 
contribution.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998; 64 
FR 70995, Dec. 20, 1999]



Sec. 107.240  Limitations on including non-cash capital contributions in Private Capital.

    Non-cash capital contributions to a Licensee or license applicant 
are included in Private Capital only if they fall into one of the 
following categories:
    (a) Direct obligations of, or obligations guaranteed as to principal 
and interest by, the United States.
    (b) Services rendered or to be rendered to you, priced at no more 
than their fair market value.
    (c) Tangible assets used in your operations, priced at no more than 
their fair market value.
    (d) Shares in a Disadvantaged Business received by a subsidiary 
Section 301(d) Licensee from its parent Licensee, valued at the lower of 
cost or fair value.
    (e) Other non-cash assets approved by SBA.



Sec. 107.250  Exclusion of stock options issued by Licensee from Management Expenses.

    Stock options issued by any Licensee, including a 1940 or 1980 Act 
Company, are not considered compensation and therefore do not count as 
part of a Licensee's Management Expenses.

[[Page 43]]

                      Applying for an SBIC License



Sec. 107.300  License application form and fee.

    The license application must be submitted on SBA Form 415 together 
with a processing fee computed as follows:
    (a) All license applicants will pay a base fee of $10,000.
    (b) All applicants who will be Partnership Licensees will pay an 
additional $5,000 fee, for a total of $15,000.
    (c) All applicants who will be issuing Participating Securities will 
pay an additional $5,000 fee, for a total of $15,000, or a total fee of 
$20,000 if they also intend to be Partnership Licensees.



  Subpart D--Changes in Ownership, Control, or Structure of Licensee; 
                           Transfer of License

               Changes in Control or Ownership of Licensee



Sec. 107.400  Changes in ownership of 10 percent or more of Licensee but no change of Control.

    (a) Prior approval requirements. You must obtain SBA's prior written 
approval for any proposed transfer or issuance of ownership interests 
that results in the ownership (beneficial or of record) by any Person, 
or group of Persons acting in concert, of at least 10 percent of any 
class of your stock or partnership capital.
    (b) Fee. A processing fee of $200 must accompany each such request 
for approval of a change of ownership.



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

    (a) Prior approval requirements. You must obtain SBA's prior written 
approval for any proposed transaction or event that results in Control 
by any Person(s) not previously approved by SBA.
    (b) Fee. A processing fee of $10,000 must accompany any application 
for approval of one or more transactions or events that will result in a 
transfer of Control.



Sec. 107.420  Prohibition on exercise of ownership or Control rights in Licensee before SBA approval.

    Without prior written SBA approval, no change of ownership or 
Control may take effect and no officer, director, employee or other 
Person acting on your behalf shall:
    (a) Register on your books any transfer of ownership interest to the 
proposed new owner(s);
    (b) Permit the proposed new owner(s) to exercise voting rights with 
respect to such ownership interest (including directly or indirectly 
procuring or voting any proxy, consent or authorization as to such 
voting rights at any shareholders' or partnership meeting);
    (c) Permit the proposed new owner(s) to participate in any manner in 
the conduct of your affairs (including exercising control over your 
books, records, funds or other assets; participating directly or 
indirectly in any disposition thereof; or serving as an officer, 
director, partner, employee or agent); or
    (d) Allow ownership or Control to pass to another Person.



Sec. 107.430  Notification to SBA of transactions that may change ownership 
or Control.

    You must promptly notify SBA as soon as you have knowledge of 
transactions or events that may result in a transfer of Control or 
ownership of at least 10 percent of your capital. If there is any doubt 
as to whether a particular transaction or event will result in such a 
change, report the facts to SBA.



Sec. 107.440  Standards governing prior SBA approval for a proposed transfer of Control.

    SBA approval is contingent upon full disclosure of the real parties 
in interest, the source of funds for the new owners' interest, and other 
data requested by SBA. As a condition of approving a proposed transfer 
of control, SBA may:
    (a) Require an increase in your Regulatory Capital;
    (b) Require the new owners or the transferee's Control Person(s) to 
assume, in writing, personal liability for your Leverage, effective only 
in the

[[Page 44]]

event of their direct or indirect participation in any transfer of 
Control not approved by SBA; or
    (c) Require compliance with any other conditions set by SBA, 
including compliance with the requirements for minimum capital and 
management-ownership diversity as in effect at such time for new license 
applicants.

[61 FR 3189, Jan. 31, 1996]



Sec. 107.450  Notification to SBA of pledge of Licensee's shares.

    (a) You must notify SBA in writing, within 30 calendar days, of the 
terms of any transaction in which:
    (1) Any Person, or group of Persons acting in concert, pledges 
shares of your stock (or equivalent ownership interests) as collateral 
for indebtedness; and
    (2) The shares pledged are at least 10 percent of your Regulatory 
Capital.
    (b) If the transaction creates a change of ownership or Control, you 
must comply with Sec. 107.400 or Sec. 107.410, as appropriate.

  Restrictions on Common Control or Ownership of Two or More Licensees



Sec. 107.460  Restrictions on Common Control or ownership of two (or more) Licensees.

    (a) General rule. Without SBA's prior written approval, you must not 
have an officer, director, manager, Control Person, or owner (with a 
direct or indirect ownership interest of at least 10 percent) who is 
also:
    (1) An officer, director, manager, Control Person, or owner (with a 
direct or indirect ownership interest of at least 10 percent) of another 
Licensee; or
    (2) An officer or director of any Person that directly or indirectly 
controls, or is controlled by, or is under Common Control with, another 
Licensee.
    (b) Exceptions to general rule. This Sec. 107.460 does not apply to:
    (1) Common officers, directors, managers, or owners of a Section 
301(c) Licensee and its Section 301(d) subsidiary; or
    (2) Common officers, directors, managers, Control Persons, or owners 
of two (or more) Licensees which have no Leverage.

                     Change in Structure of Licensee



Sec. 107.470  SBA approval of merger, consolidation, or reorganization of Licensee.

    (a) Prior approval requirements. You may not merge, consolidate, 
change form of organization (corporation or partnership) or reorganize 
without SBA's prior written approval. Any such merger or consolidation 
will be subject to Sec. 107.440.
    (b) Fee. A processing fee of $5,000 must accompany any application 
for approval of a change in your form of organization (from corporation 
to partnership or partnership to corporation).

                           Transfer of License



Sec. 107.475  Transfer of license.

    You may not transfer your license in any manner without SBA's prior 
written approval.



            Subpart E--Managing the Operations of a Licensee

                          General Requirements



Sec. 107.500  Lawful operations under the Act.

    You must engage only in the activities contemplated by the Act and 
in no other activities.



Sec. 107.501  Identification as a Licensee.

    You must display your SBIC license in a prominent location. You must 
also have a listed telephone number. Before collecting an application 
fee or extending Financing to a Small Business, you must obtain a 
written statement from the concern acknowledging its awareness that you 
are ``a Federal licensee under the Small Business Investment Act of 
1958, as amended.''



Sec. 107.502  Representations to the public.

    You may not represent or imply to anyone that the SBA, the U.S. 
Government or any of its agencies or officers has approved any ownership 
interests you have issued or obligations you have incurred. Be certain 
to include a statement to this effect in any solicitation to investors. 
Example: You may not represent or imply that ``SBA

[[Page 45]]

stands behind the Licensee'' or that ``Your capital is safe because 
SBA's experts review proposed investments to make sure they are safe for 
the Licensee.''



Sec. 107.503  Licensee's adoption of an approved valuation policy.

    (a) Valuation guidelines. You must prepare, document and report the 
valuations of your Loans and Investments in accordance with the 
Valuation Guidelines for SBICs issued by SBA. These guidelines may be 
obtained from SBA's Investment Division.
    (b) SBA approval of valuation policy. You must have a written 
valuation policy approved by SBA for use in determining the value of 
your Loans and Investments. You must either:
    (1) Adopt without change the model valuation policy set forth in 
section III of the Valuation Guidelines for SBICs; or
    (2) Obtain SBA's prior written approval of an alternative valuation 
policy.
    (c) Responsibility for valuations. Your board of directors or 
general partner(s) will be solely responsible for adopting your 
valuation policy and for using it to prepare valuations of your Loans 
and Investments for submission to SBA. If SBA reasonably believes that 
your valuations, individually or in the aggregate, are materially 
misstated, it reserves the right to require you to engage, at your 
expense, an independent third party, acceptable to SBA, to substantiate 
the valuations.
    (d) Frequency of valuations. (1) If you have outstanding Leverage or 
Earmarked Assets, you must value your Loans and Investments at the end 
of the second quarter of your fiscal year, and at the end of your fiscal 
year.
    (2) Otherwise, you must value your Loans and Investments only at 
your fiscal year end.
    (3) On a case-by-case basis, SBA may require you to perform 
valuations more frequently.
    (4) You must report material adverse changes in valuations at least 
quarterly, within thirty days following the close of the quarter.
    (e) Review of valuations by independent public accountant. (1) For 
valuations performed as of the end of your fiscal year, your independent 
public accountant must review your valuation procedures and the 
implementation of such procedures, including adequacy of documentation.
    (2) The independent public accountant's report on your audited 
annual financial statements (SBA Form 468) must include a statement that 
your valuations were prepared in accordance with your approved valuation 
policy established in accordance with section 310(d)(2) of the Act.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998]



Sec. 107.504  Equipment and office requirements.

    (a) Computer capability. You must have a personal computer with a 
modem, and be able to use this equipment to prepare reports (using SBA-
provided software) and transmit them to SBA. In addition, by March 31, 
2000, you must have access to the Internet and the capability to send 
and receive electronic mail via the Internet.
    (b) Facsimile capability. You must be able to receive facsimile 
messages 24 hours per day at your primary office.
    (c) Accessible office. You must maintain an office that is 
convenient to the public and is open for business during normal working 
hours.

[64 FR 70995, Dec. 20, 1999]



Sec. 107.505  Facsimile requirement.

    You must be able to receive fax messages 24 hours per day at your 
primary office.



Sec. 107.506  Safeguarding Licensee's assets/Internal controls.

    You must adopt a plan to safeguard your assets and monitor the 
reliability of your financial data, personnel, Portfolio, funds and 
equipment. You must provide your bank and custodian with a certified 
copy of your resolution or other formal document describing your control 
procedures.



Sec. 107.507  Violations based on false filings and nonperformance of agreements with SBA.

    The following shall constitute a violation of this part:

[[Page 46]]

    (a) Nonperformance. Nonperformance of any of the requirements of any 
Debenture, Participating Security or Preferred Security, or of any 
written agreement with SBA.
    (b) False statement. In any document submitted to SBA:
    (1) Any false statement knowingly made; or
    (2) Any misrepresentation of a material fact; or
    (3) Any failure to state a material fact. A material fact is any 
fact which is necessary to make a statement not misleading in light of 
the circumstances under which the statement was made.



Sec. 107.509  Employment of SBA officials.

    Without SBA's prior written approval, for a period of two years 
after the date of your most recent issuance of Leverage (or the receipt 
of any SBA Assistance as defined in part 105 of this chapter), you are 
not permitted to employ, offer employment to, or retain for professional 
services, any person who:
    (a) Served as an officer, attorney, agent, or employee of SBA on or 
within one year before such date; and
    (b) As such, occupied a position or engaged in activities which, in 
SBA's determination, involved discretion with respect to the granting of 
Assistance under the Act.

                       Management and Compensation



Sec. 107.510  SBA approval of Licensee's Investment Adviser/Manager.

    You may employ an Investment Adviser/Manager who will be subject to 
the supervision of your board of directors or general partner. If you 
have Leverage or plan to seek Leverage, you must obtain SBA's prior 
written approval of the management contract. SBA's approval of an 
Investment Adviser/Manager for one Licensee does not indicate approval 
of that manager for any other Licensee.
    (a) Management contract. The contract must:
    (1) Specify the services the Investment Adviser/Manager will render 
to you and to the Small Businesses in your Portfolio; and
    (2) Indicate the basis for computing Management Expenses.
    (b) Material change to approved management contract. If there is a 
material change, both you and SBA must approve such change in advance. 
If you are uncertain if the change is material, submit the proposed 
revision to SBA.



Sec. 107.520  Management Expenses of a Licensee.

    SBA must approve any increases in your Management Expenses if you 
have outstanding Leverage or Earmarked Assets.
    (a) Definition of Management Expenses. Management Expenses include:
    (1) Salaries;
    (2) Office expenses;
    (3) Travel;
    (4) Business development;
    (5) Office and equipment rental;
    (6) Bookkeeping; and
    (7) Expenses related to developing, investigating and monitoring 
investments.
    (b) Management Expenses do not include services provided by 
specialized outside consultants, outside lawyers and independent public 
accountants, if they perform services not generally performed by a 
venture capital company.
    (c) If your Management Expenses have not already been approved by 
SBA, you must submit such expenses for approval with your SBA Form 468 
for your first fiscal year ending after January 31, 1996.

                      Cash Management by a Licensee



Sec. 107.530  Restrictions on investments of idle funds by leveraged Licensees.

    (a) Applicability of this section. This Sec. 107.530 applies if you 
have outstanding Leverage or if you have applied for Leverage.
    (b) Permitted investments of idle funds. Funds not invested in Small 
Businesses must be maintained in:
    (1) Direct obligations of, or obligations guaranteed as to principal 
and interest by, the United States, which mature within 15 months from 
the date of the investment; or
    (2) Repurchase agreements with federally insured institutions, with 
a maturity of seven days or less. The securities underlying the 
repurchase agreements must be direct obligations of, or

[[Page 47]]

obligations guaranteed as to principal and interest by, the United 
States. The securities must be maintained in a custodial account at a 
federally insured institution; or
    (3) Certificates of deposit with a maturity of one year or less, 
issued by a federally insured institution; or
    (4) A deposit account in a federally insured institution, subject to 
a withdrawal restriction of one year or less; or
    (5) A checking account in a federally insured institution; or
    (6) A reasonable petty cash fund.
    (c) Deposit of funds in excess of the insured amount. (1) You are 
permitted to deposit funds in a federally insured institution in excess 
of the institution's insured amount, but only if the institution is 
``well capitalized'' in accordance with the definition set forth in 
regulations of the Federal Deposit Insurance Corporation, as amended (12 
CFR 325.103).
    (2) Exception: You may make a temporary deposit (not to exceed 30 
days) in excess of the insured amount, in a transfer account established 
to facilitate the receipt and disbursement of funds or to hold funds 
necessary to honor Commitments issued.
    (d) Deposit of funds in Associate institution. A deposit in, or a 
repurchase agreement with, a federally insured institution that is your 
Associate is not considered a Financing of such Associate under 
Sec. 107.730, provided the terms of such deposit or repurchase agreement 
are no less favorable than those available to the general public.

               Borrowing by Licensees From Non-SBA Sources



Sec. 107.550  Prior approval of secured third-party debt of leveraged Licensees.

    (a) Definition. In this Sec. 107.550, ``secured third-party debt'' 
means any non-SBA debt secured by any of your assets, including secured 
guarantees and other contingent obligations that you voluntarily assume, 
secured lines of credit, and secured Temporary Debt of a Licensee with 
outstanding Participating Securities.
    (b) General rule. If you have outstanding Leverage, you must get 
SBA's written approval before you incur any secured third-party debt or 
refinance any debt with secured third-party debt, including any renewal 
of a secured line of credit, increase in the maximum amount available 
under a secured line of credit, or expansion of the scope of a security 
interest or lien. For purposes of this paragraph (b), ``expansion of the 
scope of a security interest or lien'' does not include the substitution 
of one asset or group of assets for another, provided the asset values 
(as reported on your most recent annual Form 468) are comparable.
    (c) Additional rule for secured lines of credit in existence on 
April 8, 1994. If you have outstanding Leverage and you have a secured 
line of credit that was created on or before April 8, 1994, you must 
receive SBA's written approval of the line before you increase the 
amounts outstanding thereunder.
    (d) Conditions for SBA approval. As a condition of granting its 
approval under this Sec. 107.550, SBA may impose such restrictions or 
limitations as it deems appropriate, taking into account your historical 
performance, current financial position, proposed terms of the secured 
debt and amount of aggregate debt you will have outstanding (including 
Leverage). SBA will not favorably consider any requests for approval 
which include a blanket lien on all your assets, or a security interest 
in your investor commitments in excess of 125 percent of the proposed 
borrowing.
    (e) Thirty day approval. Unless SBA notifies you otherwise within 30 
days after it receives your request, you may consider your request 
automatically approved if:
    (1) You are in regulatory compliance;
    (2) The security interest in your assets is limited to either those 
assets being acquired with the borrowed funds or an asset coverage ratio 
of no more than 2:1;
    (3) Your Leverage does not exceed 150 percent of your Leverageable 
Capital; and
    (4) Your request is for approval of a secured line of credit that 
would not cause your total outstanding borrowings (not including 
Leverage) to exceed 50 percent of your Leverageable Capital.

[[Page 48]]



Sec. 107.560  Subordination of SBA's creditor position.

    (a) Debentures purchased or guaranteed on or before July 1, 1991. 
Under the terms of any Debenture purchased or guaranteed by SBA on or 
before July 1, 1991, SBA's unsecured claims against you, as a Debenture-
holder or as subrogee, are subordinated in favor of all your other 
creditors, except to the extent that such claims may be subject to 
equitable subordination in SBA's favor.
    (b) Debentures purchased or guaranteed after July 1, 1991, including 
refinancings of Debentures previously purchased or guaranteed. (1) Under 
the terms of any Debenture purchased or guaranteed by SBA after July 1, 
1991, SBA's unsecured claims against you, as a Debenture-holder or as 
subrogee, are subordinated only in favor of non-Associate lenders; and, 
to the extent that your indebtedness to such lenders exceeds the lesser 
of $10,000,000 or 200 percent of your Regulatory Capital (determined as 
of the date your Debentures were purchased or guaranteed), SBA's 
unsecured claims enjoy parity with those of other unsecured creditors, 
except with respect to indebtedness created on or before July 1, 1991.
    (2) In order to induce others to lend you money after your Debenture 
has been purchased or guaranteed, SBA may agree in writing on a case-by-
case basis to subordinate its unsecured claims, on such terms as it may 
determine, in favor of one or more of your Associates, or in favor of 
other lenders in excess of the amounts mentioned in paragraph (b)(1) of 
this section.
    (3) SBA reserves the authority to refuse to subordinate its claims 
if it determines, at the time you request your Debenture be purchased or 
guaranteed, that the exercise of reasonable investment prudence and your 
financial condition warrant such refusal.



Sec. 107.570  Restrictions on third-party debt of issuers of Participating Securities.

    (a) General. Temporary Debt is the only debt (other than Leverage) 
that you are permitted to incur if you have applied to issue 
Participating Securities or if you have outstanding Participating 
Securities. For additional rules governing secured Temporary Debt, see 
Sec. 107.550.
    (b) Definition of Temporary Debt. Temporary Debt means your short-
term borrowings if:
    (1) Such borrowings are for the purpose of maintaining your 
operating liquidity or providing funds for a particular Financing of a 
Small Business;
    (2) The funds are borrowed from a regulated financial institution or 
a regulated credit company (or, if approved by SBA on a case-by-case 
basis, from non-regulated lenders including shareholders or partners);
    (3) Your total outstanding borrowings (not including Leverage) do 
not exceed 50 percent of your Leverageable Capital; and
    (4) All such borrowings are fully paid off for at least 30 
consecutive days during your fiscal year so that you have no outstanding 
third-party debt for 30 days.

           Voluntary Decrease in Licensee's Regulatory Capital



Sec. 107.585  Voluntary decrease in Licensee's Regulatory Capital.

    You must obtain SBA's prior written approval to reduce your 
Regulatory Capital by more than two percent in any fiscal year, unless 
otherwise permitted under Secs. 107.1560 and 107.1570. At all times, you 
must retain sufficient Regulatory Capital to meet the minimum capital 
requirements in the Act and Sec. 107.210, and sufficient Leverageable 
Capital to avoid having excess Leverage in violation of section 303 of 
the Act and Secs. 107.1150 through 107.1170.

           Requirement To Conduct Active Investment Operations



Sec. 107.590  Licensee's requirement to maintain active operations.

    (a) Activity test. You must conduct active operations, as determined 
under this Sec. 107.590, as a condition of your license. You will be 
considered active if:
    (1) During the eighteen months preceding your most recent fiscal 
year end, you made Financings totaling at least 20 percent of your 
Regulatory Capital; or

[[Page 49]]

    (2) Your idle funds did not exceed 20 percent of your total assets 
(at cost) at your most recent fiscal year end.
    (b) Permitted exceptions to activity requirements. You are 
considered active if your failure to meet the requirements in paragraph 
(a) of this section is the result of one or more of the following 
factors:
    (1) Your excess idle funds are the result of the receipt, within the 
previous nine months, of realized gains, repayments, additional capital 
contributions, or Leverage.
    (2) It is necessary for you to maintain excess idle funds to conduct 
your operations because:
    (i) Your unfunded commitments from investors are no more than 20 
percent of your Regulatory Capital; and
    (ii) You cannot receive additional Leverage, solely because SBA has 
insufficient funds available.
    (3) You have not made sufficient Financings because of a lack of 
available funds, evidenced by Loans and Investments (at cost) equal to 
at least 90 percent of your Combined Capital as of your most recent 
fiscal year end.
    (4) You have not made sufficient Financings solely because SBA has 
restricted your ability to make investments.
    (c) Applicability of activity requirements. The activity 
requirements in paragraph (a) of this section do not apply if you have 
filed a ``Wind-up Plan'' approved by SBA. ``Wind-up Plan'' means a plan 
that you prepare when you decide that you will no longer make any 
Financings other than follow-on investments, and that you update 
annually when you file your SBA Form 468. The plan must contain your 
best estimates of the following:
    (1) The remaining number of years you expect to operate.
    (2) For each of your Loans and Investments, the expected liquidation 
date and anticipated proceeds.
    (3) The timing of your repayment of obligations to SBA.
    (4) The timing and amount of any planned reductions in your 
Management Expenses.
    (d) Phase-in of activity requirements. (1) General rule. You must 
meet the activity requirements in this Sec. 107.590 as of the end of 
your first full fiscal year beginning after January 31, 1996. Until 
then, you will be considered active if you meet the activity 
requirements in effect on January 30, 1996.
    (2) Rule for new Licensees. If you received your license after 
January 31, 1996, or if you received your license less than eighteen 
months before the fiscal year end determined under paragraph (d)(1) of 
this section, you must meet the activity requirements in this 
Sec. 107.590 as of the end of your second full fiscal year beginning 
after the date you received your license.



 Subpart F--Recordkeeping, Reporting, and Examination Requirements for 
                                Licensees

                Recordkeeping Requirements for Licensees



Sec. 107.600  General requirement for Licensee to maintain and preserve records.

    (a) Maintaining your accounting records. You must establish and 
maintain your accounting records using SBA's standard chart of accounts 
for Licensees, unless SBA approves otherwise.
    (b) Location of records. You must keep the following records at your 
principal place of business or, in the case of paragraph (b)(3) of this 
section, at the branch office that is primarily responsible for the 
transaction:
    (1) All your accounting and other financial records;
    (2) All minutes of meetings of directors, stockholders, executive 
committees, partners, or other officials; and
    (3) All documents and supporting materials related to your business 
transactions, except for any items held by a custodian under a written 
agreement between you and a Portfolio Concern or non-SBA lender, or any 
securities held in a safe deposit box, or by a licensed securities 
broker in an amount not exceeding the broker's per-account insurance 
coverage.
    (c) Preservation of records. You must retain all the records that 
are the basis for your financial reports. Such records

[[Page 50]]

must be preserved for the periods specified in this paragraph (c), and 
must remain accessible for the first two years of the preservation 
period.
    (1) You must preserve for at least 15 years or, in the case of a 
Partnership Licensee, at least two years beyond the date of liquidation:
    (i) All your accounting ledgers and journals, and any other records 
of assets, asset valuations, liabilities, equity, income, and expenses.
    (ii) Your Articles, bylaws, minute books, and license application.
    (iii) All documents evidencing ownership of the Licensee including 
ownership ledgers, and ownership transfer registers.
    (2) You must preserve for at least six years all supporting 
documentation (such as vouchers, bank statements, or canceled checks) 
for the records listed in paragraph (b)(1) of this section.
    (3) After final disposition of any item in your Portfolio, you must 
preserve for at least six years:
    (i) Financing applications and Financing instruments.
    (ii) All loan, participation, and escrow agreements.
    (iii) Size status declarations (SBA Form 480) and Financing 
Eligibility Statements (SBA Form 1941).
    (iv) Any capital stock certificates and warrants of the Portfolio 
Concern that you did not surrender or exercise.
    (v) All other documents and supporting material relating to the 
Portfolio Concern, including correspondence.
    (4) You may substitute a microfilm or computer-scanned or generated 
copy for the original of any record covered by this paragraph (c).



Sec. 107.610  Required certifications for Loans and Investments.

    For each of your Loans and Investments, you must have the documents 
listed in this section. You must keep these documents in your files and 
make them available to SBA upon request.
    (a) SBA Form 480, the Size Status Declaration, executed both by you 
and by the concern you are financing. By executing this document, both 
parties certify that the concern is a Small Business. For securities 
purchased from an underwriter in a public offering, you may substitute a 
prospectus showing that the concern is a Small Business.
    (b) SBA Form 652, a certification by the concern you are financing 
that it will not illegally discriminate (see part 112 of this chapter).
    (c) SBA Form 1941 (for Section 301(d) Licensees only), executed both 
by you and by the concern you are financing. By executing this document, 
both parties certify that the concern is a Disadvantaged Business.
    (d) A certification by the concern you are financing of the intended 
use of the proceeds. For securities purchased from an underwriter in a 
public offering, you may substitute a prospectus indicating the intended 
use of proceeds.
    (e) For each LMI Investment:
    (1) A certification by the concern, dated as of the date of 
application for SBIC financing, as to the basis for its qualification as 
an LMI Enterprise,
    (2) If the concern qualifies as an LMI Enterprise as defined in 
paragraph (2) of the definition of LMI Enterprise in Sec. 107.50, an 
additional certification dated no later than the date 180 days after the 
closing of the LMI Investment, as to the location of the concern's 
employees or tangible assets or the principal residences of its full-
time employees as of the date of such certification, and
    (3) Certification(s) by the SBIC, made contemporaneously with the 
certification(s) of the concern, that the concern qualifies as an LMI 
Enterprise as of the date(s) of the concern's certification(s) and the 
basis for such qualification.

[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999]



Sec. 107.620  Requirements to obtain information from Portfolio Concerns.

    All the information required by this section is subject to the 
requirements of Sec. 107.600 and must be in English.
    (a) Information for initial Financing decision. Before extending any 
Financing, you must require the applicant to submit such financial 
statements, plans of operation (including intended use of financing 
proceeds), cash flow analyses and projections as are necessary to 
support your investment decision. The

[[Page 51]]

information submitted must be consistent with the size and type of the 
business and the amount of the proposed Financing.
    (b) Updated financial information. (1) The terms of each Financing 
must require the Portfolio Concern to provide, at least annually, 
sufficient financial information to enable you to perform the following 
required procedures:
    (i) Evaluate the financial condition of the Portfolio Concern for 
the purpose of valuing your investment;
    (ii) Determine the continued eligibility of the Portfolio Concern; 
and
    (iii) Verify the use of Financing proceeds.
    (2) The information submitted to you must be certified by the 
president, chief executive officer, treasurer, chief financial officer, 
general partner, or proprietor of the Portfolio Concern.
    (3) For financial and valuation purposes, you may accept a complete 
copy of the Federal income tax return filed by the Portfolio Concern (or 
its proprietor) in lieu of financial statements, but only if appropriate 
for the size and type of the business involved.
    (4) The requirements in this paragraph (b) do not apply when you 
acquire securities from an underwriter in a public offering (see 
Sec. 107.825). In that case, you must keep copies of all reports 
furnished by the Portfolio Concern to the holders of its securities.
    (c) Information required for examination purposes. You must obtain 
any information requested by SBA's examiners for the purpose of 
verifying the certifications made by a Portfolio Concern under 
Sec. 107.610. In this regard, your Financing documents must contain 
provisions requiring the Portfolio Concern to give you and/or SBA's 
examiners access to its books and records for such purpose.

                  Reporting Requirements for Licensees



Sec. 107.630  Requirement for Licensees to file financial statements with SBA (Form 468).

    (a) Annual filing of Form 468. For each fiscal year, you must submit 
to SBA financial statements and supplementary information prepared on 
SBA Form 468. You must file Form 468 on or before the last day of the 
third month following the end of your fiscal year, except for the 
information required under paragraph (e) of this section, which must be 
filed on or before the last day of the fifth month following the end of 
your fiscal year.
    (1) Audit of Form 468. The annual Form 468 must be audited by an 
independent public accountant acceptable to SBA.
    (2) Insurance requirement for public accountant. Unless SBA approves 
otherwise, your independent public accountant must carry at least 
$1,000,000 of Errors and Omissions insurance, or be self-insured and 
have a net worth of at least $1,000,000.
    (b) Interim filings of Form 468. When requested by SBA, you must 
file interim reports on Form 468. SBA may require you to file the entire 
form or only certain statements and schedules. You must file such 
reports on or before the last day of the month following the end of the 
reporting period. If you have an outstanding Leverage commitment from 
SBA, see the filing requirements in Sec. 107.1220.
    (c) Standards for preparation of Form 468. You must prepare SBA Form 
468 in accordance with SBA's Accounting Standards and Financial 
Reporting Requirements for Small Business Investment Companies.
    (d) Where to file Form 468. Submit all filings of Form 468 to the 
Investment Division of SBA.
    (e) Reporting of economic impact information on Form 468. Your 
annual filing of SBA Form 468 must include an assessment of the economic 
impact of each Financing, specifying the full-time equivalent jobs 
created or retained, and the impact of the Financing on the revenues and 
profits of the business and on taxes paid by the business and its 
employees.



Sec. 107.640  Requirement to file Portfolio Financing Reports (SBA Form 1031).

    For each Financing of a Small Business (excluding guarantees), you 
must submit a Portfolio Financing Report on SBA Form 1031 within 30 days 
of the closing date.

[[Page 52]]



Sec. 107.650  Requirement to report portfolio valuations to SBA.

    You must determine the value of your Loans and Investments in 
accordance with Sec. 107.503. You must report such valuations to SBA 
within 90 days of the end of the fiscal year in the case of annual 
valuations, and within 30 days following the close of other reporting 
periods. You must report material adverse changes in valuations at least 
quarterly, within thirty days following the close of the quarter.



Sec. 107.660  Other items required to be filed by Licensee with SBA.

    (a) Reports to owners. You must give SBA a copy of any report you 
furnish to your investors, including any prospectus, letter, or other 
publication concerning your financial operations or those of any 
Portfolio Concern.
    (b) Documents filed with SEC. You must give SBA a copy of any 
report, application or document you file with the Securities and 
Exchange Commission.
    (c) Litigation reports. When you become a party to litigation or 
other proceedings, you must give SBA a report within 30 days that 
describes the proceedings and identifies the other parties involved and 
your relationship to them.
    (1) The proceedings covered by this paragraph (c) include any action 
by you, or by your security holder(s) in a personal or derivative 
capacity, against an officer, director, Investment Adviser or other 
Associate of yours for alleged breach of official duty.
    (2) SBA may require you to submit copies of the pleadings and other 
documents SBA may specify.
    (3) Where proceedings have been terminated by settlement or final 
judgment, you must promptly advise SBA of the terms.
    (4) This paragraph (c) does not apply to collection actions or 
proceedings to enforce your ordinary creditors' rights.
    (d) Notification of criminal charges. If any officer, director, or 
general partner of the Licensee, or any other person who was required by 
SBA to complete a personal history statement in connection with your 
license, is charged with or convicted of any criminal offense other than 
a misdemeanor involving a minor motor vehicle violation, you must report 
the incident to SBA within 5 calendar days. Such report must fully 
describe the facts which pertain to the incident.
    (e) Other reports. You must file any other reports that SBA may 
require by written directive.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5866, Feb. 5, 1998]



Sec. 107.670  Application for exemption from civil penalty for late filing of reports.

    (a) If it is impracticable to submit any required report within the 
time allowed, you may apply for an extension. The request for an 
extension must:
    (1) Be filed before the reporting deadline;
    (2) Certify to an extraordinary occurrence, not within your control, 
that makes timely filing of the report impracticable; and
    (3) Be accompanied by written evidence of such occurrence, where 
appropriate.
    (b) Upon receipt of your request, SBA may exempt you from the civil 
penalty provision of section 315(a) of the Act, in such manner and under 
such conditions as SBA determines.



Sec. 107.680  Reporting changes in Licensee not subject to prior SBA 
approval.

    (a) Changes to be reported for post approval. (1) This section 
applies to any changes in your Articles, ownership, capitalization, 
management, operating area, or investment policies that do not require 
SBA's prior approval. You must report such changes to SBA within 30 days 
for post approval. A processing fee of $200 must accompany each request 
for post approval of new officers, directors, or Control Persons.
    (2) Exception for non-leveraged Licensees. If you do not have 
outstanding Leverage or Earmarked Assets, you are not required to obtain 
post approval of new directors or new officers other than your chief 
operating officer; however, you must notify SBA of the new directors or 
officers within 30 days.
    (b) Approval by SBA. You may consider any change submitted under 
this section Sec. 107.680 to be approved unless

[[Page 53]]

SBA notifies you to the contrary within 90 days after receiving it. 
SBA's approval is contingent upon your full disclosure of all relevant 
facts and is subject to any conditions SBA may prescribe.

       Examinations of Licensees by SBA for Regulatory Compliance



Sec. 107.690  Examinations.

    SBA will examine all Licensees for the purpose of evaluating 
regulatory compliance.



Sec. 107.691  Responsibilities of Licensee during examination.

    You must make all books, records and other pertinent documents and 
materials available for the examination, including any information 
required by the examiner under Sec. 107.620(c). In addition, the 
agreement between you and the independent public accountant performing 
your audit must provide that any information in the accountant's working 
papers be made available to SBA upon request.



Sec. 107.692  Examination fees.

    (a) General. SBA will assess fees for examinations in accordance 
with this Sec. 107.692. Unless SBA determines otherwise on a case by 
case basis, SBA will not assess fees for special examinations to obtain 
specific information.
    (b) Base fee. A base fee will be assessed based on your total assets 
(at cost) as of the date of your latest certified financial statement or 
a more recent interim statement requested by and submitted to SBA in 
connection with the examination. The base fee table is as follows:

----------------------------------------------------------------------------------------------------------------
      Total assets of licensee          Base fee                      Plus, percent of assets
----------------------------------------------------------------------------------------------------------------
$0 to $1,500,000....................       $3,500  +0%
$1,500,001 to $5,000,000............        3,700  +.065% of the amount over $1,500,000
$5,000,001 to $10,000,000...........        6,000  +.02% of the amount over $5,000,000
$10,000,001 to $15,000,000..........        7,000  +.01% of the amount over $10,000,000`
$15,000,001 to $25,000,000..........        7,700  +.015% of the amount over $15,000,000
$25,000,001 to $50,000,000..........        9,200  +.015% of the amount over $25,000,000
$50,000,001 to $60,000,000..........       13,000  +.01% of the amount over $50,000,000
$60,000,001 and above...............       14,000  +0%
----------------------------------------------------------------------------------------------------------------

    (c) Adjustments to base fee. Your base fee, as determined by the 
table in paragraph (b) of this section, will be adjusted (increased or 
decreased) based on the following criteria:
    (1) If you have no outstanding regulatory violations at the time of 
the commencement of the examination and SBA did not identify any 
violations as a result of the most recent prior examination, you will 
receive a 15% discount on your base fee;
    (2) If you were fully responsive to the letter of notification of 
examination (that is, you provided all requested documents and 
information within the time period stipulated in the notification letter 
in a complete and accurate manner, and you prepared and had available 
all information requested by the examiner for on-site review), you will 
receive a 10% discount on your base fee;
    (3) If you are organized as a partnership or limited liability 
company, you will pay an additional charge equal to 5% of your base fee;
    (4) If you are a Licensee authorized to issue Participating 
Securities, you will pay an additional charge equal to 10% of your base 
fee; and
    (5) If you maintain your records/files in multiple locations (as 
permitted under Sec. 107.600(b)), you will pay an additional charge 
equal to 10% of your base fee.
    (d) Fee discounts and additions table. The following table 
summarizes the discounts and additions noted in paragraph (c) of this 
section:

----------------------------------------------------------------------------------------------------------------
                                                 Amount of                                            Amount of
                                                discount--%                                          Addition--%
           Examination fee discounts              of base           Examination fee additions          of base
                                                examination                                          examination
                                                    fee                                                  fee
----------------------------------------------------------------------------------------------------------------
No prior violations...........................         15    Partnership or limited liability                5
                                                              company.

[[Page 54]]

 
Responsiveness................................         10    Participating Security Licensee.......         10
                                                             Records/files at multiple locations...         10
----------------------------------------------------------------------------------------------------------------

    (e) Delay fee. If, in the judgement of SBA, the time required to 
complete your examination is delayed due to your lack of cooperation or 
the condition of your records, SBA may assess an additional fee of up to 
$500 per day.

[62 FR 23338, Apr. 30, 1997]



          Subpart G--Financing of Small Businesses by Licensees

   Determining the Eligibility of a Small Business for SBIC Financing



Sec. 107.700  Compliance with size standards in part 121 of this chapter as a condition of Assistance.

    You are permitted to provide financial assistance and management 
services only to a Small Business. To determine whether an applicant is 
a Small Business, you may use either the financial size standards in 
Sec. 121.301(c)(1) of this chapter or the industry standard covering the 
industry in which the applicant is primarily engaged, as set forth in 
Sec. 121.301(c)(2) of this chapter.



Sec. 107.710  Requirement to finance smaller enterprises.

    Your Portfolio must include Financings to Smaller Enterprises.
    (a) Definition of Smaller Enterprise. A Smaller Enterprise means any 
small business concern that:
    (1) Both together with its Affiliates, and by itself, meets the size 
standard of Sec. 121.201 of this chapter at the time of Financing for 
the industry in which it is then primarily engaged; or
    (2) Together with its affiliates has a net worth of not more than $6 
million and average net income after Federal income taxes (excluding any 
carry-over losses) for the preceding two years no greater than $2 
million. If the applicant is not required by law to pay Federal income 
taxes at the enterprise level, but is required to pass income through to 
its shareholders, partners, beneficiaries, or other equitable owners, 
the applicant's ``net income after Federal income taxes'' will be its 
net income reduced by an amount computed as follows:
    (i) If the applicant is not required by law to pay State (and local, 
if any) income taxes at the enterprise level, multiply its net income by 
the marginal State income tax rate (or by the combined State and local 
income tax rates, as applicable) that would have applied if it were a 
taxable corporation.
    (ii) Multiply the applicant's net income, less any deduction for 
State and local income taxes calculated under paragraph (a)(2)(i) of 
this section, by the marginal Federal income tax rate that would have 
applied if the applicant were a taxable corporation.
    (iii) Add the results obtained in paragraphs (a)(2)(i) and 
(a)(2)(ii) of this section.
    (b) Smaller Enterprise Financings--(1) General rule. At the close of 
each of your fiscal years, for all Financings you extended since April 
25, 1994, excluding Financings made in whole or in part with Leverage in 
excess of $90,000,000, at least 20 percent (in total dollars) must have 
been invested in Smaller Enterprises. If you were licensed after April 
25, 1994, the 20 percent requirement applies to the Financings you 
extended since you were licensed, excluding Financings made in whole or 
in part with Leverage in excess of $90,000,000, plus any pre-licensing 
investments approved by SBA for inclusion in your Regulatory Capital. 
For purposes of this paragraph (b)(1), Leverage in excess of $90,000,000 
includes aggregate Leverage over $90,000,000 issued by two or more 
Licensees under Common Control. See also paragraph (d) of this section.
    (2) Phase-in for new Licensees At the close of your first full 
fiscal year after licensing, at least 10 percent of the total dollar 
amount of the Financings

[[Page 55]]

you extended, including any pre-licensing investments approved by SBA 
for inclusion in your Regulatory Capital, must have been invested in 
Smaller Enterprises. At the close of each fiscal year thereafter, you 
must meet the requirement in paragraph (b)(1) of this section.
    (c) Special requirement for certain leveraged Licensees. (1) This 
paragraph (c) applies if you were licensed on or before September 30, 
1996, and you issued Leverage after that date, and you have Regulatory 
Capital of:
    (i) Less than $10,000,000 if such Leverage included Participating 
Securities; or
    (ii) Less than $5,000,000 if such Leverage was Debentures only.
    (2) At the close of each of your fiscal years, at least 50 percent 
of the total dollar amount of the Financings you extended after 
September 30, 1996 must have been invested in Smaller Enterprises.
    (d) Special requirement for Leverage over $90,000,000. If you have 
issued Leverage over $90,000,000 (including aggregate Leverage over 
$90,000,000 issued by two or more Licensees under Common Control), at 
the end of each of your fiscal years the cumulative Financings you 
extended to Smaller Enterprises must equal at least:
    (1) The dollar amount necessary to satisfy paragraph (b) of this 
section; plus
    (2) 100 percent of the amount of all Financings made in whole or in 
part with Leverage over $90,000,000.
    (e) Financing a change of ownership which results in the creation of 
a Smaller Enterprises. The Financing of a change of ownership under 
Sec. 107.750 which results in the creation of a Smaller Enterprise 
qualifies as a Smaller Enterprise Financing.
    (f) Non-compliance with this section. If you have not reached the 
required percentage of Smaller Enterprise Financings at the end of any 
fiscal year, then you must be in compliance by the end of the following 
fiscal year. However, you will not be eligible for additional Leverage 
until you reach the required percentage (see Sec. 107.1120(c) through 
(e)).

[62 FR 11760, Mar. 13, 1997, as amended at 63 FR 5866, Feb. 5, 1998; 64 
FR 70995, Dec. 20, 1999; 66 FR 30647, June 7, 2001]



Sec. 107.720  Small Businesses that may be ineligible for financing.

    (a) Relenders or reinvestors. You are not permitted to finance any 
business that is a relender or reinvestor.
    (1) Definition. Relenders or reinvestors are businesses whose 
primary business activity involves, directly or indirectly, providing 
funds to others, purchasing debt obligations, factoring, or long-term 
leasing of equipment with no provision for maintenance or repair.
    (2) Exception. You may provide Venture Capital Financing to 
Disadvantaged Businesses that are relenders or reinvestors (except banks 
or savings and loans not insured by agencies of the federal government, 
and agricultural credit companies). Without SBA's prior written 
approval, total Financings under this paragraph (a)(2) that are 
outstanding as of the close of your fiscal year must not exceed your 
Regulatory Capital.
    (b) Passive Businesses. You are not permitted to finance a passive 
business.
    (1) Definition. A business is passive if:
    (i) It is not engaged in a regular and continuous business operation 
(for purposes of this paragraph (b), the mere receipt of payments such 
as dividends, rents, lease payments, or royalties is not considered a 
regular and continuous business operation); or
    (ii) Its employees are not carrying on the majority of day to day 
operations, and the company does not provide effective control and 
supervision, on a day to day basis, over persons employed under 
contract; or
    (iii) It passes through substantially all of the proceeds of the 
Financing to another entity.
    (2) Exception for pass-through of proceeds to subsidiary. You may 
finance a passive business if it is a Small Business and it passes 
substantially all the proceeds through to one or more subsidiary 
companies, each of which is an eligible Small Business that is not 
passive. For the purpose of this paragraph (b)(2), ``subsidiary 
company'' means a

[[Page 56]]

company in which at least 50 percent of the outstanding voting 
securities are owned by the Financed passive business.
    (3) Exception for certain Partnership Licensees. With the prior 
written approval of SBA, if you are a Partnership Licensee, you may form 
one or more wholly-owned corporations in accordance with this paragraph 
(b)(3). The sole purpose of such corporation(s) must be to provide 
Financing to one or more eligible, unincorporated Small Businesses. You 
may form such corporation(s) only if a direct Financing to such Small 
Businesses would cause any of your investors to incur unrelated business 
taxable income under section 511 of the Internal Revenue Code of 1986, 
as amended (26 U.S.C. 511). Your ownership of such corporation(s) will 
not constitute a violation of Sec. 107.865(a) and your investment of 
funds in such corporation(s) will not constitute a violation of 
Sec. 107.730(a).
    (c) Real Estate Businesses. (1) You are not permitted to finance any 
business classified under Major Group 65 (Real Estate) or Industry No. 
1531 (Operative Builders) of the SIC Manual, with the following 
exceptions:
    (i) Title Abstract companies (Industry No. 6541); and
    (ii) Companies listed under Industry No. 6531 (for example, real 
estate agents, brokers, escrow agents, managers and multiple listing 
services) that derive at least 80 percent of their revenue from non-
Affiliate sources.
    (2) You are not permitted to finance a business, regardless of SIC 
classification, if the Financing is to be used to acquire or refinance 
real property, unless the Small Business:
    (i) Is acquiring an existing property and will use at least 51 
percent of the usable square footage for an eligible business purpose; 
or
    (ii) Is building or renovating a building and will use at least 67 
percent of the usable square footage for an eligible business purpose; 
or
    (iii) Occupies the subject property and uses at least 67 percent of 
the usable square footage for an eligible business purpose.
    (d) Project Financing. You are not permitted to finance a business 
if:
    (1) The assets of the business are to be reduced or consumed, 
generally without replacement, as the life of the business progresses, 
and the nature of the business requires that a stream of cash payments 
be made to the business's financing sources, on a basis associated with 
the continuing sale of assets. Examples include real estate development 
projects and oil and gas wells; or
    (2) The primary purpose of the Financing is to fund production of a 
single item or defined limited number of items, generally over a defined 
production period, and such production will constitute the majority of 
the activities of the Small Business. Examples include motion pictures 
and electric generating plants.
    (e) Farm land purchases. You are not permitted to finance the 
acquisition of farm land. Farm land means land which is or is intended 
to be used for agricultural or forestry purposes, such as the production 
of food, fiber, or wood, or is so taxed or zoned.
    (f) Public interest. You are not permitted to finance any business 
if the proceeds are to be used for purposes contrary to the public 
interest, including but not limited to activities which are in violation 
of law, or inconsistent with free competitive enterprise.
    (g) Foreign investment--(1) General rule. You are not permitted to 
finance a business if:
    (i) The funds will be used substantially for a foreign operation; or
    (ii) At the time of the Financing or within one year thereafter, 
more than 49 percent of the employees or tangible assets of the Small 
Business are located outside the United States (unless you can show, to 
SBA's satisfaction, that the Financing was used for a specific domestic 
purpose).
    (2) Exception. This paragraph (g) does not prohibit a Financing used 
to acquire foreign materials and equipment or foreign property rights 
for use or sale in the United States.
    (h) Associated supplier. You are not permitted to finance a business 
that purchases, or will purchase, goods or services from a supplier who 
is your Associate, except under the following conditions:

[[Page 57]]

    (1) The amount of goods and services purchased (or to be purchased) 
from your Associate with the proceeds of the Financing, or with funds 
released as a result of the Financing, is less than 50 percent of the 
total amount of the Financing (75 percent for a Section 301(d) 
Licensee);
    (2) The price of such goods and services is no higher than that 
charged other customers of your Associate; and
    (3) The Small Business purchases no capital goods from your 
Associate.
    (i) Financing Licensees. You are not permitted to provide funds, 
directly or indirectly, that the Small Business will use:
    (1) To purchase stock in or provide capital to a Licensee; or
    (2) To repay an indebtedness incurred for the purpose of investing 
in a Licensee.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 
FR 70995, Dec. 20, 1999]



Sec. 107.730  Financings which constitute conflicts of interest.

    (a) General rule. You must not self-deal to the prejudice of a Small 
Business, the Licensee, its shareholders or partners, or SBA. Unless you 
obtain a prior written exemption from SBA for special instances in which 
a Financing may further the purposes of the Act despite presenting a 
conflict of interest, you must not directly or indirectly:
    (1) Provide Financing to any of your Associates.
    (2) Provide Financing to an Associate of another Licensee if one of 
your Associates has received or will receive any direct or indirect 
Financing or a Commitment from that Licensee or a third Licensee 
(including Financing or Commitments received under any understanding, 
agreement, or cross dealing, reciprocal or circular arrangement).
    (3) Borrow money from:
    (i) A Small Business Financed by you;
    (ii) An officer, director, or owner of at least a 10 percent equity 
interest in such business; or
    (iii) A Close Relative of any such officer, director, or equity 
owner.
    (4) Provide Financing to a Small Business to discharge an obligation 
to your Associate or free other funds to pay such obligation. This 
paragraph (a)(4) does not apply if the obligation is to an Associate 
Lending Institution and is a line of credit or other obligation incurred 
in the normal course of business.
    (5) Provide Financing to a Small Business for the purpose of 
purchasing property from your Associate, except as permitted under 
Sec. 107.720(h).
    (b) Rules applicable to Associates. Without SBA' s prior written 
approval, your Associates must not, directly or indirectly:
    (1) Borrow money from any Person described in paragraph (a)(3) of 
this section.
    (2) Receive from a Small Business any compensation in connection 
with Assistance you provide (except as permitted under Secs. 107.825(c) 
and 107.900), or anything of value for procuring, attempting to procure, 
or influencing your action with respect to such Assistance.
    (c) Applicability of other laws. You are also bound by any 
restrictions in Federal or State laws governing conflicts of interest 
and fiduciary obligations.
    (d) Financings with Associates--(1) Financings with Associates 
requiring prior approval. Without SBA's prior written approval, you may 
not Finance any business in which your Associate has either a voting 
equity interest, or total equity interests (including potential 
interests), of at least five percent.
    (2) Other Financings with Associates. If you and an Associate 
provide Financing to the same Small Business, either at the same time or 
at different times, you must be able to demonstrate to SBA's 
satisfaction that the terms and conditions are (or were) fair and 
equitable to you, taking into account any differences in the timing of 
each party's financing transactions.
    (3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. A 
Financing that falls into one of the following categories is exempt from 
the prior approval requirement in paragraph (d)(1) of this section or is 
presumed to be fair and equitable to you for the purposes of paragraph 
(d)(2) of this section, as appropriate:
    (i) Your Associate is a Lending Institution that is providing 
financing under a credit facility in order to meet

[[Page 58]]

the operational needs of the Small Business, and the terms of such 
financing are usual and customary.
    (ii) Your Associate invests in the Small Business on the same terms 
and conditions and at the same time as you.
    (iii) Both you and your Associate are leveraged Licensees, and both 
have outstanding Participating Securities or neither has outstanding 
Participating Securities.
    (iv) You have no outstanding Leverage and do not intend to issue 
Leverage in the future, and your Associate either is not a Licensee or 
has no outstanding Leverage and does not intend to issue Leverage in the 
future.
    (e) Use of Associates to manage Portfolio Concerns. To protect your 
investment, you may designate an Associate to serve as an officer, 
director, or other participant in the management of a Small Business. 
You must identify any such Associate in your records available for SBA's 
review under Sec. 107.600. Without SBA's prior written approval, the 
Associate must not:
    (1) Have any other direct or indirect financial interest in the 
Portfolio Concern that exceeds, or has the potential to exceed, 5 
percent of the Portfolio Concern's equity.
    (2) Have served for more than 30 days as an officer, director or 
other participant in the management of the Portfolio Concern before you 
provided Financing.
    (3) Receive any income or anything of value from the Portfolio 
Concern unless it is for your benefit, with the exception of director's 
fees, expenses, and distributions based upon the Associate's ownership 
interest in the Concern.
    (f) 1940 and 1980 Act Companies: SEC exemptions. If you are a 1940 
or 1980 Act Company and you receive an exemption from the Securities and 
Exchange Commission for a transaction described in this Sec. 107.730, 
you need not obtain SBA's approval of the transaction. However, you must 
promptly notify SBA of the transaction and satisfy the public notice 
requirements in paragraph (g) of this section.
    (g) Public notice. Before SBA grants an exemption under this 
Sec. 107.730, you must publish notice of the transaction in a newspaper 
of general circulation in the locality most directly affected by the 
transaction, and furnish a certified copy to SBA within 10 days of 
publication. SBA will publish a similar notice in the Federal Register.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 
FR 70996, Dec. 20, 1999]



Sec. 107.740  Portfolio diversification (``overline'' limitation).

    (a) General rule. This Sec. 107.740 applies if you have outstanding 
Leverage or intend to issue Leverage in the future. Without SBA's prior 
written approval, you may provide Financing or a Commitment to a Small 
Business only if the resulting amount of your aggregate outstanding 
Financings and Commitments to such Small Business and its Affiliates 
does not exceed:
    (1) For a Section 301(c) Licensee, 20 percent of the sum of:
    (i) Your Regulatory Capital as of the date of the Financing or 
Commitment; plus
    (ii) Any Distribution(s) you made under Sec. 107.1570(b), during the 
five years preceding the date of the Financing or Commitment, which 
reduced your Regulatory Capital; plus
    (iii) Any Distribution(s) you made under Sec. 107.585, during the 
five years preceding the date of the Financing or Commitment, which 
reduced your Regulatory Capital by no more than two percent or which SBA 
approves for inclusion in the sum determined in this paragraph (a)(1).
    (2) For a Section 301(d) Licensee, 30 percent of a sum determined in 
the manner set forth in paragraph (a)(1)(i) through (iii) of this 
section.
    (b) Outstanding Financings. For the purposes of paragraph (a) of 
this section, you must measure each outstanding Financing at its current 
cost plus any amount of the Financing that was previously written off.
    (c) Adjustment to Regulatory Capital. For the purposes of paragraph 
(a) of this section, you may compute a higher maximum permitted 
investment in a Small Business (an ``increased limit'') by adding ``net 
unrealized gains'' on Publicly Traded and Marketable securities to your 
Regulatory Capital, subject to the following conditions:

[[Page 59]]

    (1) ``Net unrealized gains'' on Publicly Traded and Marketable 
securities means unrealized gains on Publicly Traded and Marketable 
securities minus unrealized losses on all Loans and Investments.
    (2) You must value your Publicly Traded and Marketable securities in 
accordance with your SBA-approved valuation policy.
    (3) You must have positive Retained Earnings Available for 
Distribution at the time you compute an increased limit under this 
paragraph (c).
    (4) At the time you first compute an increased limit, and as of the 
first business day of each calendar quarter that the increased limit is 
in effect, you must keep copies in your files of the NASDAQ listings (or 
the Wall Street Journal) or written quotations from the market makers 
quoting the Publicly Traded and Marketable securities which support the 
adjustment.
    (5) If your net unrealized gains on Publicly Traded and Marketable 
securities are more than 30 percent below their original level on the 
first business day of any calendar quarter, and remain so for the next 
30 days, you agree to do one of the following to remain in compliance 
with the terms of your Leverage:
    (i) By the first day of the next calendar quarter, increase your 
Regulatory Capital sufficiently to restore support for the increased 
limit; or
    (ii) Lower the increased limit to reflect the decrease in net 
unrealized gains on Publicly Traded and Marketable securities, and 
reduce any Financings that exceed the lower limit.

    Example to paragraph (c) of this section. Your Regulatory Capital is 
$2,500,000 and your overline limit is $500,000 (20 percent of 
$2,500,000). On January 15, 1995, you document net unrealized gains on 
Publicly Traded and Marketable securities of $200,000 and compute an 
increased limit of $540,000 (20 percent of $2,700,000). You now make an 
investment of $540,000 in a Small Business. Nothing changes until the 
first business day of April, 1996, when you document net unrealized 
gains on Publicly Traded and Marketable securities of only $120,000, a 
reduction of more than 30 percent. Your net unrealized gains remain at 
this level for the next 30 days. Your increased limit is now only 
$524,000 (20 percent of $2,620,000). By July 1, 1996, you must either 
increase Regulatory Capital by $80,000 to restore your increased limit 
to $540,000, or reduce your portfolio investment from $540,000 to 
$524,000.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 
FR 70996, Dec. 20, 1999]



Sec. 107.750  Conditions for financing a change of ownership of a Small Business.

    You may finance a change of ownership of a Small Business only under 
the conditions set forth in this section.
    (a) The Financing must:
    (1) Promote the sound development or preserve the existence of the 
Small Business;
    (2) Help create a Small Business as a result of a corporate 
divestiture; or
    (3) Facilitate ownership in a Disadvantaged Business.
    (b) The Resulting Concern (as defined in paragraph (c) of this 
section) must:
    (1) Be a Small Business under Sec. 107.700;
    (2) Have 500 or fewer full-time equivalent employees; or meet one of 
the appropriate debt/equity ratio tests:
    (i) If you have outstanding Leverage, the Resulting Concern's ratio 
of debt to equity must be no more than 5 to 1; or
    (ii) If you have no outstanding Leverage, the Resulting Concern's 
ratio of debt to equity must be no more than 8 to 1.
    (c) Definitions. (1) The ``Resulting Concern'' is determined by 
viewing the business as though the change of ownership had already 
occurred, giving effect to all contemplated financing, mergers, and 
acquisitions.
    (2) For purposes of this section, ``debt'' means long-term debt, 
including contingent liabilities, but excluding accounts payable, 
operating leases, letters of credit, subordinated notes payable to the 
seller, any other liabilities approved for exclusion by SBA and short-
term working capital loans (so long as the loans carry a zero balance 
for 30 consecutive days during the concern's fiscal year).
    (3) For purposes of this section, ``equity'' means common and 
preferred stock (corporation), contributed capital (partnership), or 
membership interests (limited liability company).

[[Page 60]]



Sec. 107.760  How a change in size or activity of a Portfolio Concern affects the Licensee and the Portfolio Concern.

    (a) Effect on Licensee of a change in size of a Portfolio Concern. 
If a Portfolio Concern no longer qualifies as a Small Business you may 
keep your investment in the concern and:
    (1) Subject to the overline limitations of Sec. 107.740, you may 
provide additional Financing to the concern up to the time it makes a 
public offering of its securities.
    (2) Even after the concern makes a public offering, you may exercise 
any stock options, warrants, or other rights to purchase Equity 
Securities which you acquired before the public offering, or fund 
Commitments you made before the public offering.
    (b) Effect of a change in business activity occurring within one 
year of Licensee's initial Financing--(1) Retention of Investment. 
Unless you receive SBA's written approval, you may not keep your 
investment in a Portfolio Concern, small or otherwise, which becomes 
ineligible by reason of a change in its business activity within one 
year of your initial investment.
    (2) Request for SBA's approval to retain investment. If you request 
that SBA approve the retention of your investment, your request must 
include sufficient evidence to demonstrate that the change in business 
activity was caused by an unforeseen change in circumstances and was not 
contemplated at the time the Financing was made.
    (3) Additional Financing. If SBA approves your request to retain an 
investment under paragraph (b)(2) of this section, you may provide 
additional Financing to the Portfolio Concern to the extent necessary to 
protect against the loss of the amount of your original investment, 
subject to the overline limitations of Sec. 107.740.
    (c) Effect of a change in business activity occurring more than one 
year after the initial Financing. If a Portfolio Concern becomes 
ineligible because of a change in business activity more than one year 
after your initial Financing you may:
    (1) Retain your investment; and
    (2) Provide additional Financing to the Portfolio Concern to the 
extent necessary to protect against the loss of the amount of your 
original investment, subject to the overline limitations of 
Sec. 107.740.

Structuring Licensee's Financing of Eligible Small Businesses: Types of 
                                Financing



Sec. 107.800  Financings in the form of Equity Securities.

    (a) You may purchase the Equity Securities of a Small Business. You 
may not, inadvertently or otherwise:
    (1) Become a general partner in any unincorporated business; or
    (2) Become jointly or severally liable for any obligations of an 
unincorporated business.
    (b) Definition. Equity Securities means stock of any class in a 
corporation, stock options, warrants, limited partnership interests in a 
limited partnership, membership interests in a limited liability 
company, or joint venture interests. If the Financing agreement contains 
debt-type acceleration provisions or includes redemption provisions 
other than those permitted under Sec. 107.850, the security will be 
considered a Debt Security for purposes of Sec. 107.855.



Sec. 107.810  Financings in the form of Loans.

    You may make Loans to Small Businesses. A Loan means a transaction 
evidenced by a debt instrument with no provision for you to acquire 
Equity Securities.



Sec. 107.815  Financings in the form of Debt Securities.

    You may purchase Debt Securities from Small Businesses.
    (a) Definitions. Debt Securities are instruments evidencing a loan 
with an option or any other right to acquire Equity Securities in a 
Small Business or its Affiliates, or a loan which by its terms is 
convertible into an equity position, or a loan with a right to receive 
royalties that are excluded from the Cost of Money pursuant to 
Sec. 107.855(g)(12). Consideration must be paid for all options that you 
acquire.
    (b) Restriction on options obtained by Licensee's management and 
employees. If you have outstanding Leverage or plan

[[Page 61]]

to obtain Leverage, your employees, officers, directors or general 
partners, or the general partners of the management company that is 
providing services to you or to your general partner, may obtain options 
in a Financed Small Business only if:
    (1) They participate in the Financing on a pari passu basis with 
you; or
    (2) SBA gives its prior written approval; or
    (3) The options received are compensation for service as a member of 
the board of directors of the Small Business, and such compensation does 
not exceed that paid to other outside directors. In the absence of such 
directors, fees must be reasonable when compared with amounts paid to 
outside directors of similar companies.

[61 FR 3189, Jan. 31, 1996, as amended at 65 FR 69432, Nov. 17, 2000]



Sec. 107.820  Financings in the form of guarantees.

    At the request of a Small Business or where necessary to protect 
your existing investment, you may guarantee the monetary obligation of a 
Small Business to any non-Associate creditor.
    (a) You may not issue a guaranty if:
    (1) You would become subject to State regulation as an insurance, 
guaranty or surety business;
    (2) The amount of the guaranty plus any direct Financings to the 
Small Business exceed the overline limitations of Sec. 107.740, except 
that a pledge of the Equity Securities of the issuer or a subordination 
of your lien or creditor position does not count toward your overline; 
or
    (3) The total financing cost to the Small Business exceeds the cost 
of money limits of Sec. 107.855.
    (b) Pledge of Licensee's assets as guaranty. For purposes of this 
section, a guaranty with recourse only to specific asset(s) you have 
pledged is equal to the fair market value of such asset(s) or the amount 
of the debt guaranteed, whichever is less.



Sec. 107.825  Purchasing securities from an underwriter or other third party.

    (a) Securities purchased through or from an underwriter. You may 
purchase the securities of a Small Business through or from an 
underwriter if:
    (1) You purchase such securities within 90 days of the date the 
public offering is first made;
    (2) Your purchase price is no more than the original public offering 
price; and
    (3) The amount paid by you for the securities (less ordinary and 
reasonable underwriting charges and commissions) has been, or will be, 
paid to the Small Business, and the underwriter certifies in writing 
that this requirement has been met.
    (b) Recordkeeping requirements. If you have outstanding Leverage or 
plan to obtain Leverage, you must keep records available for SBA's 
inspection which show the relevant details of the transaction, 
including, but not limited to, date, price, commissions, and the 
underwriter's certifications required under paragraph (c) of this 
section.
    (c) Underwriter's requirements. If you have outstanding Leverage or 
plan to obtain Leverage, the underwriter must certify whether it is your 
Associate. You may pay reasonable and customary commissions and expenses 
to an Associate underwriter for the portion of an offering that you 
purchase, provided it is no more than 25 percent of the total offering. 
If you buy more than 25 percent of the offering, the amount you pay to 
the Associate underwriter must not exceed the total of the application 
and closing fees and reimbursable expenses permitted by Sec. 107.860.
    (d) Securities purchased from another Licensee or from SBA. You may 
purchase from, or exchange with, another Licensee, Portfolio securities 
(or any interest therein). Such purchase or exchange may only be made on 
a non-recourse basis. You may not have more than one-third of your total 
assets(valued at cost) invested in such securities. If you have 
previously sold Portfolio Securities (or any interest therein) on a 
recourse basis, you shall include the amount for which you may be 
contingently liable in your overline computation.
    (e) Purchases of securities from other non-issuers. You may purchase 
securities of a Small Business from a non-

[[Page 62]]

issuer not previously described in this Sec. 107.825 if:
    (1) Such acquisition is a reasonably necessary part of the overall 
sound Financing of the Small Business under the Act; or
    (2) The securities are acquired to finance a change of ownership 
under Sec. 107.750.

 Structuring Licensee's Financing of an Eligible Small Business: Terms 
                       and Conditions of Financing



Sec. 107.830  Minimum duration/term of financing.

    (a) General rule. The duration/term of all your Financings must be 
for a minimum period of one year.
    (b) Restrictions on mandatory redemption of Equity Securities. If 
you have acquired Equity Securities, options or warrants on terms that 
include redemption by the Small Business, you must not require 
redemption by the Small Business within the first year of your 
acquisition except as permitted in Sec. 107.850.
    (c) Special rules for Loans and Debt Securities. (1) Term. The 
minimum term for Loans and Debt Securities starts with the first 
disbursement of the Financing.
    (2) Prepayment. You 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.
    (3) Prepayment penalties. You may charge a reasonable prepayment 
penalty which must be agreed upon at the time of the Financing. If SBA 
determines that a prepayment penalty is unreasonable, you must refund 
the entire penalty to the Small Business. A prepayment penalty equal to 
5 percent of the outstanding balance during the first year of any 
Financing, declining by one percentage point per year through the fifth 
year, is considered reasonable.

[61 FR 3189, Jan. 31, 1996, as amended at 69 FR 8098, Feb. 23, 2004]



Sec. 107.835  Exceptions to minimum duration/term of Financing.

    You may make a Short-term Financing for a term less than one year if 
the Financing is:
    (a) An interim Financing in contemplation of long-term Financing. 
The contemplated long-term Financing must be in an amount at least equal 
to the short-term Financing, and must be made by you alone or in 
participation with other investors; or
    (b) For protection of your prior investment(s); or
    (c) For the purpose of Financing a change of ownership under 
Sec. 107.750. The total amount of such Financings may not exceed 20 
percent of your Loans and Investments (at cost) at the end of any fiscal 
year; or
    (d) For the purpose of aiding a Small Business in performing a 
contract awarded under a Federal, State, or local government set-aside 
program for ``minority'' or ``disadvantaged'' contractors.

[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999; 
69 FR 8098, Feb. 23, 2004]



Sec. 107.840  Maximum term of Financing.

    The maximum term of any Loan or Debt Security Financing must be no 
longer than 20 years.



Sec. 107.845  Maximum rate of amortization on Loans and Debt Securities.

    The principal of any Loan (or the loan portion of any Debt Security) 
with a term of one year or less cannot be amortized faster than straight 
line. If the term is greater than one year, the principal cannot be 
amortized faster than straight line for the first year.

[69 FR 8098, Feb. 23, 2004]



Sec. 107.850  Restrictions on redemption of Equity Securities.

    (a) A Portfolio Concern cannot be required to redeem Equity 
Securities earlier than one year from the date of the first closing 
unless:
    (1) The concern makes a public offering, or has a change of 
management or control, or files for protection under the provisions of 
the Bankruptcy Code, or materially breaches your Financing agreement; or

[[Page 63]]

    (2) You make a follow-on investment, in which case the new 
securities may be redeemed in less than one year, but no earlier than 
the redemption date associated with your earliest Financing of the 
concern.
    (b) The redemption price must be either:
    (1) A fixed amount that is no higher than the price you paid for the 
securities; or
    (2) An amount that cannot be fixed or determined before the time of 
redemption. In this case, the redemption price must be based on:
    (i) A reasonable formula that reflects the performance of the 
concern (such as one based on earnings or book value); or
    (ii) The fair market value of the concern at the time of redemption, 
as determined by a professional appraisal performed under an agreement 
acceptable to both parties.
    (c) Any method for determining the redemption price must be agreed 
upon no later than the date of the first (or only) closing of the 
Financing.

[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 52646, Sept. 30, 1999; 
69 FR 8098, Feb. 23, 2004]



Sec. 107.855  Interest rate ceiling and limitations on fees charged to 
Small Businesses (``Cost of Money'').

    ``Cost of Money'' means the interest and other consideration that 
you receive from a Small Business. Subject to lower ceilings prescribed 
by local law, the Cost of Money to the Small Business must not exceed 
the ceiling determined under this section.
    (a) Financings to which the Cost of Money rules apply. This section 
applies to all Loans and Debt Securities. As required by 
Sec. 107.800(b), you must include as Debt Securities any equity 
interests with redemption provisions that do not meet the restrictions 
in Sec. 107.850.
    (b) When to determine the Cost of Money ceiling for a Financing. You 
may determine your Cost of Money ceiling for a particular Financing as 
of the date you issue a Commitment or as of the date of the first 
closing of the Financing. Once determined, the Cost of Money ceiling 
remains fixed for the duration of the Financing.
    (c) How to determine the Cost of Money ceiling for a Financing. At a 
minimum, you may use a Cost of Money ceiling of 19 percent for a Loan 
and 14 percent for a Debt Security. To determine whether you may charge 
more, do the following:
    (1) Choose a base rate for your Cost of Money computation. The base 
rate may be either the Debenture Rate currently in effect plus the 
applicable Charge determined under Sec. 107.1130(d)(1), or your own 
``Cost of Capital'' as determined under paragraph (d) of this section.
    (2) For a Loan, add 11 percentage points to the base rate; for a 
Debt Security, add 6 percentage points. In either case, round the sum 
down to the nearest eighth of one percent.
    (3) If the result is more than 19 percent (for a Loan) or 14 percent 
(for a Debt Security), you may use it as your Cost of Money ceiling.
    (4) If two or more Licensees participate in the same Financing of a 
Small Business, the base rate used in this paragraph (c) is the highest 
of the following:
    (i) The current Debenture Rate plus the applicable Charge determined 
under Sec. 107.1130(d)(1);
    (ii) The Cost of Capital of the lead Licensee; or
    (iii) The weighted average of the Cost of Capital for all Licensees 
participating in the Financing.
    (d) How to determine your Cost of Capital. ``Cost of Capital'' is an 
optional computation of the weighted average interest rate you pay on 
your ``qualified borrowings''. ``Qualified borrowings'' means your 
Debentures together with your borrowings at or below the usual interest 
rate charged by banks in your locality on the date your loan was made.
    (1) For any fiscal year, you may compute your Cost of Capital:
    (i) As of the first day of your fiscal year, to remain in effect for 
the entire year; or
    (ii) As of the first day of every fiscal quarter during the fiscal 
year, to remain in effect for the duration of the quarter.
    (2) For each qualified borrowing outstanding at your last fiscal 
year or fiscal quarter end, multiply the ending principal balance (net 
of related

[[Page 64]]

unamortized fees) by the number of days during the past four fiscal 
quarters that the borrowing was outstanding, and divide the result by 
365.
    (3) Add together the amounts computed for all borrowings under 
paragraph (d)(2) of this section. The result is your weighted average 
borrowings.
    (4) For all qualified borrowings outstanding at your last fiscal 
year or fiscal quarter end, determine the aggregate interest expense for 
the past four fiscal quarters, excluding amortization of loan fees. For 
the purposes of this paragraph (d)(4):
    (i) Interest expense on Debentures includes the 1 percent Charge 
paid by a Licensee under Sec. 107.1130(d)(1); and
    (ii) Section 301(d) Licensees with outstanding subsidized Debentures 
are presumed to have paid interest at the rate stated on the face of 
such Debentures, without regard to any subsidy paid by SBA.
    (5) Divide the interest expense from paragraph (d)(4) of this 
section by the weighted average borrowings from paragraph (d)(3) of this 
section, and multiply by 100. The result is your Cost of Capital, which 
you may use to compute a Cost of Money ceiling under paragraph (c) of 
this section.
    (e) SBA review of Cost of Capital computation. You must keep your 
Cost of Capital computations in a separate file available for SBA's 
review.
    (1) A computation that is kept in such a file and is audited by your 
independent public accountant is considered correct unless SBA 
demonstrates otherwise.
    (2) If a computation is not kept in such a file or is unaudited, you 
must prove its accuracy to SBA's satisfaction.
    (f) Charges included in the Cost of Money. The Cost of Money 
includes all interest, points, discounts, fees, royalties, profit 
participation, and any other consideration you receive from a Small 
Business, except for the specific exclusions in paragraph (g) of this 
section. For equity interests subject to the Cost of Money rules (see 
paragraph (a) of this section), you must include:
    (1) The portion of the fixed redemption price that exceeds your 
original cost.
    (2) Any amount of a redemption that is paid out of accounts other 
than the Small Business's capital accounts (capital, paid-in surplus, or 
retained earnings of a corporation; or partners' capital of a 
partnership).
    (g) Charges excluded from the Cost of Money. You may exclude from 
the Cost of Money:
    (1) Discount on the loan portion of a Debt Security, if such 
discount exists solely as the result of the allocation of value to 
detachable stock purchase warrants in accordance with generally accepted 
accounting principles.
    (2) Closing fees, application fees, and expense reimbursements, each 
as permitted under Sec. 107.860.
    (3) Reasonable prepayment penalties permitted under 
Sec. 107.830(d)(3).
    (4) Out-of-pocket conveyance and/or recordation fees and taxes.
    (5) Reasonable closing costs.
    (6) Fees for management services as permitted under Sec. 107.900.
    (7) Reasonable and necessary out-of-pocket expenses you incur to 
monitor the Financing.
    (8) Board of director fees not in excess of those paid to other 
outside directors, if your board representation meets the requirements 
of Sec. 107.730(e).
    (9) A reasonable fee for arranging financing for a Small Business 
from a source that is neither a Licensee nor an Associate of yours. The 
Small Business must agree in writing to pay such a fee before you 
arrange the financing.
    (10) A one-time ``bonus'' that satisfies the requirements in 
paragraph (i) of this section.
    (11) The difference between the contractual interest rate of the 
Financing and a default rate of interest permitted as follows:
    (i) If a Small Business is in default, you may charge a default rate 
of interest as much as 7 percentage points higher than the contractual 
rate until the default is cured.
    (ii) For this purpose, ``default'' means either failure to pay an 
amount when due or failure to provide information required under the 
Financing documents.
    (12) Royalty payments based on improvement in the performance of the 
Small Business after the date of the Financing.

[[Page 65]]

    (13) Gains realized on the disposition of Equity Securities issued 
by the Small Business.
    (h) How to evaluate compliance with the Cost of Money ceiling. You 
must determine whether a Financing is within the Cost of Money ceiling 
based on its discounted cash flows, as follows:
    (1) Beginning with the date of the first disbursement (``period 
zero''), identify your cash inflows and cash outflows for each period of 
the Financing. The appropriate period to use (such as years, quarters, 
or months) depends on how you have structured the disbursements and 
payments.
    (2) Discount the cash flows back to the first disbursement date 
using the Cost of Money ceiling from paragraph (d) of this section as 
the discount rate.
    (3) If the result is zero or less, the Financing is within the Cost 
of Money ceiling; if it is greater than zero, the Financing exceeds the 
Cost of Money ceiling.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 
FR 52646, Sept. 30, 1999; 65 FR 69432, Nov. 17, 2000]



Sec. 107.860  Financing fees and expense reimbursements a Licensee may 
receive from a Small Business.

    You may collect Financing fees and receive expense reimbursements 
from a Small Business only as permitted under this Sec. 107.860.
    (a) Application fee. You may collect a nonrefundable application fee 
from a Small Business to review its Financing application. The 
application fee may be collected at the same time as the closing fee 
under paragraph (c) or (d) of this section, or earlier. The fee must be:
    (1) No more than 1 percent of the amount of Financing requested (or, 
if two or more Licensees participate in the Financing, their combined 
application fees are no more than 1 percent of the total Financing 
requested); and
    (2) Agreed to in writing by the Financing applicant.
    (b) SBA review of application fees. For any fiscal year, if the 
number of application fees you collect is more than twice the number of 
Financings closed, SBA in its sole discretion may determine that you are 
engaged in activities not contemplated by the Act, in violation of 
Sec. 107.500.
    (c) Closing fee--Loans. You may charge a closing fee on a Loan if:
    (1) The fee is no more than 2 percent of the Financing amount (or, 
if two or more Licensees participate in the Financing, their combined 
closing fees are no more than 2 percent of the total Financing amount); 
and
    (2) You charge the fee no earlier than the date of the first 
disbursement.
    (d) Closing fee--Debt or Equity Financings. You may charge a Closing 
Fee on a Debt Security or Equity Security Financing if:
    (1) The fee is no more than 4 percent of the Financing amount (or, 
if two or more Licensees participate in the Financing, their combined 
closing fees are no more than 4 percent of the total Financing amount); 
and
    (2) You charge the fee no earlier than the date of the first 
disbursement.
    (e) Limitation on dual fees. If another Licensee or an Associate of 
yours collects a transaction fee under Sec. 107.900(e) in connection 
with your Financing of a Small Business, the sum of the transaction fee 
and your application and closing fees cannot exceed the maximum 
application and closing fees permitted under this Sec. 107.860.
    (f) Expense reimbursements. You may charge a Small Business for the 
reasonable out-of-pocket expenses, other than Management Expenses, that 
you incur to process its Financing application. If SBA determines that 
any of your reimbursed expenses are unreasonable or are Management 
Expenses, SBA will require you to include such amounts in the Cost of 
Money or refund them to the Small Business.
    (g) Breakup fee. If a Small Business accepts your Commitment and 
then fails to close the Financing because it has accepted funds from 
another source, you may charge a ``breakup fee'' equal to the closing 
fee that you would have been permitted to charge under paragraph (c) or 
(d) of this section.

[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996]

[[Page 66]]



Sec. 107.865  Control of a Small Business by a Licensee.

    (a) In general. You, or you and your Associates (in the latter case, 
the ``Investor Group''), may exercise Control over a Small Business for 
purposes connected to your investment, through ownership of voting 
securities, management agreements, voting trusts, majority 
representation on the board of directors, or otherwise. The period of 
such Control will be limited to the seventh anniversary of the date on 
which such Control was initially acquired, or any earlier date specified 
by the terms of any investment agreement.
    (b) Presumption of control. Control over a Small Business based on 
ownership of voting securities will be presumed to exist whenever you or 
the Investor Group own or control, directly or indirectly:
    (1) At least 50 percent of the outstanding voting securities, if 
there are fewer than 50 shareholders; or
    (2) More than 25 percent of the outstanding voting securities, if 
there are 50 or more shareholders; or
    (3) At least 20 percent of the outstanding voting securities, if 
there are 50 or more shareholders and no other party holds a larger 
block.
    (c) Rebuttals to presumption of Control. A presumption of Control 
under paragraph (b) of this section is rebutted if:
    (1) The management of the Small Business owns at least a 25 percent 
interest in the voting securities of the business; and
    (2) The management of the Small Business can elect at least 40 
percent of the board members of a corporation, general partners of a 
limited partnership, or managers of a limited liability company, as 
appropriate, and the Investor Group can elect no more than 40 percent. 
The balance of such officials may be elected through mutual agreement by 
management and the Investor Group.
    (d) Extension of Control. With SBA's prior written approval you, or 
the Investor Group, may retain Control for such additional period as may 
be reasonably necessary to complete divestiture of Control or to ensure 
the financial stability of the portfolio company.
    (e) Additional Financing for businesses under Licensee's Control. If 
you assume Control of a Small Business, you may later provide additional 
Financing, without an exemption under Sec. 107.730(a)(1).

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5867, Feb. 5, 1998; 64 
FR 52646, Sept. 30, 1999; 67 FR 64790, Oct. 22, 2002]



Sec. 107.880  Assets acquired in liquidation of Portfolio securities.

    You may acquire assets in full or partial liquidation of a Small 
Business's obligation to you under the conditions permitted by this 
Sec. 107.880. The assets may be acquired from the Small Business, a 
guarantor of its obligation, or another party.
    (a) Timely disposition of assets. You must dispose of assets 
acquired in liquidation of a Portfolio security within a reasonable 
period of time.
    (b) Permitted expenditures to preserve assets. (1) You may incur 
reasonably necessary expenditures to maintain and preserve assets 
acquired.
    (2) You may incur reasonably necessary expenditures for improvements 
to render such assets saleable.
    (3) You may make payments of mortgage principal and interest 
(including amounts in arrears when you acquired the asset), pay taxes 
when due, and pay for necessary insurance coverage.
    (c) SBA approval of expenditures. This paragraph (c) applies if you 
have outstanding Leverage or are applying for Leverage. Any application 
for SBA approval under this paragraph must specify all expenses 
estimated to be necessary pending disposal of the assets. Without SBA's 
prior written approval:
    (1) Your total expenditures under paragraphs (b)(1) and (b)(2) of 
this section plus your total Financing(s) to the Small Business must not 
exceed your overline limit under Sec. 107.740; and
    (2) Your total expenditures under paragraph (b) of this section plus 
your total Financing(s) to the Small Business must not exceed 35 percent 
of your Regulatory Capital.

[[Page 67]]

                  Limitations on Disposition of Assets



Sec. 107.885  Disposition of assets to Licensee's Associates or to 
competitors of Portfolio Concern.

    Sale of assets to Associate. Except with SBA's prior written 
approval, you are not permitted to dispose of assets (including assets 
acquired in liquidation) to any Associate if you have outstanding 
Leverage or Earmarked Assets. As a prerequisite to such approval, you 
must demonstrate that the proposed terms of disposal are at least as 
favorable to you as the terms obtainable elsewhere.

[61 FR 3189, Jan. 31, 1996, as amended at 67 FR 64791, Oct. 22, 2002]

                      Management Services and Fees



Sec. 107.900  Management fees for services provided to a Small Business by Licensee or its Associate.

    This Sec. 107.900 applies to management services that you or your 
Associate provide to a Small Business during the term of a Financing or 
prior to Financing. It does not apply to management services that you or 
your Associate provide to a Small Business that you do not finance. Fees 
permitted under this section are not included in the Cost of Money (see 
Sec. 107.855).
    (a) Permitted management fees. You or your Associate may provide 
management services to a Small Business financed by you if:
    (1) You or your Associate have entered into a written contract with 
the Small Business;
    (2) The fees charged are for services actually performed;
    (3) Services are provided on an hourly fee, project fee, or other 
reasonable basis; and
    (4) You can demonstrate to SBA, upon request, that the rate does not 
exceed the prevailing rate charged for comparable services by other 
organizations in the geographic area of the Small Business.
    (b) Fees for service as a board member. You or your Associate may 
receive fees in the form of cash, warrants, or other payments, for 
services provided as members of the board of directors of a Small 
Businesses Financed by you. The fees must not exceed those paid to other 
outside board members. In the absence of such board members, fees must 
be reasonable when compared with amounts paid to outside directors of 
similar companies.
    (c) SBA approval required. You must obtain SBA's prior written 
approval of any management contract that does not satisfy paragraphs (a) 
or (b) of this section.
    (d) Recordkeeping requirements. You must keep a record of hours 
spent and amounts charged to the Small Business, including expenses 
charged.
    (e) Transaction fees. (1) You may charge reasonable transaction fees 
for work you or your Associate perform to prepare a client for a public 
offering, private offering, or sale of all or part of the business, and 
for assisting with the transaction. Compensation may be in the form of 
cash, notes, stock, and/or options.
    (2) Your Associate may charge market rate investment banking fees to 
a Small Business on that portion of a Financing that you do not provide.



      Subpart H--Non-leveraged Licensees--Exceptions to Regulations



Sec. 107.1000  Licensees without Leverage--exceptions to the regulations.

    The regulatory exceptions in this section apply to Licensees with no 
outstanding Leverage or Earmarked Assets.
    (a) You are exempt from the following provisions (but you must come 
into compliance with them to become eligible for Leverage):
    (1) The overline limitation in Sec. 107.740.
    (2) The restrictions in Sec. 107.530 on investments of idle funds, 
provided you do not engage in activities not contemplated by the Act.
    (3) The restrictions in Sec. 107.550 on third-party debt.
    (4) The restrictions in Sec. 107.880 on expenses incurred to 
maintain or improve assets acquired in liquidation of Portfolio 
securities.
    (5) The recordkeeping requirements and fee limitations in 
Sec. 107.825 (b) and (c), respectively, for securities purchased through 
or from an underwriter.

[[Page 68]]

    (b) You are exempt from the requirements to obtain SBA's prior 
approval for:
    (1) A decrease in your Regulatory Capital of more than two percent 
under Sec. 107.585 (but not below the minimum required under the Act or 
these regulations). You must report the reduction to SBA within 30 days.
    (2) Disposition of any asset to your Associate under Sec. 107.885.
    (3) A contract to employ an Investment Adviser/Manager under 
Sec. 107.510. However, you must notify SBA of the Management Expenses to 
be incurred under such contract, or of any subsequent material changes 
in such Management Expenses, within 30 days of execution. In order to 
become eligible for Leverage, you must have the contract approved by 
SBA.
    (4) Your initial Management Expenses under Sec. 107.140 and 
increases in your Management Expenses under Sec. 107.520. However, you 
must have your Management Expenses approved by SBA in order to become 
eligible for Leverage.
    (5) Options obtained from a Small Business by your management or 
employees under Sec. 107.815(b).
    (c) You are exempt from the requirement in Sec. 107.680 to obtain 
SBA's post approval of new directors and new officers, other than your 
chief operating officer. However, you must notify SBA of the new 
directors or officers within 30 days, and you must have all directors 
and officers approved by SBA in order to become eligible for Leverage.



      Subpart I--SBA Financial Assistance for Licensees (Leverage)

              General Information About Obtaining Leverage



Sec. 107.1100  Types of Leverage and application procedures.

    (a) Types of Leverageable available. You may apply for Leverage from 
SBA in one or both of the following forms:
    (1) The purchase or guarantee of your Debentures.
    (2) The purchase or guarantee of your Participating Securities.
    (b) Applying for Leverage. The Leverage application process has two 
parts. You must first apply for SBA's conditional commitment to reserve 
a specific amount of Leverage for your future use. Yu may then apply to 
draw down Leverage against the commitment. See Secs. 107.1200 through 
107.1240.
    (c) Where to send your application. Send all Leverage applications 
to SBA, Investment Division, 409 Third Street, S.W., Washington, DC 
20416.

[63 FR 5868, Feb. 5, 1998, as amended at 64 FR 70996, Dec. 20, 1999]



Sec. 107.1120  General eligibility requirements for Leverage.

    To be eligible for Leverage, you must:
    (a) Demonstrate a need for Leverage, evidenced by your investment 
activity and a lack of sufficient funds for investment. For your first 
issuance of Leverage, if you have invested at least 50 percent of your 
Leverageable Capital, you are presumed to lack sufficient funds for 
investment.
    (b) Have adequate Private Capital to satisfy the requirements for 
financial viability under Sec. 107.200.
    (c) Meet the minimum capital requirements of Sec. 107.210, subject 
to the following additional conditions:
    (1) If you were licensed after September 30, 1996 under the 
exception in Sec. 107.210(a)(1), you will not be eligible for Leverage 
until you have Regulatory Capital of at least $5,000,000.
    (2) If you were licensed on or before September 30, 1996, and have 
Regulatory Capital of less than $5,000,000 (less than $10,000,000 if you 
wish to issue Participating Securities):
    (i) You must certify in writing that at least 50 percent of the 
aggregate dollar amount of your Financings extended after September 30, 
1996 will be provided to Smaller Enterprises (as defined in 
Sec. 107.710(a)); and
    (ii) You must demonstrate to SBA's satisfaction that the approval of 
Leverage will not create or contribute to an unreasonable risk of 
default or loss to the United States government, based on such 
measurements of profitability and financial viability as SBA deems 
appropriate.
    (d) Certify, if applicable, that you will satisfy the requirement in 
Sec. 107.710(d) to provide Financing to Smaller Enterprises.

[[Page 69]]

    (e) Certify in writing that you are in compliance with the 
requirement to finance Smaller Enterprises in Sec. 107.710(b).
    (f) Show, to the satisfaction of SBA, that your management is 
qualified and has the knowledge, experience, and capability necessary 
for investing in the types of businesses contemplated by the Act, the 
regulations in this part and your business plan.
    (g) Be in compliance with the regulations in this part.
    (h) If required by SBA, have your Control Person(s) assume, in 
writing, personal responsibility for your Leverage, effective only if 
such Control Person(s) participate (directly or indirectly) in a 
transfer of Control not approved by SBA.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998; 64 
FR 70996, Dec. 20, 1999]



Sec. 107.1130  Leverage fees and additional charges payable by Licensee.

    (a) Leverage fee. You must pay a leverage fee to SBA for each 
issuance of a Debenture or Participating Security. The fee is 3 percent 
of the face amount of the Leverage issued.
    (b) Payment of leverage fee. (1) If you issue a Debenture or 
Participating Security to repay or redeem existing Leverage, you must 
pay the leverage fee before SBA will guarantee or purchase the new 
Leverage security.
    (2) If you issue a Debenture or Participating Security that is not 
used to repay or redeem existing Leverage, SBA will deduct the leverage 
fee from the proceeds remitted to you, unless you prepaid the fee under 
Sec. 107.1210.
    (c) Refundability. The leverage fee is not refundable under any 
circumstances.
    (d) Additional charge for Leverage.--(1) Debentures. You must pay to 
SBA a Charge of 1 percent per annum on the outstanding amount of your 
Debentures issued on or after October 1, 1996, payable under the same 
terms and conditions as the interest on the Debentures. This Charge does 
not apply to Debentures issued pursuant to a Leverage commitment 
obtained from SBA on or before September 30, 1996.
    (2) Participating Securities. You must pay to SBA a Charge of 1 
percent per annum on the outstanding amount of your Participating 
Securities issued on or after October 1, 1996, payable under the same 
terms and conditions as the Prioritized Payments on the Participating 
Securities. This Charge does not apply to Participating Securities 
issued pursuant to a Leverage commitment obtained from SBA on or before 
September 30, 1996.
    (e) Other Leverage fees. SBA may establish a fee structure for 
services performed by the CRA. SBA will not collect any fee for its 
guarantee of TCs.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998]



Sec. 107.1140  Licensee's acceptance of SBA remedies under Secs. 107.1800 through 107.1820.

    If you issue Leverage after April 25, 1994, you automatically agree 
to the terms and conditions in Secs. 107.1800 through 107.1820 as they 
exist at the time of issuance. The effect of these terms and conditions 
is the same as if they were fully incorporated in the terms of your 
Leverage.

       Maximum Amount of Leverage for Which a Licensee Is Eligible



Sec. 107.1150  Maximum amount of Leverage for a Section 301(c) Licensee.

    (a) Maximum amount of Leverage. (1) Amounts before indexing. If you 
are a Section 301(c) Licensee, the following table shows the maximum 
amount of Leverage you may have outstanding at any time, subject to the 
indexing adjustment set forth in paragraph (a)(2) of this section:

------------------------------------------------------------------------
                                             Then your maximum leverage
     If your leverageable capital is:                    is:
------------------------------------------------------------------------
(1) Not over $17,500,000..................  300 percent of Leverageable
                                             Capital
(2) Over $17,500,000 but not over           $52,500,000 + [2 x
 $35,100,000.                                (Leverageable Capital -
                                             $17,500,000)]
(3) Over $35,100,000 but not over           $87,700,000 + (Leverageable
 $52,600,000.                                Capital -$35,100,000)
(4) Over $52,600,000......................  $105,200,000
------------------------------------------------------------------------

    (2) Indexing of maximum amount of Leverage. SBA will adjust the 
amounts in paragraph (a) of this section annually to reflect increases 
through September in the Consumer Price Index published by the Bureau of 
Labor Statistics. SBA

[[Page 70]]

will publish the indexed maximum Leverage amounts each year in a Notice 
in the Federal Register.
    (b) Exceptions to maximum Leverage provisions. (1) Licensees under 
Common Control. Two or more Licensees under Common Control may have 
aggregate outstanding Leverage over $105,200,000 (subject to indexing as 
set forth in paragraph (a)(2) of this section) only if SBA gives them 
permission to do so. SBA may grant such permission on a case-by-case 
basis only. SBA may impose any terms and conditions SBA considers 
appropriate to minimize its risk of loss in the event of default.
    (2) Licensees with excess Leverage issued before March 31, 1993. If 
you had outstanding Debentures on March 31, 1993 that exceeded 300 
percent of your Leverageable Capital:
    (i) You do not have to prepay the excess amount.
    (ii) You may apply for an additional Debenture guarantee or 
Participating Security guarantee if you use the proceeds solely to pay 
the amount due at maturity on a Debenture issued before March 31, 1993. 
The new Debenture or Participating Security must mature on or before 
September 30, 2002.
    (iii) You must maintain at least 65 percent of your ``Total Funds 
Available for Investment'' in ``Venture Capital Financings'' (as defined 
in Sec. 107.1160(e) and (f), respectively) until your outstanding 
Debentures no longer exceed 300 percent of your Leverageable Capital.
    (3) Maximum amount of Participating Securities. See Sec. 107.1170.

[61 FR 3189, Jan. 31, 1996, as amended at 64 FR 70996, Dec. 20, 1999]



Sec. 107.1160  Maximum amount of Leverage for a Section 301(d) Licensee.

    This section applies to Leverage issued by a Section 301(d) Licensee 
on or before September 30, 1996. Effective October 1, 1996, a Section 
301(d) Licensee may apply to issue new Leverage, or refinance existing 
Leverage, only on the same terms permitted under Sec. 107.1150.
    (a) Maximum amount of subsidized Leverage. (1) ``Subsidized 
Leverage'' means Debentures with a reduced interest rate and Preferred 
Securities. If you are a Section 301(d) Licensee:
    (i) The maximum amount of subsidized Leverage you may have 
outstanding at any time is the lesser of 400 percent of your 
Leverageable Capital, or $35,000,000. The same limit applies to a group 
of Section 301(d) Licensees under Common Control.
    (ii) The maximum amount of Preferred Securities you may have 
outstanding at any time is 200 percent of your Leverageable Capital.
    (2) Certain types and amounts of subsidized Leverage have special 
eligibility requirements (see paragraphs (c) and (d) of this section).
    (b) Maximum amount of total Leverage. Use Sec. 107.1150 (a) and 
(b)(1) to determine your maximum amount of Leverage as if you were a 
Section 301(c) Licensee. If the result is more than your maximum 
subsidized Leverage, then this is your maximum total (subsidized plus 
non-subsidized) Leverage. Otherwise, your maximum total Leverage is the 
same as your maximum subsidized Leverage. For Participating Securities, 
see Sec. 107.1170.
    (c) Special eligibility requirements for fourth tier of Leverage. A 
``fourth tier of Leverage'' is any amount of outstanding Leverage in 
excess of 300 percent of your Leverageable Capital.
    (1) To qualify for a fourth tier of Leverage, you must have invested 
(or have Commitments to invest) at least 30 percent of your ``Total 
Funds Available for Investment'' in ``Venture Capital Financings'' (see 
the definitions in paragraphs (e) and (f) of this section).
    (2) While you have a fourth tier of Leverage, you must maintain 
Venture Capital Financings (at cost) that equal at least 30 percent of 
your Total Funds Available for Investment.
    (d) Special eligibility requirements for second tier of Preferred 
Securities. A ``second tier of Preferred Securities'' is any amount of 
outstanding Preferred Securities in excess of 100 percent of your 
Leverageable Capital.
    (1) To qualify for a second tier of Preferred Securities:
    (i) If your license was issued after October 13, 1971, you must have 
at least $500,000 of Leverageable Capital.
    (ii) You must have invested (or have Commitments to invest) at least 
the same dollar amount in Venture Capital Financings.

[[Page 71]]

    (2) While you have a second tier of Preferred Securities, you must 
maintain at least the same dollar amount of Venture Capital Financings 
(at cost).
    (e) Definition of ``Total Funds Available for Investment''. Total 
Funds Available for Investment means the result obtained from the 
following formula:

T = .90 x (CA + LI)

Where:

T = Total funds available for investment
CA = Total current assets
LI = Total Loans and Investment at cost (as reported on SBA Form 468), 
net of current maturities

    (f) Definition of ``Venture Capital Financing''. Venture Capital 
Financing means an investment represented by common or preferred stock, 
a limited partnership interest, or a similar ownership interest; or by 
an unsecured debt instrument that is subordinated by its terms to all 
other borrowings of the issuer.
    (1) A debt secured by any agreement with a third party is not a 
Venture Capital Financing, whether or not you have a security interest 
in any asset of the third party or have recourse against the third 
party.
    (2) A Financing that originally qualified as a Venture Capital 
Financing will continue to qualify (at its original cost), even if you 
later must report it on SBA Form 468 under either Assets Acquired in 
Liquidation of Portfolio Securities or Operating Concerns Acquired.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998]



Sec. 107.1170  Maximum amount of Participating Securities for any Licensee.

    The maximum amount of Participating Securities you may have 
outstanding at any time is 200 percent of your Leverageable Capital. If 
you are a Section 301(d) Licensee, the maximum combined amount of 
Participating Securities and Preferred Securities you may have 
outstanding at any time is 200 percent of your Leverageable Capital.

    Conditional Commitments by SBA To Reserve Leverage for a Licensee



Sec. 107.1200  SBA's Leverage commitment to a Licensee--application procedure, amount, and term.

    (a) General. Under the provisions in Secs. 107.1200 through 
107.1240, you may apply for SBA's conditional commitment to reserve a 
specific amount and type of Leverage for your future use. You may then 
apply to draw down Leverage against the commitment.
    (b) Applying for a Leverage commitment. SBA will notify you when it 
is accepting requests for Leverage commitments. Upon receipt of your 
request, SBA will send you a complete application package.
    (c) Limitations on the amount of a Leverage commitment. The amount 
of a Leverage commitment must be a multiple of $5,000.
    (d) Term of Leverage commitment. SBA's Leverage commitment will 
automatically lapse on the expiration date stated in the commitment 
letter issued to you by SBA.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998]



Sec. 107.1210  Payment of leverage fee upon receipt of commitment.

    (a) Partial prepayment of leverage fee. As a condition of SBA's 
Leverage commitment, and before you draw any Leverage under such 
commitment, you must pay to SBA a non-refundable fee equal to 1 percent 
of the face amount of the Debentures or Participating Securities 
reserved under the commitment. This amount represents a partial 
prepayment of the 3 percent leverage fee established under 
Sec. 107.1130(a).
    (b) Automatic cancellation of commitment. Unless you pay the fee 
required under paragraph (a) of this section by 5:00 P.M. Eastern Time 
on the 30th calendar day following the issuance of SBA's Leverage 
commitment, the commitment will be automatically canceled.

[63 FR 5868, Feb. 5, 1998]



Sec. 107.1220  Requirement for Licensee to file quarterly financial statements.

    As long as any part of SBA's Leverage commitment is outstanding, you 
must give SBA a Financial Statement

[[Page 72]]

on SBA Form 468 (Short Form) as of the close of each quarter of your 
fiscal year (other than the fourth quarter, which is covered by your 
annual filing of Form 468 under Sec. 107.630(a)). You must file this 
form within 30 days after the close of the quarter. You will not be 
eligible for a draw if you are not in compliance with this 
Sec. 107.1220.

[64 FR 70996, Dec. 20, 1999]



Sec. 107.1230  Draw-downs by Licensee under SBA's Leverage commitment.

    (a) Licensee's authorization of SBA to purchase or guarantee 
securities. By submitting a request for a draw against SBA's Leverage 
commitment, you authorize SBA, or any agent or trustee SBA designates, 
to guarantee your Debenture or Participating Security and to sell it 
with SBA's guarantee.
    (b) Limitations on amount of draw. The amount of a draw must be a 
multiple of $5,000. SBA, in its discretion, may determine a minimum 
dollar amount for draws against SBA's Leverage commitments. Any such 
minimum amounts will be published in Notices in the Federal Register 
from time to time.
    (c) Effect of regulatory violations on Licensee's eligibility for 
draws--(1) General rule. You are eligible to make a draw against SBA's 
Leverage commitment only if you are in compliance with all applicable 
provisions of the Act and SBA regulations (i.e., no unresolved statutory 
or regulatory violations).
    (2) Exception to general rule. If you are not in compliance, you may 
still be eligible for draws if:
    (i) SBA determines that your outstanding violations are of non-
substantive provisions of the Act or regulations and that you have not 
repeatedly violated any non-substantive provisions; or
    (ii) You have agreed with SBA on a course of action to resolve your 
violations and such agreement does not prevent you from issuing 
Leverage.
    (d) Procedures for funding draws. You may request a draw at any time 
during the term of the commitment. With each request, submit the 
following documentation:
    (1) A statement certifying that there has been no material adverse 
change in your financial condition since your last filing of SBA Form 
468 (see also Sec. 107.1220 for SBA Form 468 filing requirements).
    (2) If your request is submitted more than 30 days following the end 
of your fiscal year, but before you have submitted your annual filing of 
SBA Form 468 (Long Form) in accordance with Sec. 107.630(a), a 
preliminary unaudited annual financial statement on SBA Form 468 (Short 
Form).
    (3) A statement certifying that to the best of your knowledge and 
belief, you are in compliance with all provisions of the Act and SBA 
regulations (i.e., no unresolved regulatory or statutory violations), or 
a statement listing any specific violations you are aware of. Either 
statement must be executed by one of the following:
    (i) An officer of the Licensee;
    (ii) An officer of a corporate general partner of the Licensee; or
    (iii) An individual who is authorized to act as or for a general 
partner of the Licensee.
    (4) A statement that the proceeds are needed to fund one or more 
particular Small Businesses or to provide liquidity for your operations. 
If required by SBA, the statement must include the name and address of 
each Small Business, and the amount and anticipated closing date of each 
proposed Financing.
    (e) Reporting requirements after drawing funds. (1) Within 30 
calendar days after the actual closing date of each Financing funded 
with the proceeds of your draw, you must file an SBA Form 1031 
confirming the closing of the transaction.
    (2) If SBA required you to provide information concerning a specific 
planned Financing under paragraph (d)(3) of this section, and such 
Financing has not closed within 60 calendar days after the anticipated 
closing date, you must give SBA a written explanation of the failure to 
close.
    (3) If you do not comply with this paragraph (e), you will not be 
eligible for additional draws. SBA may also determine that you are not 
in compliance with the terms of your Leverage under Secs. 107.1810 or 
107.1820.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998; 64 
FR 70996, Dec. 20, 1999]

[[Page 73]]



Sec. 107.1240  Funding of Licensee's draw request through sale to short-term investor.

    (a) Licensee's authorization of SBA to arrange sale of securities to 
short-term investor. By submitting a request for a draw of Debenture or 
Participating Security Leverage, you authorize SBA, or any agent or 
trustee SBA designates, to enter into any agreements (and to bind you to 
such agreements) necessary to accomplish:
    (1) The sale of your Debenture or Participating Security to a short-
term investor at a rate that may be different from the Trust Certificate 
Rate which will be established at the time of the pooling of your 
security;
    (2) The purchase of your security from the short-term investor, 
either by you or on your behalf; and
    (3) The pooling of your security with other securities with the same 
maturity date.
    (b) Sale of Debentures to a short-term investor. If SBA sells your 
Debenture to a short-term investor:
    (1) The sale price will be the face amount.
    (2) At the next scheduled date for the sale of Debenture Trust 
Certificates, whether or not the sale actually occurs, you must pay 
interest to the short-term investor for the short-term period. If the 
actual sale of Trust Certificates takes place after the scheduled date, 
you must pay the short-term investor interest from the scheduled sale 
date to the actual sale date. This additional interest is due on the 
actual sale date.
    (3) Failure to pay the interest constitutes noncompliance with the 
terms of your Leverage (see Sec. 107.1810).
    (c) Sale of Participating Securities to a short-term investor. If 
SBA sells your Participating Security to a short-term investor, the sale 
price will be the face amount.
    (d) Licensee's right to repurchase its Debentures before pooling. 
You may repurchase your Debentures from the short-term investor before 
they are pooled. To do so, you must:
    (1) Give SBA written notice at least 10 days before the cut-off date 
for the pool in which your Debenture is to be included; and
    (2) Pay the face amount of the Debenture, plus interest, to the 
short-term investor.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5868, Feb. 5, 1998]

         Preferred Securities Leverage--Section 301(d) Licensees



Sec. 107.1400  Dividends or partnership distributions on 4 percent Preferred Securities.

    If you issued Preferred Securities to SBA on or after November 21, 
1989, you must pay SBA a dividend or partnership distribution of 4 
percent per year, from the date you issued Preferred Securities to the 
date you repay them, both inclusive. The dividend or partnership 
distribution is:
    (a) Computed on the par value of the outstanding stock or the face 
value of the outstanding limited partnership interest.
    (b) Cumulative. This means that if you do not pay the entire 
dividend or partnership distribution for a given fiscal year, the unpaid 
balance accumulates as a distribution in arrears. You do not have to pay 
interest on distributions in arrears.
    (c) Preferred. This means that you must pay SBA in full (including 
distributions in arrears) before setting aside or paying any amount to 
any other equity holder.
    (d) Payable at the discretion of your Board of Directors or General 
Partner(s), except that all distributions in arrears must be paid in 
full when you redeem the Preferred Securities.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]



Sec. 107.1410  Requirement to redeem 4 percent Preferred Securities.

    You must redeem 4 percent Preferred Securities not later than 15 
years from the date of issuance. At the redemption date, you must pay to 
SBA:
    (a) The par value (of preferred stock) or face value (of a preferred 
limited partnership interest); plus
    (b) Any unpaid dividends or partnership distributions accrued to the 
redemption date.

[[Page 74]]



Sec. 107.1420  Articles requirements for 4 percent Preferred Securities.

    If you have outstanding 4 percent Preferred Securities, your 
Articles must contain all the provisions in Secs. 107.1400 and 107.1410.

[63 FR 5869, Feb. 5, 1998]



Sec. 107.1430  Redeeming 4 percent Preferred Securities with proceeds of 
non-subsidized Debentures.

    If SBA approves, a Section 301(d) Licensee may use the proceeds of a 
Debenture to redeem Preferred Securities at their mandatory redemption 
date, including any accrued unpaid dividends or partnership 
distributions.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]



Sec. 107.1440  Three percent preferred stock issued before November 21, 1989.

    Before November 21, 1989, Preferred Securities were available only 
in the form of preferred stock and had a preferred and cumulative 
dividend of 3 percent. If you have such preferred stock outstanding, you 
must follow Sec. 107.1400 (except for Sec. 107.1400(d)), substituting 
``3 percent'' for ``4 percent'' throughout.) Dividends on 3 percent 
preferred stock are payable at the discretion of your Board of Directors 
or General Partner(s), except that all dividends in arrears must be paid 
in full before any non-SBA investor receives any distribution. Upon your 
liquidation, SBA is entitled to payment of all dividends in arrears even 
if you have no Retained Earnings Available for Distribution at such 
time.



Sec. 107.1450  Optional redemption of Preferred Securities.

    (a) Redemption at par or face value. A Section 301(d) Licensee may 
redeem Preferred Securities at any time, provided you give SBA at least 
30 days written notice. You may redeem all or only part of your 
Preferred Securities, but the par value or face value of the securities 
being redeemed must be at least $50,000. At the redemption date, you 
must pay to SBA:
    (1) The par value (of preferred stock) or face value (of a preferred 
limited partnership interest); plus
    (2) Any unpaid dividends or partnership distributions accrued to the 
redemption date.
    (b) Repurchase of 3 percent preferred stock for less than par value. 
If you issued 3 percent preferred stock to SBA, you may ask SBA to sell 
it back to you at a price less than its par value. The terms and 
conditions of any such transaction will be as set forth in the Notice 
published in the Federal Register on April 1, 1994 (Copies of this 
notice are available from SBA, 409 3rd Street, SW., Washington, DC, 
20416). SBA has sole discretion to:
    (1) Approve or disapprove the sale.
    (2) Determine the sale price after considering any factors SBA 
considers appropriate.
    (3) Determine the form of payment SBA will accept. SBA is not 
authorized to accept the proceeds of a subsidized Debenture as payment.

                    Participating Securities Leverage



Sec. 107.1500  General description of Participating Securities.

    (a) Types of Participating Securities. Participating Securities are 
redeemable, preferred, equity-type securities. SBA may purchase or 
guarantee Participating Securities issued by Licensees in the form of 
limited partnership interests, preferred stock, or debentures with 
interest payable only to the extent of earnings. The structure, terms 
and conditions of Participating Securities are set forth in detail in 
Secs. 107.1500 through 107.1590.
    (b) Special eligibility requirements for Participating Securities. 
In addition to the general eligibility requirements for Leverage under 
Sec. 107.1120, Participating Securities issuers must also comply with 
special rules on:
    (1) Minimum capital (see Sec. 107.210).
    (2) Liquidity (see Sec. 107.1505).
    (3) Non-SBA borrowing (see Sec. 107.570).
    (4) Equity investing, as set forth in this paragraph (b)(4). If you 
issue Participating Securities, you must invest an amount equal to the 
Original Issue Price of such securities solely in Equity Capital 
Investments, as defined in Sec. 107.50.
    (c) Special features of Participating Securities--Prioritized 
Payments, Adjustments, and Profit Participation. When

[[Page 75]]

you issue Participating Securities, you agree to make the following 
payments:
    (1) Prioritized Payments. Depending upon the type of Participating 
Security you issue, Prioritized Payments may be preferred partnership 
distributions, preferred dividends, or interest. Your obligation to pay 
Prioritized Payments is contingent upon your profits as determined under 
Sec. 107.1520.
    (2) Adjustments to Prioritized Payments. If you have unpaid 
Prioritized Payments, you must compute Adjustments, which are additional 
contingent obligations determined under Sec. 107.1520. The conditions 
for paying Adjustments are the same as for Prioritized Payments.
    (3) SBA Profit Participation. Profit Participation is an amount 
payable to SBA under Sec. 107.1530 in consideration for SBA's guarantee 
of your Participating Securities.
    (d) Distributions by Licensees issuing Participating Securities. 
Sections 107.1540 through 107.1580 govern both required and optional 
Distributions by Participating Securities issuers. Distributions include 
both profit distributions and returns of capital, paid either to SBA or 
to your non-SBA investors.
    (e) Mandatory redemption of Participating Securities. You must 
redeem Participating Securities at the redemption date, which is the 
same as the maturity date of the Trust Certificates for the Trust 
containing such securities. The redemption date can never be later than 
15 years after the issue date. You must pay the Redemption Price plus 
any unpaid Earned Prioritized Payments and any earned Adjustments and 
earned Charges (see Sec. 107.1520).
    (f) Priority of Participating Securities in liquidation of Licensee. 
In the event of your liquidation, the following are senior in priority, 
for all purposes, to all other equity interests you have issued at any 
time:
    (1) The Redemption Price of Participating Securities;
    (2) Any Earned Prioritized Payments and any earned Adjustments and 
earned Charges (see Sec. 107.1520); and
    (3) Any Profit Participation allocated to SBA under Sec. 107.1530.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]



Sec. 107.1505  Liquidity requirements for Licensees issuing Participating Securities.

    If you have outstanding Participating Securities, you must maintain 
sufficient liquidity to avoid a condition of Liquidity Impairment. Such 
a condition will constitute noncompliance with the terms of your 
Leverage under Sec. 107.1820(e).
    (a) Definition of Liquidity Impairment. A condition of Liquidity 
Impairment exists when your Liquidity Ratio, as determined in paragraph 
(b) of this section, is less than 1.20. You are responsible for 
calculating whether you have a condition of Liquidity Impairment:
    (1) As of the close of your fiscal year;
    (2) At the time you apply for Leverage, unless SBA permits 
otherwise; and
    (3) At such time as you contemplate making any Distribution.
    (b) Computation of Liquidity Ratio. Your Liquidity Ratio equals your 
Total Current Funds Available (A) divided by your Total Current Funds 
Required (B), as determined in the following table:

                     Calculation of Liquidity Ratio
------------------------------------------------------------------------
                                   Amount
      Financial account         reported  on     Weight      Weighted
                                SBA form 468                  amount
------------------------------------------------------------------------
(1) Cash and invested idle     ..............  x1.00      ..............
 funds.
(2) Commitments from           ..............  x1.00      ..............
 investors.
(3) Current maturities.......  ..............  x0.50      ..............
(4) Other current assets.....  ..............  x1.00      ..............
(5) Publicly Traded and        ..............  x1.00      ..............
 Marketable Securities.
(6) Anticipated operating                 (1)  x1.00      ..............
 revenue for next 12 months.
(7) Total Current Funds        ..............  .........               A
 Available.
(8) Current liabilities......  ..............  x1.00      ..............
(9) Commitments to Small       ..............  x0.75      ..............
 Businesses.
(10) Anticipated operating                (1)  x1.00      ..............
 expense for next 12 months.
(11) Anticipated interest                 (1)  x1.00      ..............
 expense for next 12 months.

[[Page 76]]

 
(12) Contingent liabilities    ..............  x0.25      ..............
 (guarantees).
(13) Total Current Funds       ..............  .........               B
 Required.
------------------------------------------------------------------------
\1\ As determined by Licensee's management under its business plan.


[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5869, Feb. 5, 1998]



Sec. 107.1510  How a Licensee computes Earmarked Profit (Loss).

    Computing your Earmarked Profit (Loss) is the first step in 
determining your obligations to pay Prioritized Payments, Adjustments 
and Charges under Sec. 107.1520 and Profit Participation under 
Sec. 107.1530.
    (a) Requirement to compute your Earmarked Profit (Loss). While you 
have Participating Securities outstanding or have Earmarked Assets (as 
defined in paragraph (b) of this section), you must compute your 
Earmarked Profit (Loss) for:
    (1) Each full fiscal year.
    (2) Any interim period (consisting of one or more fiscal quarters) 
for which you want to make a Distribution.
    (b) How to determine your Earmarked Assets. ``Earmarked Assets'' 
means all the Loans and Investments that you have when you issue 
Participating Securities or that you acquire while you have 
Participating Securities outstanding, and any non-cash assets that you 
receive in exchange for such Loans and Investments.
    (1) An Earmarked Asset remains earmarked until you dispose of it, 
even if you no longer have any outstanding Participating Securities.
    (2) Investments you make after redeeming all your Participating 
Securities are not Earmarked Assets. However, if you issue new 
Participating Securities, all of your Loans and Investments again become 
Earmarked Assets.
    (3) If you were licensed before March 31, 1993, you may be permitted 
to exclude Loans and Investments held at that date from Earmarked Assets 
under Sec. 107.1590.
    (c) How to compute your Earmarked Asset Ratio. You must determine 
your Earmarked Asset Ratio each time you compute Earmarked Profit 
(Loss). If all your Loans and Investments are Earmarked Assets, your 
Earmarked Asset Ratio equals 100 percent. Otherwise, compute your 
Earmarked Asset Ratio using the following formula:

EAR = (EA / LI) x 100

where:

EAR = Earmarked Asset Ratio.
EA = Average Earmarked Assets (at cost) for the fiscal year or interim 
period.
LI = Average Loans and Investments (at cost) for the fiscal year or 
interim period.

    (d) How to compute your Earmarked Profit (Loss) if Earmarked Asset 
Ratio is 100 percent. (1) (i) If your Earmarked Asset Ratio from 
paragraph (b) of this section is 100 percent, use the following formula 
to compute your Earmarked Profit (Loss):

EP = NI + IK + EME

where:

EP = Earmarked Profit (Loss)
NI = Net Income (Loss), as reported on SBA Form 468 except as otherwise 
provided in this paragraph (d)(1)
IK = Unrealized Appreciation (Depreciation) on Earmarked Assets that you 
are distributing as an In-Kind Distribution under Sec. 107.1580
EME = Excess Management Expenses

    (ii) For the purpose of determining Net Income (Loss), leverage fees 
paid to SBA and partnership syndication costs that you incur must be 
capitalized and amortized on a straight-line basis over not less than 
five years.
    (2) ``Excess Management Expenses'' are those that exceed the 
following limit:
    (i) For a full fiscal year, the limit is the lower of:
    (A) 2.5 percent of your weighted average Combined Capital for the 
year, plus $125,000 if Combined Capital is below $20,000,000; or

[[Page 77]]

    (B) Your Management Expenses approved by SBA.
    (ii) For less than a full fiscal year, you must prorate the annual 
amounts in paragraph (d)(2)(i) of this section to determine the limit.
    (e) How to compute your Earmarked Profit (Loss) if Earmarked Asset 
Ratio is less than 100 percent. If your Earmarked Asset Ratio is less 
than 100 percent, compute your Earmarked Profit (Loss) as follows:
    (1) Do the Earmarked Profit (Loss) computation in paragraph (d) of 
this section.
    (2) Subtract your net realized gain (loss) (as reported on SBA Form 
468) on Loans and Investments that are not Earmarked Assets.
    (3) Separate the result from paragraph (e)(2) of this section into:
    (i) Net realized gain (loss) (as reported on SBA Form 468) on 
Earmarked Assets (``EGL''); and
    (ii) The remainder (``R'').
    (4) Your Earmarked Profit (Loss) equals:

EGL + (R x Earmarked Asset Ratio)

    (f) How to compute your cumulative Earmarked Profit (Loss). Sum your 
Earmarked Profit (Loss) for all fiscal years and for any interim period 
following the end of your last fiscal year. The total is your cumulative 
Earmarked Profit (Loss), which you must use in the Prioritized Payment 
computations under Sec. 107.1520.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5870, Feb. 5, 1998]



Sec. 107.1520  How a Licensee computes and allocates Prioritized Payments to SBA.

    This section tells you how to compute Prioritized Payments, 
Adjustments and Charges on Participating Securities and determine the 
amounts you must pay. To distribute these amounts, see Sec. 107.1540.
    (a) How to compute Prioritized Payments and Adjustments--(1) 
Prioritized Payments. For a full fiscal year, the Prioritized Payment on 
an outstanding Participating Security equals the Redemption Price times 
the related Trust Certificate Rate. For an interim period, you must 
prorate the annual Prioritized Payment. If your Participating Security 
was sold to a short-term investor in accordance with Sec. 107.1240, the 
Prioritized Payment for the short-term period equals the Redemption 
Price times the short-term rate.
    (2) Adjustments. Compute Adjustments using paragraph (f) of this 
section.
    (3) Charges. Compute Charges in accordance with Sec. 107.1130(d)(2).
    (b) Licensee's obligation to pay Prioritized Payments, Adjustments 
and Charges. You are obligated to pay Prioritized Payments, Adjustments 
and Charges only if you have profit as determined in paragraph (d) of 
this section.
    (1) Prioritized Payments that you must pay (or have already paid) 
because you have sufficient profit are ``Earned Prioritized Payments''.
    (2) Prioritized Payments that have not become payable because you 
lack sufficient profit are ``Accumulated Prioritized Payments''. Treat 
all Prioritized Payments as ``Accumulated'' until they become ``Earned'' 
under this section.
    (3) Adjustments (computed under paragraph (f) of this section) and 
Charges (computed under Sec. 107.1130(d)(2)) are ``earned'' according to 
the same criteria applied to Prioritized Payments.
    (c) How to keep track of Prioritized Payments. You must establish 
three accounts to record your Accumulated and Earned Prioritized 
Payments:
    (1) Accumulation Account. The Accumulation Account is a memorandum 
account. Its balance represents your Accumulated Prioritized Payments, 
unearned Adjustments and unearned Charges.
    (2) Distribution Account. The Distribution Account is a liability 
account. Its balance represents your unpaid Earned Prioritized Payments, 
earned Adjustments and earned Charges.
    (3) Earned Payments Account. The Earned Payments Account is a 
memorandum account. Each time you add to the Distribution Account 
balance, add the same amount to the Earned Payments Account. Its balance 
represents your total (paid and unpaid) Earned Prioritized Payments, 
earned Adjustments and earned Charges.

[[Page 78]]

    (d) How to determine your profit for Prioritized Payment purposes. 
As of the end of each fiscal year and any interim period for which you 
want to make a Distribution:
    (1) Bring the Accumulation Account up to date by adding to it all 
Prioritized Payments and Charges through the end of the appropriate 
fiscal period.
    (2) Determine whether you have profit for the purposes of this 
section by doing the following computation:
    (i) Cumulative Earmarked Profit (Loss) under Sec. 107.1510(f); minus
    (ii) The Earned Payments Account balance; minus
    (iii) All Distributions previously made under Secs. 107.1550, 
107.1560 and 107.1570(a); minus
    (iv) Any Profit Participation previously allocated to SBA under 
Sec. 107.1530, but not yet distributed.
    (3) The amount computed in paragraph (d)(2) of this section, if 
greater than zero, is your profit. If the amount is zero or less, you 
have no profit.
    (4) If you have a profit, continue with paragraph (e) of this 
section. Otherwise, continue with paragraph (f) of this section.
    (e) Allocating Prioritized Payments to the Distribution Account. (1) 
If you have a profit under paragraph (d) of this section, determine the 
lesser of:
    (i) Your profit; or
    (ii) The balance in your Accumulation Account.
    (2) Subtract the result in paragraph (e)(1) of this section from the 
Accumulation Account and add it to the Distribution Account and the 
Earned Payments Account.
    (f) How to compute Adjustments. You must compute Adjustments as of 
the end of each fiscal year if you have a balance greater than zero in 
either your Accumulation Account or your Distribution Account, after 
giving effect to any Distribution that will be made no later than the 
second Payment Date following the fiscal year end.
    (1) Determine the combined average Accumulation Account and 
Distribution Account balances for the fiscal year, assuming that 
Prioritized Payments accumulate on a daily basis without compounding.
    (2) Multiply the average balance computed in paragraph (f)(1) of 
this section by the average of the Trust Certificate Rates for all the 
Participating Securities poolings during the fiscal year.
    (3) Add the amounts computed in this paragraph (f) to your 
Accumulation Account.
    (g) Licensee's obligation to pay Prioritized Payments after 
redeeming Participating Securities. This paragraph (g) applies if you 
have redeemed all your Participating Securities, but you still hold 
Earmarked Assets and still have a balance in your Accumulation Account.
    (1) You must continue to perform all the procedures in this section 
as of the end of each fiscal quarter and prior to making any 
Distribution. You must distribute any Earned Prioritized Payments, 
earned Adjustments and earned Charges in accordance with Sec. 107.1540.
    (2) After you dispose of all your Earmarked Assets and make any 
required Distributions in accordance with Sec. 107.1540, your obligation 
to pay any remaining Accumulated Prioritized Payments, unearned 
Adjustments and unearned Charges will be extinguished.

[63 FR 5870, Feb. 5, 1998]



Sec. 107.1530  How a Licensee computes SBA's Profit Participation.

    This section tells you how to compute SBA's Profit Participation. 
Profit Participation is included in the Distributions you make to SBA 
under Secs. 107.1550 and 107.1560.
    (a) How to compute Profit Participation. Profit Participation equals 
your ``Base'' times your ``Profit Participation Rate'' (if the Base is 
zero or less, you do not owe SBA Profit Participation). Compute the Base 
using paragraph (c) of this section and the Profit Participation Rate 
using paragraphs (d) through (g) of this section. You must compute your 
Earmarked Profit (Loss) under Sec. 107.1510 and your Prioritized 
Payments and Adjustments under Sec. 107.1520 before you can compute 
Profit Participation.
    (b) How to keep track of Profit Participation. You must establish a 
Profit Participation Account to record your computations under this 
section and payments under Secs. 107.1550 and 107.1560.

[[Page 79]]

Its balance represents your unpaid Profit Participation.
    (c) How to compute the Base. As of the end of each fiscal year and 
any year-to-date interim period for which you want to make a 
Distribution, compute your Base using the following formula:

B = EP - PPA - UL

where:

B = Base.
EP = Earmarked Profit (Loss) for the period from Sec. 107.1510.
PPA = Prioritized Payments for the period from Sec. 107.1520(a)(1), 
Adjustments (if applicable) from Sec. 107.1520(f), and Charges (if 
applicable) from Sec. 107.1130(d)(2).
UL = ``Unused Loss'' from prior periods as determined in this paragraph 
(c).

    (1) If the Base computed as of the end of your previous fiscal year 
(your ``Previous Base'') was less than zero, your Unused Loss equals 
your Previous Base.
    (2) If your Previous Base was zero or greater, your Unused Loss 
equals zero, with the following exception: If you made an interim 
Distribution of Profit Participation during your previous fiscal year, 
and your Previous Base was lower than the interim Base on which your 
Distribution was computed, then your Unused Loss equals the difference 
between the interim Base and the Previous Base. For example, assume you 
are computing your Base as of December 31, 1997, your fiscal year end. 
Your Previous Base, computed as of December 31, 1996, was $3,000,000. 
During 1996, you made an interim Distribution which was computed on a 
Base of $3,500,000 as of June 30, 1996. The $500,000 difference between 
the 1996 interim and year-end Bases would be carried forward as Unused 
Loss in the computation of your Base as of December 31, 1997.
    (3) If you had no Participating Securities outstanding as of the end 
of your last fiscal year, you may request SBA's approval to treat your 
Undistributed Net Realized Loss, as reported on SBA Form 468 for that 
year, as Unused Loss. If you did not file SBA Form 468 because you were 
not yet licensed as of the end of your last fiscal year, you may request 
SBA's approval to treat pre-licensing losses as Unused Loss.
    (d) How to compute the Profit Participation Rate. You must determine 
your Profit Participation Rate each time you compute a Base that is 
greater than zero. Compute the Rate by following the steps in paragraphs 
(e) through (g) of this section.
    (e) Compute the ``PLC ratio''. (1) General rule. The ``PLC ratio'' 
is the highest ratio of outstanding Participating Securities to 
Leverageable Capital that you have ever attained.
    (2) Exception. You may reduce the ratio computed under paragraph 
(e)(1) of this section if you have increased your Leverageable Capital 
above its highest previous level. The increase must have taken place at 
least 120 days before the date as of which your Base is computed. In 
addition, the increase must have been expressly provided for in a plan 
of operations submitted to and approved by SBA in writing, or must be 
the result of the takedown of commitments or the conversion of non-cash 
assets that were included in your Private Capital. If these conditions 
are satisfied, compute your reduced PLC ratio as follows:
    (i) Divide the highest dollar amount of Participating Securities you 
have ever had outstanding by your increased Leverageable Capital.
    (ii) If the result in paragraph (e)(2)(i) of this section is lower 
than your PLC ratio currently in effect, such result will become your 
new PLC ratio.
    (f) Compute the Profit Participation Rate (before indexing). Compute 
the Profit Participation Rate (before indexing) using the table in this 
paragraph (f). Then go to paragraph (g) of this section to determine 
whether to index the Profit Participation Rate.

------------------------------------------------------------------------
     If your PLC ratio is:       Then your Profit Participation Rate is:
------------------------------------------------------------------------
1 or less......................  9%xPLC Ratio.
More than 1....................  9%+[3%x(PLC ratio-1)].
------------------------------------------------------------------------

    (g) Indexing the Profit Participation Rate. The Profit Participation 
Rate is indexed, up or down, to the yield-to-maturity on Treasury bonds 
with a remaining term of ten (10) years (the ``Treasury Rate''). You 
must perform the indexing procedures in this paragraph (g) unless the 
Treasury Rate was exactly 8 percent on every date that you issued 
Participating Securities.
    (1) Licensees that have issued Participating Securities on only one 
occasion.

[[Page 80]]

Determine the Treasury Rate for the date you issued your Participating 
Security. Adjust the Profit Participation Rate from paragraph (f) of 
this section by the percentage difference between the Treasury Rate and 
8 percent. For example, assume that you issued Participating Securities 
when the Treasury Rate was 10 percent. The percentage difference between 
10 percent and 8 percent is 25 percent. If you had a PLC ratio of 1, the 
Profit Participation Rate before indexing would be 9 percent. You would 
increase this rate by 25 percent, giving you a Profit Participation Rate 
of 11.25 percent.
    (2) Licensees that have issued Participating Securities on more than 
one occasion. Determine the Treasury Rate for each of the dates you 
issued Participating Securities.
    (i) Compute an average of all such Treasury Rates, weighted to 
reflect the dollar amount of each issuance (ignoring any redemptions) 
and the number of days from the date of each issuance to the date as of 
which you are computing the Profit Participation Rate.

    Example to paragraph (g)(2)(i) of this section. If you issued $10 
million of Participating Securities on the 60th day of Fiscal Year 1 
when the Treasury Rate was 8 percent, and another $15 million on the 
100th day of Fiscal Year 3 when the Treasury Rate was 10 percent, then 
the weighted average Treasury Rate computed as of the end of Fiscal Year 
3 would be 8.55 percent. [Days elapsed since first issuance of 
Participating Securities = 1,035; days elapsed since second issuance of 
Participating Securities = 265; weighted amount of first issuance = 
$10,000,000 x 1,035/1,035 = $10,000,000; weighted amount of second 
issuance = $15,000,000 x 265/1035 = $3,840,579; weighted average amount 
of Participating Securities issued = $10,000,000 + $3,840,579 = 
$13,840,579; weighted average Treasury Rate= {(.08 x $10,000,000) + (.10 
x $3,840,579){time}  / $13,840,579 = 8.55%]

    (ii) Adjust the Profit Participation Rate from paragraph (f) of this 
section by the percentage difference between the weighted average 
Treasury Rate and 8 percent. In the example given in paragraph (g)(2)(i) 
of this section, if the PLC ratio were equal to 2, the Profit 
Participation Rate for the fiscal year would be 12.83 percent. 
[{((.0855-.08) / .08) + 1{time}  x .12 x 100 = 12.83%]
    (h) Computing SBA's Profit Participation. If the Base from paragraph 
(c) of this section is greater than zero, you must compute SBA's Profit 
Participation as follows:
    (1) Multiply the Base from paragraph (c) of this section by the 
Profit Participation Rate from paragraph (g) of this section.
    (2) If your last Profit Participation computation was for an interim 
period during the same fiscal year and used a higher Profit 
Participation Rate than the Rate you just used in paragraph (h)(1) of 
this section, you must adjust the amount computed in paragraph (h)(1) of 
this section as follows:
    (i) Determine the difference between the Profit Participation Rate 
you just used in paragraph (h)(1) of this section and the Rate used in 
your previous computation;
    (ii) Multiply the difference by the Base from your last Profit 
Participation computation; and
    (iii) Add the result to the amount you computed in paragraph (h)(1) 
of this section.
    (3) Reduce the Profit Participation computed in paragraphs (h)(1) 
and (h)(2) of this section by any amounts of Profit Participation that 
you distributed or reserved for distribution to SBA, or its designated 
agent or Trustee, for any previous interim period(s) during the fiscal 
year. The result is SBA's Profit Participation (unless it is less than 
zero, in which case SBA's Profit Participation is zero).
    (i) Allocation of Profit Participation. Before any Distribution and 
in any case within 120 days following the end of your fiscal year, you 
must add the amount of Profit Participation computed under this 
Sec. 107.1530 to the Profit Participation Account. You must reserve 
funds equal to this amount for distribution to SBA, or its designated 
agent or Trustee; you may not reinvest these funds or use them for any 
other purpose.

[61 FR 3189, Jan. 31, 1996; 61 FR 41496, Aug. 9, 1996, as amended at 63 
FR 5871, Feb. 5, 1998]



Sec. 107.1540  Distributions by Licensee--Prioritized Payments and Adjustments.

    After you compute Prioritized Payments and Adjustments under 
Sec. 107.1520,

[[Page 81]]

you must distribute them in accordance with this Sec. 107.1540. You must 
notify SBA of any planned distribution under this section 10 business 
days before the distribution date, unless SBA permits otherwise.
    (a) Requirement to distribute Prioritized Payments and Adjustments. 
This paragraph (a) applies only if you satisfy the liquidity requirement 
in Sec. 107.1505. All Distributions under this paragraph (a) go to SBA 
or its designated agent or trustee.
    (1) You must distribute the balance in your Distribution Account 
from Sec. 107.1520 annually on the first or second Payment Date 
following your fiscal year end, and on any date when you are making any 
other Distribution.
    (2) You may distribute all or part of the balance in your 
Distribution Account on any Payment Date regardless of whether you are 
making any other Distribution on that date.
    (b) Additional requirement for Licensees with undistributed 
Prioritized Payments. This paragraph (b) applies if you do not 
distribute the full amount in your Distribution Account by the second 
Payment Date following the end of your fiscal year. At the end of each 
fiscal quarter, until you reduce the balance in your Distribution 
Account to zero, you must:
    (1) Do all the steps in Sec. 107.1520; and
    (2) Distribute the balance in your Distribution Account on the next 
Payment Date following the end of your fiscal quarter, provided you 
satisfy the liquidity requirement in Sec. 107.1505.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5871, Feb. 5, 1998]



Sec. 107.1550  Distributions by Licensee--permitted ``tax Distributions'' to private investors and SBA.

    If you have outstanding Participating Securities or Earmarked 
Assets, and you are a limited partnership, ``S Corporation,'' or 
equivalent pass-through entity for tax purposes, you may make ``tax 
Distributions'' to your investors in accordance with this Sec. 107.1550, 
whether or not they have an actual tax liability. SBA receives a share 
of any tax Distribution you make. This section tells you when you may 
make a ``tax Distribution'' and how to compute it. You must notify SBA 
of any planned distribution under this section 10 business days before 
the distribution date, unless SBA permits otherwise.
    (a) Conditions for making a tax Distribution. You may make a tax 
Distribution only if:
    (1) You have paid all your Prioritized Payments, Adjustments, and 
Charges, so that the balance in both your Distribution Account and your 
Accumulation Account is zero (see Sec. 107.1520).
    (2) You satisfy the liquidity requirement in Sec. 107.1505.
    (3) The tax Distribution does not exceed your Retained Earnings 
Available for Distribution.
    (4) The tax Distribution does not exceed the Maximum Tax Liability 
from paragraph (b) of this section.
    (b) How to compute the Maximum Tax Liability. (1) You may compute 
your Maximum Tax Liability for a full fiscal year or for any calendar 
quarter. Use the following formula:

M = (TOI x HRO) + (TCG x HRC)

where:

M = Maximum Tax Liability
TOI = Net ordinary income allocated to your partners or other owners for 
Federal income tax purposes for the fiscal year or calendar quarter for 
which the Distribution is being made, excluding Prioritized Payments 
allocated to SBA.
HRO = The highest combined marginal Federal and State income tax rate 
for corporations or individuals on ordinary income, determined in 
accordance with paragraphs (b)(2) through (b)(4) of this section.
TCG = Net capital gains allocated to your partners or other owners for 
Federal income tax purposes for the fiscal year or calendar quarter for 
which the Distribution is being made, excluding Prioritized Payments 
allocated to SBA.
HRC = The highest combined marginal Federal and State income tax rate 
for corporations or individuals on capital gains, determined in 
accordance with paragraphs (b)(2) through (b)(4) of this section.

    (2) You may compute the highest combined marginal Federal and State 
income tax rate on ordinary income and capital gains using either 
individual or corporate rates. However, you must apply the same type of 
rate, either individual or corporate, to both ordinary income and 
capital gains.
    (3) In determining the combined Federal and State income tax rate, 
you

[[Page 82]]

must assume that State income taxes are deductible from Federal income 
taxes. For example, if the Federal tax rate was 35 percent and the State 
tax rate was 5 percent, the combined tax rate would be [35% x (1-.05)] + 
5% = 38.25%.
    (4) For purposes of this paragraph (b), the ``State income tax'' is 
that of the State where your principal place of business is located, and 
does not include any local income taxes.
    (c) SBA's share of the tax Distribution. (1) SBA's percentage share 
of the tax Distribution is equal to the Profit Participation Rate 
computed under Sec. 107.1530.
    (2) SBA may direct you to pay its share of the tax Distribution to 
its designated agent or Trustee.
    (3) SBA will apply its share of the tax Distribution in the order 
set forth in Sec. 107.1560(g).
    (d) Paying a tax Distribution. You may make an annual tax 
Distribution on the first or second Payment Date following the end of 
your fiscal year. You may make a quarterly tax Distribution on the first 
Payment Date following the end of the calendar quarter for which the 
Distribution is being made. See also Sec. 107.1575(a).
    (e) Excess tax Distributions. (1) As of the end of your fiscal year, 
you must determine whether you made any excess tax Distributions for the 
year in accordance with paragraph (e)(2) of this section. Any tax 
Distributions that you make for a subsequent period must be reduced by 
the excess amount distributed.
    (2) Determine your excess tax Distributions by adding together all 
your quarterly tax Distributions for the year (ignoring any required 
reductions for excess tax Distributions made in prior years), and 
subtracting the maximum tax Distribution that you would have been 
permitted to make based upon a single computation performed for the 
entire fiscal year. The result, if greater than zero, is your excess tax 
Distribution for the year.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5871, Feb. 5, 1998; 64 
FR 70996, Dec. 20, 1999]



Sec. 107.1560  Distributions by Licensee--required Distributions to private investors and SBA.

    You must make Distributions under this Sec. 107.1560 if you have 
outstanding Participating Securities or Earmarked Assets and you satisfy 
the conditions in paragraph (a) of this section. Distributions under 
this section are determined as of the end of each fiscal year. You must 
notify SBA of any planned distribution under this section 10 business 
days before the distribution date, unless SBA permits otherwise.
    (a) Conditions for making Distributions. Distributions under this 
section are subject to the following conditions:
    (1) You must have paid all Prioritized Payments, Adjustments and 
Charges, so that the balance in both your Distribution Account and your 
Accumulation Account is zero (see Secs. 107.1520 and 107.1540).
    (2) You must have made any permitted tax Distribution that you 
choose to make under Sec. 107.1550.
    (3) You must satisfy the liquidity requirement in Sec. 107.1505.
    (4) The amount you distribute under this section must not exceed 
your remaining Retained Earnings Available for Distribution.
    (b) Total amount you must distribute. Unless SBA permits otherwise, 
the total amount you must distribute equals the result (if greater than 
zero) of the following computation:
    (1) Your Retained Earnings Available for Distribution as of the end 
of your fiscal year, after giving effect to any Distribution under 
Secs. 107.1540 and 107.1550; minus
    (2) All previous Distributions under this section and 
Sec. 107.1570(a) that were applied as redemptions or repayments of 
Leverage; plus
    (3) All previous Distributions under Sec. 107.1570(b) that reduced 
your Retained Earnings Available for Distribution.
    (c) When you must make Distributions. You must make the required 
Distributions on either the first or second Payment Date following the 
end of your fiscal year.
    (d) Effect of Distributions on Retained Earnings Available for 
Distribution. Distributions under this Sec. 107.1560 have the following 
effect on your Retained Earnings Available for Distribution:

[[Page 83]]

    (1) All Distributions to private investors reduce Retained Earnings 
Available for Distribution.
    (2) Distributions to SBA, or its designated agent or Trustee, reduce 
Retained Earnings Available for Distribution if they are applied as 
payments of Profit Participation or distributions on Preferred 
Securities (see paragraph (g) of this section).
    (3) Distributions to SBA, or its designated agent or Trustee, do not 
reduce Retained Earnings Available for Distribution if they are applied 
as a repayment or redemption of Leverage (see paragraph (g) of this 
section).
    (e) SBA's share of the total Distribution. Use the following table 
to determine the percentage share of the total Distribution (from 
paragraph (b) of this section) that goes to SBA (or its designated agent 
or Trustee):

              SBA's Percentage Share of Total Distribution
------------------------------------------------------------------------
 If your ratio of Leverage to Leverageable   Then SBA's percentage share
  Capital as of the fiscal period end is:      of the Distribution is:
------------------------------------------------------------------------
Over 200%.................................  [Leverage / (Leverage +
                                             Leverageable Capital)] x
                                             100.
Over 100% but not over 200%...............  50%.
100% or less..............................  Profit Participation Rate
                                             from Sec.  107.1530.
------------------------------------------------------------------------

    (f) Exceptions to the Distribution requirement. (1) With SBA's prior 
written approval, you may withhold from distribution reasonable reserves 
necessary to protect your investments or relative position in Loans and 
Investments and to meet contingent liabilities.
    (i) If you submit a written request for SBA approval, you may 
consider it approved unless SBA notifies you otherwise within 30 days 
from receipt.
    (ii) Reserves that you withhold from distribution may not be used to 
make investments in additional portfolio companies.
    (iii) Withholding of reserves under this paragraph (f)(1) is not a 
``payment failure'' in violation of Sec. 107.1820(e)(6).
    (2) SBA may restrict Distributions under this Sec. 107.1560 if SBA 
determines that the value of your assets is materially overstated. SBA 
must give you notice of such a determination in advance of your proposed 
Distribution.
    (g) How SBA will apply your Distributions. Your Distributions to SBA 
(or its designated agent or Trustee) under this Sec. 107.1560 will be 
applied in the following order:
    (1) First, to Profit Participation;
    (2) Second, to the extent there remain any Retained Earnings 
Available for Distribution, to distributions on Preferred Securities;
    (3) Third, as a redemption of Participating Securities in order of 
issue;
    (4) Fourth, as a redemption of Preferred Securities; and
    (5) Fifth, as the repayment of principal of any outstanding 
Debentures, with such repayment to be made into escrow on terms and 
conditions SBA determines.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998]



Sec. 107.1570  Distributions by Licensee--optional Distribution to private investors and SBA.

    If you have outstanding Participating Securities or Earmarked 
Assets, you may make two types of optional Distributions under this 
Sec. 107.1570: quarterly Distributions determined the same way as the 
required annual Distributions in Sec. 107.1560, and Distributions 
allocated between SBA and your private investors in proportion to the 
capital contributions of each. You must notify SBA of any planned 
distribution under this section 10 business days before the distribution 
date, unless SBA permits otherwise.
    (a) Quarterly Distributions subject to conditions in Sec. 107.1560. 
(1) You may make Distributions under this paragraph (a) as of the end of 
any fiscal quarter, giving SBA (or its designated agent or Trustee) a 
percentage share determined under Sec. 107.1560(e).
    (2) Such Distributions are subject to all the provisions in 
Sec. 107.1560 (a)(1), (a)(3), (a)(4), (d), (f)(2), and (g).
    (3) You may make such Distributions only on the next Payment Date 
following the end of your fiscal quarter.
    (4) The total amount of such Distributions may not exceed the result 
of the following computation:
    (i) Your Retained Earnings Available for Distribution as of the end 
of your fiscal quarter; minus

[[Page 84]]

    (ii) All previous Distributions under this paragraph (a) or 
Sec. 107.1560 that were applied as redemptions or repayments of 
Leverage; plus
    (iii) All previous Distributions under paragraph (b) of this section 
that reduced your Retained Earnings Available for Distribution.
    (b) Other optional Distributions. On any Payment Date, you may make 
additional Distributions to your private investors and to SBA (or its 
designated agent or Trustee) under this paragraph (b).
    (1) Conditions for making a Distribution. You may make a 
Distribution under this paragraph (b) only if:
    (i) You have distributed all Earned Prioritized Payments, earned 
Adjustments, and earned Charges, so that the balance in your 
Distribution Account is zero (see Sec. 107.1520).
    (ii) You have distributed all Profit Participation computed under 
Sec. 107.1530 which you are required to distribute under Sec. 107.1560 
or permitted to distribute under paragraph (a) of this section, as 
appropriate, and you have made all required Distributions under 
Sec. 107.1560.
    (iii) You satisfy the liquidity requirement in Sec. 107.1505 or 
obtain SBA's prior written approval of the Distribution.
    (iv) You do not have a condition of Capital Impairment.
    (v) The Distribution does not reduce your Regulatory Capital 
(excluding commitments from Institutional Investors) below the minimum 
required under Sec. 107.210, unless SBA approves the reduction as part 
of a plan of liquidation.
    (vi) The Distribution does not cause you to have excess Leverage 
contrary to section 303 of the Act.
    (2) SBA's share of Distribution. (i) If your Capital Impairment 
Percentage under Sec. 107.1840 is zero, SBA's percentage share of any 
Distribution under this paragraph (b) equals:

[Leverage /(Leverage + Leverageable Capital)] x 100


In this formula, use Leverage and Leverageable Capital as of the date of 
the Distribution, after giving effect to any Distribution under 
Sec. 107.1560 and paragraph (a) of this section.
    (ii) If your Capital Impairment Percentage under Sec. 107.1840 is 
greater than zero, you must modify the formula in paragraph (b)(2)(i) of 
this section by replacing Leverageable Capital with:

Leverageable Capital x (100% - CIP)

where ``CIP'' is your Capital Impairment Percentage or 100 percent, 
whichever is less.

    (3) How SBA will apply Distributions. Any amounts you distribute to 
SBA, or its designated agent or Trustee, under this paragraph (b) will 
be applied as a repayment or redemption of Leverage in the order set 
forth in Sec. 107.1560(g)(3) through (g)(5).
    (4) Effect of Distributions on Retained Earnings Available for 
Distribution. Any amounts you distribute to non-SBA investors under this 
paragraph (b) must reduce your Retained Earnings Available for 
Distribution to zero before reducing your Private Capital.
    (5) Permitted exception to Sec. 107.585. You may make any 
Distribution permitted by this paragraph (b), even if the result is a 
reduction in your Regulatory Capital that would otherwise be prohibited 
under Sec. 107.585.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998]



Sec. 107.1575  Distributions on other than Payment Dates.

    (a) Permitted Distributions on other than Payment Dates. 
Notwithstanding any provisions to the contrary in Secs. 107.1540 through 
107.1570, you may make Distributions on dates other than Payment Dates 
as follows:
    (1) Required annual Distributions under Sec. 107.1540(a)(1), annual 
Distributions under Sec. 107.1550, and any Distributions under 
Sec. 107.1560 must be made no later than the second Payment Date 
following the end of your fiscal year.
    (2) Required Distributions under Sec. 107.1540(b) must be made no 
later than the first Payment Date following the end of the applicable 
fiscal quarter;
    (3) Optional Distributions under Sec. 107.1540(a)(2) and 
Sec. 107.1570 may be made on any date.
    (4) Quarterly Distributions under Sec. 107.1550 must be made no 
earlier than the last day of the calendar quarter for which the 
Distribution is being made and no later than the first Payment

[[Page 85]]

Date following the end of such calendar quarter.
    (b) Conditions for making Distribution. All Distributions under this 
section are subject to the following conditions:
    (1) You must obtain SBA's written approval before the distribution 
date;
    (2) The ending date of the period for which you compute your 
Earmarked Profits, Prioritized Payments, Adjustments, Charges, Profit 
Participation, Retained Earnings Available for Distribution, liquidity 
ratio, Capital Impairment, and any other applicable computations 
required under Secs. 107.1500 through 107.1570, must be:
    (i) The distribution date, or
    (ii) If your Distribution includes annual Distributions under 
Secs. 107.1540(a)(1), 107.1550 and/or 107.1560, your most recent fiscal 
year end;
    (3) If your Distribution includes an amount which SBA will apply as 
a redemption of Participating Securities, the effective date of such 
redemption, for all purposes including future computations of 
Prioritized Payments, will be the next Payment Date following the 
distribution date.

[63 FR 5872, Feb. 5, 1998, as amended at 64 FR 70997, Dec. 20, 1999]



Sec. 107.1580  Special rules for In-Kind Distributions by Licensees.

    (a) In-Kind Distributions while Licensee has outstanding 
Participating Securities. A Distribution under Secs. 107.1540, 107.1560 
or 107.1570 may consist of securities (an ``In-Kind Distribution''). 
Such a Distribution must satisfy the conditions in this paragraph (a).
    (1) You may distribute only Distributable Securities.
    (2) You must distribute each security pro-rata to all investors and 
to SBA or its designated agent or Trustee, based on the amounts that 
each party would receive if the Distribution were in cash.
    (3) You must impute a gain (loss) on each security being distributed 
as if it were being sold, using the value of the security as of the 
declaration date of the Distribution (if you are a Corporate Licensee) 
or the distribution date (if you are a Partnership Licensee).
    (4) You must deposit SBA's share of securities being distributed 
with a disposition agent designated by SBA. As an alternative, if you 
agree, SBA may direct you to dispose of its shares. In this case, you 
must promptly remit the proceeds to SBA.
    (b) In-Kind Distributions after Licensee has redeemed all 
Participating Securities. This paragraph (b) applies from the time you 
redeem all your Participating Securities until you dispose of all your 
Earmarked Assets.
    (1) You may make an In-Kind Distribution of an Earmarked Asset only 
if you pay SBA the lower of:
    (i) An amount equal to the Unrealized Appreciation on the asset; or
    (ii) The full amount of your Accumulated Prioritized Payments and 
unpaid Adjustments.
    (2) You must obtain SBA's prior written approval of any In-Kind 
Distribution of Earmarked Assets that are not Distributable Securities, 
specifically including approval of the valuation of the assets.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5872, Feb. 5, 1998; 64 
FR 70997, Dec. 20, 1999]



Sec. 107.1585  Exchange of Debentures for Participating Securities.

    You may, in SBA's discretion, retire a Debenture through the 
issuance of Participating Securities. To do so, you must:
    (a) Obtain SBA's approval to issue Participating Securities;
    (b) Pay all unpaid accrued interest on the Debenture, plus any 
applicable prepayment penalties, fees, and other charges;
    (c) Have outstanding Equity Capital Investments (at cost) equal to 
the amount of the Debenture being refinanced; and
    (d) Classify all your existing Loans and Investments as Earmarked 
Assets.

[63 FR 5869, Feb. 5, 1998]



Sec. 107.1590  Special rules for companies licensed on or before March 31, 1993.

    This section applies to companies licensed on or before March 31, 
1993 that apply to issue Participating Securities.
    (a) Election to exclude pre-existing portfolio. You may choose to 
exclude all (but not a portion) of your Loans and Investments as of 
March 31, 1993, from classification as Earmarked Assets if:

[[Page 86]]

    (1) The proceeds of your first issuance of Participating Securities 
are not used to refinance outstanding Debentures (see Sec. 107.1585(a)). 
SBA will consider payment or prepayment of any outstanding Debenture to 
be a refinancing unless you demonstrate to SBA's satisfaction that you 
can pay the Debenture principal without relying on the proceeds of the 
Participating Securities.
    (2) SBA, in its sole discretion, approves the exclusion.
    (b) Treatment of pre-existing portfolio if not excluded. If you do 
not choose to exclude your Loans and Investments as of March 31, 1993, 
they will be Earmarked Assets for all purposes.
    (c) Requirements for Licensee's first issuance of Participating 
Securities. When you apply for your first issuance of Participating 
Securities, you must comply with the following:
    (1) For each of your Loans and Investments, you must submit:
    (i) The most recent annual report (or fiscal year-end financial 
statements) and the most recent interim financial statements of the 
Small Business; and
    (ii) Your valuation reports on the Small Business, prepared as of 
the end of each of your last three fiscal years. If you have applied for 
Participating Securities on the basis of interim financial statements, 
you must also submit a valuation report as of your interim financial 
statement date.
    (2) If you have negative Undistributed Net Realized Earnings and/or 
a net Unrealized Loss on Securities Held, SBA may require you to undergo 
a quasi-reorganization in accordance with generally accepted accounting 
principles.
    (3) If your financial statements accompanying the Participating 
Securities application are for an interim period, you must have your 
SBA-approved independent public accountant perform a limited-scope audit 
of the statements. For purposes of this paragraph (d)(3), ``limited 
scope audit'' means auditing procedures sufficient to enable the 
independent public accountant to express an opinion on the Statement of 
Financial Position and the accompanying Schedule of Loans and 
Investments.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998]

 Funding Leverage by Use of SBA-Guaranteed Trust Certificates (``TCs'')



Sec. 107.1600  SBA authority to issue and guarantee Trust Certificates.

    (a) Authorization. Sections 319(a) and (b) of the Act authorize SBA 
or its CRA to issue TCs, and SBA to guarantee the timely payment of the 
principal and interest thereon. Any guarantee by SBA of such TC is 
limited to the principal and interest due on the Debentures or the 
Redemption Price of and Prioritized Payments on Participating Securities 
in any Trust or Pool backing such TC. The full faith and credit of the 
United States is pledged to the payment of all amounts due under the 
guarantee of any TC.
    (b) Periodic exercise of authority. SBA will issue guarantees of 
Debentures and Participating Securities under section 303 and of TCs 
under section 319 of the Act at six month intervals, or at shorter 
intervals, taking into account the amount and number of such guarantees 
or TCs.
    (c) SBA authority to arrange public or private fundings of Leverage. 
SBA in its discretion may arrange for public or private financing under 
its guarantee authority. Such financing arranged by SBA may be 
accomplished by the sale of individual Debentures or Participating 
Securities, aggregations of Debentures or Participating Securities, or 
Pools or Trusts of Debentures or Participating Securities.
    (d) Pass-through provisions. TCs shall provide for a pass-through to 
their holders of all amounts of principal and interest paid on the 
Debentures, or the Redemption Price of and Prioritized Payments on the 
Participating Securities, in the Pool or Trust against which they are 
issued.
    (e) Formation of a Pool or Trust holding Leverage Securities. SBA 
shall approve the formation of each Pool or Trust. SBA may, in its 
discretion, establish the size of the Pools and their composition, the 
interest rate on the TCs issued against Trusts or Pools,

[[Page 87]]

fees, discounts, premiums and other charges made in connection with the 
Pools, Trusts, and TCs, and any other characteristics of a Pool or Trust 
it deems appropriate.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998]



Sec. 107.1610  Effect of prepayment or early redemption of Leverage on a 
Trust Certificate.

    (a) The rights, if any, of a Licensee to prepay any Debenture or 
make early redemption of any Participating Security are established by 
the terms of such securities, and no such right is created or denied by 
the regulations in this part.
    (b) SBA's rights to purchase or prepay any Debenture without premium 
are established by the terms of the Guaranty Agreement relating to the 
Debenture. SBA's rights to redeem, at any time, any Participating 
Security without premium are established by the terms of the Guaranty 
Agreement relating to the Participating Security.
    (c) Any prepayment of a Debenture or early redemption of a 
Participating Security pursuant to the terms of the Guaranty Agreement 
relating to such securities, shall reduce the SBA guarantee of timely 
payment of principal and interest on a TC in proportion to the amount of 
principal or Redemption Price that such prepaid Debenture or redeemed 
Participating Security represents in the Trust or Pool backing such TC.
    (d) SBA shall be discharged from its guarantee obligation to the 
holder or holders of any TC, or any successor or transferee of such 
holder, to the extent of any such prepayment, whether or not such 
successor or transferee shall have notice of any such prepayment.
    (e) Interest on prepaid Debentures and Prioritized Payments on 
Participating Securities shall accrue only through the date of such 
voluntary prepayment or SBA payment, as the case may be.
    (f) In the event that all Debentures or Participating Securities 
constituting a Trust or Pool are prepaid, the TCs backed by such Trust 
or Pool shall be redeemed by payment of the unpaid principal and 
interest on the TCs; Provided, however, that in the case of the 
prepayment of a Debenture pursuant to the provisions of the Guaranty 
Agreement relating to the Debenture, the CRA shall pass through pro rata 
to the holders of the TCs any such prepayments including any prepayment 
penalty paid by the obligor Licensee pursuant to the terms of the 
Debenture.



Sec. 107.1620  Functions of agents, including Central Registration Agent, Selling Agent and Fiscal Agent.

    (a) Agents. SBA will appoint or cause to be appointed agent(s) to 
perform functions necessary to market and service Debentures, 
Participating Securities, or TCs pursuant to this part.
    (1) Selling Agent. As a condition of guaranteeing a Debenture or 
Participating Security, SBA shall cause each Licensee to appoint a 
Selling Agent to perform functions which include, but are not limited 
to:
    (i) Selecting qualified entities to become pool or Trust assemblers 
(``Poolers'').
    (ii) Receiving guaranteed Debentures and Participating Securities as 
well as negotiating the terms and conditions of periodic offerings of 
Debentures and/or TCs with Poolers on behalf of Licensees.
    (iii) Directing and coordinating periodic sales of Debentures and 
Participating Securities and/or TCs.
    (iv) Arranging for the production of the Offering Circular, 
certificates, and such other documents as may be required from time to 
time.
    (2) Fiscal Agent. SBA shall appoint a Fiscal Agent to:
    (i) Establish performance criteria for Poolers.
    (ii) Monitor and evaluate the financial markets to determine those 
factors that will minimize or reduce the cost of funding Debentures or 
Participating Securities.
    (iii) Monitor the performance of the Selling Agent, Poolers, CRA, 
and the Trustee.
    (iv) Perform such other functions as SBA, from time to time, may 
prescribe.
    (3) Central Registration Agent. Pursuant to a contract entered into 
with SBA, the CRA, as SBA's agent, will do the following with respect to 
the Pools or Trust Certificates for the Debentures or Participating 
Securities:

[[Page 88]]

    (i) Form an SBA-approved Pool or Trust;
    (ii) Issue the TCs in the form prescribed by SBA;
    (iii) Transfer the TCs upon the sale of original issue TCs in any 
secondary market transaction;
    (iv) Receive payments from Licensees;
    (v) Make periodic payments as scheduled or required by the terms of 
the TCs, and pay all amounts required to be paid upon prepayment of 
Debentures or redemption of Participating Securities;
    (vi) Hold, safeguard, and release all Debentures and Participating 
Securities constituting Trusts or Pools upon instructions from SBA;
    (vii) Remain custodian of such other documentation as SBA shall 
direct by written instructions;
    (viii) Provide for the registration of all pooled Debentures and 
Participating Securities, all Pools and Trusts, and all TCs;
    (ix) Perform such other functions as SBA may deem necessary to 
implement the provisions of this section.
    (b) Functions. The function of locating purchasers, and negotiating 
and closing the sale of Debentures, Participating Securities and TCs, 
may be performed either by SBA or an agent appointed by SBA. Nothing in 
the regulations in this part shall be interpreted to prevent the CRA 
from acting as SBA's agent for this purpose.



Sec. 107.1630  SBA regulation of Brokers and Dealers and disclosure to purchasers of Leverage or Trust Certificates.

    (a) Disclosure to purchasers. Prior to any sale of a Debenture, 
Participating Security, or TC, SBA shall require the seller, or the 
broker or dealer as agent for the seller, to disclose to the purchaser, 
in a form prescribed or approved by SBA, specified information on the 
terms, conditions, and yield of such instrument.
    (b) Brokers and Dealers. Each broker, dealer, and Pool or Trust 
assembler approved by SBA pursuant to these regulations shall either be 
regulated by a Federal financial regulatory agency, or be a member of 
the National Association of Securities Dealers (NASD), and shall be in 
good standing in respect to compliance with the financial, ethical, and 
reporting requirements of such body. They also shall be in good standing 
with SBA as determined by the SBA Associate Administrator for Investment 
(see paragraph (d) of this section) and shall provide a fidelity bond or 
insurance in such amount as SBA may require.
    (c) Suspension and/or termination of Broker or Dealer. SBA shall 
exclude from the sale and all other dealings in Debentures, 
Participating Securities or TCs any broker or dealer:
    (1) If such broker's or dealer's authority to engage in the 
securities business has been revoked or suspended by a supervisory 
agency. When such authority has been suspended, such broker or dealer 
will be suspended by SBA for the duration of such suspension by the 
supervisory agency.
    (2) If such broker or dealer has been indicted or otherwise formally 
charged with a misdemeanor or felony bearing on its fitness, such broker 
or dealer may be suspended while the charge is pending. Upon conviction, 
participation may be terminated.
    (3) If such broker or dealer has suffered an adverse final civil 
judgment, holding that such broker or dealer has committed a breach of 
trust or violation of law or regulation protecting the integrity of 
business transactions or relationships, participation in the market for 
Debentures, Participating Securities or TCs may be terminated.
    (4) If such broker or dealer has failed to make full disclosure of 
the information required by SBA in paragraph (a) of this section, such 
broker's or dealer's participation in the market for Debentures, 
Participating Securities or TCs may be terminated.
    (d) Termination/suspension proceedings. A broker's or dealer's 
participation in the market for Debentures, Participating Securities or 
TCs will be conducted in accordance with part 134 of this chapter. SBA 
may, for any of the reasons stated in paragraphs (b)(1) through (b)(4) 
of this section, suspend the privilege of any broker or dealer to 
participate in this market. SBA shall give written notice at least ten 
(10) business days prior to the effective date of such suspension. Such 
notice shall inform the broker or dealer of the

[[Page 89]]

opportunity for a hearing pursuant to part 134 of this chapter.



Sec. 107.1640  SBA access to records of the CRA, Brokers, Dealers and Pool 
or Trust assemblers.

    The CRA and any broker, dealer and Pool or Trust assembler operating 
under the regulations in this part shall make all books, records and 
related materials associated with Debentures, Participating Securities 
and TCs available to SBA for review and copying purposes. Such access 
shall be at such party's primary place of business during normal 
business hours.

                              Miscellaneous



Sec. 107.1700  Transfer by SBA of its interest in Licensee's Leverage security.

    Upon such conditions and for such consideration as it deems 
reasonable, SBA may sell, assign, transfer, or otherwise dispose of any 
Preferred Security, Debenture, Participating Security, or other security 
held by or on behalf of SBA in connection with Leverage. Upon notice by 
SBA, Licensee will make all payments of principal, dividends, interest, 
Prioritized Payments, and redemptions as shall be directed by SBA. 
Licensee will be liable for all damage or loss which SBA may sustain by 
reason of such disposal, up to the amount of Licensee's liability under 
such security, plus court costs and reasonable attorney's fees incurred 
by SBA.



Sec. 107.1710  SBA authority to collect or compromise its claims.

    SBA may, upon such conditions and for such consideration as it deems 
reasonable, collect or compromise all claims relating to Preferred or 
Participating Securities or obligations held or guaranteed by SBA, and 
all legal or equitable rights accruing to SBA.



Sec. 107.1720  Characteristics of SBA's guarantee.

    If SBA agrees to guarantee a Licensee's Debentures or Participating 
Securities, such guarantee will be unconditional, irrespective of the 
validity, regularity or enforceability of the Debentures or 
Participating Securities or any other circumstances which might 
constitute a legal or equitable discharge or defense of a guarantor. 
Pursuant to its guarantee, SBA will make timely payments of principal 
and interest on the Debentures or the Redemption Price of and 
Prioritized Payments on the Participating Securities.

[63 FR 5873, Feb. 5, 1998]



       Subpart J--Licensee's Noncompliance With Terms of Leverage



Sec. 107.1800  Licensee's agreement to terms and conditions in Secs. 107.1810 and 107.1820.

    Any Licensee that violates the terms and conditions of its Leverage 
is subject to SBA remedies. The terms, conditions and remedies in 
Sec. 107.1810 apply to outstanding Debentures issued after April 25, 
1994. The terms, conditions and remedies in Sec. 107.1820 apply to 
outstanding Preferred Securities and Participating Securities issued 
after April 25, 1994, or if you have Earmarked Assets in your portfolio.



Sec. 107.1810  Events of default and SBA's remedies for Licensee's noncompliance with terms of Debentures.

    (a) Applicability of this section. This Sec. 107.1810 applies to 
Debentures issued after April 25, 1994. By issuing such Debentures, you 
automatically agree to the terms, conditions and remedies in this 
section, as in effect at the time of issuance and as if fully set forth 
in the Debentures. Debentures issued before April 25, 1994 continue to 
be governed by the remedies in effect at the time of their issuance.
    (b) Automatic events of default. The occurrence of one or more of 
the events in this paragraph (b) causes the remedies in paragraph (c) of 
this section to take effect immediately.
    (1) Insolvency. You become equitably or legally insolvent.
    (2) Voluntary assignment. You make a voluntary assignment for the 
benefit of creditors without SBA's prior written approval.
    (3) Bankruptcy. You file a petition to begin any bankruptcy or 
reorganization proceeding, receivership, dissolution or other similar 
creditors' rights proceeding, or such action is initiated against you 
and is not dismissed within 60 days.

[[Page 90]]

    (c) SBA remedies for automatic events of default. Upon the 
occurrence of one or more of the events in paragraph (b) of this 
section:
    (1) Without notice, presentation or demand, the entire indebtedness 
evidenced by your Debentures, including accrued interest, and any other 
amounts owed SBA with respect to your Debentures, is immediately due and 
payable; and
    (2) You automatically consent to the appointment of SBA or its 
designee as your receiver under section 311(c) of the Act.
    (d) Events of default with notice. For any occurrence (as determined 
by SBA) of one or more of the events in this paragraph (d), SBA may 
avail itself of one or more of the remedies in paragraph (e) of this 
section.
    (1) Fraud. You commit a fraudulent act which causes detriment to 
SBA's position as a creditor or guarantor.
    (2) Fraudulent transfers. You make any transfer or incur any 
obligation that is fraudulent under the terms of 11 U.S.C. 548.
    (3) Willful conflicts of interest. You willfully violate 
Sec. 107.730.
    (4) Willful non-compliance. You willfully violate one or more of the 
substantive provisions of the Act, specifically including but not 
limited to the provisions summarized in section 310(c) of the Act, or 
any substantive regulation promulgated under the Act.
    (5) Repeated Events of Default. At any time after being notified by 
SBA of the occurrence of an event of default under paragraph (f) of this 
section, you engage in similar behavior which results in another 
occurrence of the same event of default.
    (6) Transfer of Control. You violate Sec. 107.475 and/or willfully 
violate Sec. 107.410, and as a result of such violation you undergo a 
transfer of Control.
    (7) Non-cooperation under Sec. 107.1810(h). You fail to take 
appropriate steps, satisfactory to SBA, to accomplish any action SBA may 
have required under paragraph (h) of this section.
    (8) Non-notification of Events of Default. You fail to notify SBA as 
soon as you know or reasonably should have known that any event of 
default exists under this section.
    (9) Non-notification of defaults to others. You fail to notify SBA 
in writing within ten days from the date of a declaration of an event of 
default or nonperformance under any note, debenture or indebtedness of 
yours, issued to or held by anyone other than SBA.
    (e) SBA remedies for events of default with notice. Upon written 
notice to you of the occurrence (as determined by SBA) of one or more of 
the events in paragraph (d) of this section:
    (1) SBA may declare the entire indebtedness evidenced by your 
Debentures, including accrued interest, and/or any other amounts owed 
SBA with respect to your Debentures, immediately due and payable; and
    (2) SBA may avail itself of any remedy available under the Act, 
specifically including institution of proceedings for the appointment of 
SBA or its designee as your receiver under section 311(c) of the Act.
    (f) Events of default with opportunity to cure. For any occurrence 
(as determined by SBA) of one or more of the events in this paragraph 
(f), SBA may avail itself of one or more of the remedies in paragraph 
(g) of this section.
    (1) Excessive Management Expenses. Without the prior written consent 
of SBA, you incur Management Expenses in excess of those permitted under 
Sec. 107.520.
    (2) Improper Distributions. You make any Distribution to your 
shareholders or partners, except with the prior written consent of SBA, 
other than:
    (i) Distributions permitted under Sec. 107.585;
    (ii) Payments from Retained Earnings Available for Distribution 
based on either the shareholders' pro-rata interests or the provisions 
for profit distributions in your partnership agreement, as appropriate; 
and
    (iii) Distributions by Participating Securities issuers as permitted 
under Secs. 107.1540 through 107.1580.
    (3) Failure to make payment. Unless otherwise approved by SBA, you 
fail to make timely payment of any amount due under any security or 
obligation of yours that is issued to, held or guaranteed by SBA.
    (4) Failure to maintain Regulatory Capital. You fail to maintain the 
minimum Regulatory Capital required under

[[Page 91]]

these regulations or, without the prior written consent of SBA, you 
reduce your Regulatory Capital, except as permitted by Secs. 107.585 and 
107.1560 through 107.1580.
    (5) Capital Impairment. You have a condition of Capital Impairment 
as determined under Sec. 107.1830.
    (6) Cross-default. An obligation of yours that is greater than 
$100,000 becomes due or payable (with or without notice) before its 
stated maturity date, for any reason including your failure to pay any 
amount when due. This provision does not apply if you pay the amount due 
within any applicable grace period or contest the payment of the 
obligation in good faith by appropriate proceedings.
    (7) Nonperformance. You violate or fail to perform one or more of 
the terms and conditions of any security or obligation of yours that is 
issued to, held or guaranteed by SBA, or of any agreement with or 
conditions imposed by SBA in its administration of the Act and the 
regulations promulgated under the Act.
    (8) Noncompliance. Except as otherwise provided in paragraph (d)(5) 
of this section, SBA determines that you have violated one or more of 
the substantive provisions of the Act, specifically including but not 
limited to the provisions summarized in section 310(c) of the Act, or 
any substantive regulation promulgated under the Act.
    (9) Failure to maintain investment ratio. You fail to maintain the 
investment ratio for Leverage in excess of 300 percent of Leverageable 
Capital (see Secs. 107.1150(b)(2) and 107.1160(c)), if applicable to 
you, as of the end of each fiscal year. In determining whether you have 
maintained the ratio, SBA will disregard any prepayment, sale, or 
disposition of Venture Capital Financing, any increase in Leverageable 
Capital, and any receipt of additional Leverage, within 120 days prior 
to the end of your fiscal year.
    (10) Failure to maintain diversity. You fail to maintain diversity 
between management and ownership as required by Sec. 107.150, if 
applicable to you.
    (g) SBA remedies for events of default with opportunity to cure. (1) 
Upon written notice to you of the occurrence (as determined by SBA) of 
one or more of the events of default in paragraph (f) of this section, 
and subject to the conditions in paragraph (g)(2) of this section:
    (i) SBA may declare the entire indebtedness evidenced by your 
Debentures, including accrued interest, and/or any other amounts owed 
SBA with respect to your Debentures, immediately due and payable; and
    (ii) SBA may avail itself of any remedy available under the Act, 
specifically including institution of proceedings for the appointment of 
SBA or its designee as your receiver under section 311(c) of the Act.
    (2) SBA may invoke the remedies in paragraph (g)(1) of this section 
only if:
    (i) It has given you at least 15 days to cure the default(s); and
    (ii) You fail to cure the default(s) to SBA's satisfaction within 
the allotted time.
    (h) Repeated non-substantive violations. If you repeatedly fail to 
comply with one or more of the non-substantive provisions of the Act or 
any non-substantive regulation promulgated under the Act, SBA, after 
written notification to you and until you cure such condition to SBA's 
satisfaction, may deny you additional Leverage and/or require you to 
take such actions as SBA may determine to be appropriate under the 
circumstances.
    (i) Consent to removal of officers, directors, or general partners 
and/or appointment of receiver. The Articles of any Licensee issuing 
Debentures after April 25, 1994 must include the following provisions as 
a condition to the purchase or guarantee by SBA of such Leverage. Upon 
the occurrence of any of the events specified in paragraphs (d)(1) 
through (d)(6) or (f)(1) through (f)(3) of this section as determined by 
SBA, SBA shall have the right, and your consent to SBA's exercise of 
such right:
    (1) With respect to a Corporate Licensee, upon written notice, to 
require you to replace, with individuals approved by SBA, one or more of 
your officers and/or such number of directors of your board of directors 
as is sufficient to constitute a majority of such board; or
    (2) With respect to a Partnership Licensee, upon written notice, to 
require you to remove the person(s) responsible

[[Page 92]]

for such occurrence and/or to remove the general partner of Licensee, 
which general partner shall then be replaced in accordance with 
Licensee's Articles by a new general partner approved by SBA; and/or
    (3) With respect to either a Corporate or Partnership Licensee, to 
obtain the appointment of SBA or its designee as your receiver under 
section 311(c) of the Act for the purpose of continuing your operations. 
The appointment of a receiver to liquidate a Licensee is not within such 
consent, but is governed instead by the relevant provisions of the Act.



Sec. 107.1820  Conditions affecting issuers of Preferred Securities and/or Participating Securities.

    (a) Applicability of this section. This section applies if you have 
Preferred Securities issued after April 25, 1994, or if you issue 
Participating Securities or have Earmarked Assets in your portfolio. 
Your Articles must include the provisions of this Sec. 107.1820 as a 
condition to SBA's purchase of Preferred Securities or guarantee of 
Participating Securities and for as long as you own Earmarked Assets. 
Preferred Securities issued before April 25, 1994 continue to be 
governed by the remedies in effect at the time of their issuance.
    (b) Removal Conditions. Upon the occurrence (as determined by SBA) 
of any of the following conditions (``Removal Conditions''), SBA may 
avail itself of one or more of the remedies in paragraph (d) of this 
section:
    (1) Insolvency or extreme Capital Impairment. You become equitably 
or legally insolvent, or have a Capital Impairment Percentage of 100 
percent or more (``extreme Capital Impairment'') and have not cured such 
Capital Impairment within the time limits set by SBA in writing. In this 
regard:
    (i) You are not considered to have a condition of extreme Capital 
Impairment during the first eight years following your first issuance of 
Participating Securities.
    (ii) This paragraph (b)(1) does not give you an additional 
opportunity to cure if you have already had an opportunity to cure your 
Capital Impairment under paragraph (e)(3) of this section.
    (2) Voluntary assignment. You make a voluntary assignment for the 
benefit of creditors.
    (3) Bankruptcy. You begin any bankruptcy or reorganization 
proceeding, receivership, dissolution or other similar creditors' rights 
proceeding, or such action is initiated against you and is not dismissed 
within 60 days.
    (4) Transfer of Control. You violate Sec. 107.475 and/or willfully 
violate Sec. 107.410, and such violation results in a transfer of 
Control.
    (5) Fraud. You commit a fraudulent act which causes serious 
detriment to SBA's position as a guarantor or investor.
    (6) Fraudulent transfers. You make any transfer or incur any 
obligation that is fraudulent under the terms of 11 USC 548.
    (c) Contingent Removal Conditions. Upon the occurrence (as 
determined by SBA) of any of the following conditions (``Contingent 
Removal Conditions''), SBA may avail itself of one or more of the 
remedies in paragraph (d) of this section, but only if you fail to 
remove the person(s) SBA identifies as responsible for such occurrence 
and/or cure such occurrence to SBA's satisfaction within a time period 
determined by SBA (but not less than 15 days):
    (1) Willful conflicts of interest. You willfully violate 
Sec. 107.730.
    (2) Willful or repeated noncompliance. You willfully or repeatedly 
violate one or more of the substantive provisions of the Act, 
specifically including but not limited to the provisions summarized in 
section 310(c) of the Act, or any substantive regulation promulgated 
under the Act.
    (3) Failure to comply with restrictions under paragraph (f) of this 
section. You fail to comply with the restrictions imposed by SBA under 
paragraph (f) of this section.
    (d) SBA remedies for Removal Conditions and Contingent Removal 
Conditions. Upon the occurrence (as determined by SBA) of any Removal 
Condition, or any Contingent Removal Condition accompanied by your 
failure to act as set forth in paragraph (c) of this section, SBA has 
the following rights, and you consent to SBA's exercise of any or all of 
such rights:

[[Page 93]]

    (1) With respect to a Corporate Licensee, upon written notice, to 
require you to replace, with individuals approved by SBA, one or more of 
your officers and/or such number of directors as is sufficient to 
constitute a majority of your board of directors; or
    (2) With respect to a Partnership Licensee, upon written notice, to 
require you to remove the person(s) responsible for such occurrence and/
or to remove your general partner, who shall then be replaced in 
accordance with your Articles by a new general partner approved by SBA; 
and/or
    (3) With respect to either a Corporate or Partnership Licensee, to 
the appointment of SBA or its designee as your receiver under section 
311(c) of the Act for the purpose of continuing your operations. The 
appointment of a receiver to liquidate a Licensee is not within such 
consent, but is governed instead by the relevant provisions of the Act.
    (e) Restricted Operations Conditions. Upon the occurrence (as 
determined by SBA) of any of the following conditions (``Restricted 
Operations Conditions''), SBA may avail itself of any of the remedies in 
paragraph (f) of this section.
    (1) Removal Conditions or Contingent Removal Conditions. Any 
condition occurs which is listed in paragraphs (b) or (c) of this 
section.
    (2) Failure to maintain Regulatory Capital. You fail to maintain the 
minimum Regulatory Capital required by this part.
    (3) Capital or Liquidity Impairment. You have a condition of Capital 
Impairment as determined under Sec. 107.1830 or, if applicable, a 
condition of Liquidity Impairment as determined under Sec. 107.1505, and 
you fail to cure the impairment within time limits set by SBA in 
writing.
    (4) Improper Distributions. You make any Distribution to your 
shareholders or partners other than those permitted by Secs. 107.585 and 
107.1560 through 107.1580.
    (5) Excessive Management Expenses. Without the prior written consent 
of SBA, you incur Management Expenses in excess of those permitted under 
Sec. 107.520.
    (6) Failure to make payment. You fail to pay any amounts due under 
Preferred Securities or required by Secs. 107.1500 through 107.1590, 
unless otherwise permitted by SBA.
    (7) Noncompliance. Except as otherwise provided for in paragraphs 
(c)(1) and (c)(2) of this section, SBA determines that you have failed 
to comply with one or more of the substantive provisions of the Act, 
specifically including but not limited to the provisions summarized in 
section 310(c) of the Act, or any substantive regulation promulgated 
under the Act.
    (8) Failure to maintain diversity. You fail to maintain diversity 
between management and ownership as required by Sec. 107.150, if 
applicable to you.
    (9) Failure to meet investment requirements. You fail to make the 
amount of Equity Capital Investments required for Participating 
Securities (Sec. 107.1500(b)(4)), if applicable to you; or you fail to 
maintain as of the end of each fiscal year the investment ratios or 
amounts required for Leverage in excess of 300 percent of Leverageable 
Capital (Sec. 107.1160(c)) or Preferred Securities in excess of 100 
percent of Leverageable Capital (Sec. 107.1160(d)), if applicable to 
you. In determining whether you have met the maintenance requirements in 
Sec. 107.1160(c) or (d), SBA will disregard any prepayment, sale, or 
disposition of Venture Capital Financings, any increase in Leverageable 
Capital, and any receipt of additional Leverage, within 120 days prior 
to the end of your fiscal year.
    (10) Nonperformance. You violate or fail to perform one or more of 
the terms and conditions of any Participating Security or Preferred 
Security or of any agreement with or condition imposed by SBA in its 
administration of the Act and the regulations promulgated thereunder.
    (11) Noncooperation under paragraph (g) of this section. You fail to 
take appropriate steps, satisfactory to SBA, to accomplish such action 
as SBA may have required under paragraph (g) of this section.
    (f) SBA remedies for Restricted Operations Conditions. Upon the 
occurrence of any Restricted Operations Condition, and until such 
condition(s) are cured to SBA's satisfaction within a time period 
determined by SBA (but

[[Page 94]]

not less than 15 days), upon written notice SBA shall have the following 
rights, and you consent to SBA's exercise of any or all of such rights:
    (1) To prohibit you from making any additional investments except 
for investments under legally binding commitments you entered into 
before such notice and, subject to SBA's prior written approval, 
investments that are necessary to protect your investments;
    (2) Until all Leverage is redeemed and amounts due are paid, to 
prohibit Distributions by you to any party other than SBA, its agent or 
Trustee;
    (3) To require all your commitments from investors to be funded at 
the earliest time(s) permitted in accordance with your Articles; and
    (4) To review and re-determine your approved Management Expenses.
    (g) Repeated non-substantive violations. If you repeatedly fail to 
comply with one or more of the non-substantive provisions of the Act or 
any non-substantive regulation promulgated thereunder, SBA, after 
written notification to you and until such condition is cured to SBA's 
satisfaction, will deny you additional Leverage and/or require you to 
take such actions as SBA may determine to be appropriate under the 
circumstances.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998]

              Computation of Licensee's Capital Impairment



Sec. 107.1830  Licensee's Capital Impairment--definition and general requirements.

    (a) Applicability of this section. This section applies to Leverage 
issued on or after April 25, 1994. For Leverage issued before April 25, 
1994, you must comply with paragraphs (e) and (f) of this section and 
the Capital Impairment regulations in this part in effect when you 
issued your Leverage. For all Leverage issued, you must also comply with 
any contractual provisions to which you have agreed.
    (b) Significance of Capital Impairment condition. If you have a 
condition of Capital Impairment, you are not in compliance with the 
terms of your Leverage. As a result, SBA has the right to impose the 
applicable remedies for noncompliance in Secs. 107.1810(g) and 
107.1820(f).
    (c) Definition of Capital Impairment condition. You have a condition 
of Capital Impairment if your Capital Impairment Percentage, as computed 
in Sec. 107.1840, exceeds:
    (1) For Section 301(d) Licensees, 75 percent.
    (2) For Section 301(c) Licensees, the appropriate percentage from 
the following table:

                  Maximum Permitted Capital Impairment Percentages for Section 301(c) Licensees
----------------------------------------------------------------------------------------------------------------
                                                                                                      Then your
                                                                                                       maximum
                                                                                                      permitted
 If the percentage of equity capital investments      And your ratio of outstanding leverage to        capital
         (at cost) in your portfolio is:                       leverageable capital is:               impairment
                                                                                                      percentage
                                                                                                         is:
----------------------------------------------------------------------------------------------------------------
67%.............................................  100% or less.....................................           70
                                                  Over 100% but not over 200%......................           60
                                                  Over 200%........................................           50
At least 40% but under 67%......................  100% or less.....................................           55
                                                  Over 100% but not over 200%......................           50
                                                  Over 200%........................................           40
Under 40%.......................................  100% or less.....................................           45
                                                  Over 100% but not over 200%......................           40
                                                  Over 200%........................................           35
----------------------------------------------------------------------------------------------------------------

    (d) Phase-in of maximum permitted Capital Impairment Percentages for 
Section 301(c) Licensees. If you are a Section 301(c) Licensee, 
regardless of your maximum permitted Capital Impairment Percentage under 
paragraph (c) of this section, you will not have a condition of Capital 
Impairment if:
    (1) Your Capital Impairment Percentage does not exceed 50 percent; 
and

[[Page 95]]

    (2) You have not reached your first fiscal year end occurring after 
April 25, 1995.
    (e) Quarterly computation requirement and procedure. You must 
determine whether you have a condition of Capital Impairment as of the 
end of each fiscal quarter. You must notify SBA promptly if you are 
capitally impaired.
    (f) SBA's right to determine Licensee's Capital Impairment 
condition. SBA may make its own determination of your Capital Impairment 
condition at any time.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5873, Feb. 5, 1998]



Sec. 107.1840  Computation of Licensee's Capital Impairment Percentage.

    (a) General. This section contains the procedures you must use to 
determine your Capital Impairment Percentage if you have outstanding 
Leverage issued after April 25, 1994. You must compare your Capital 
Impairment Percentage to the maximum permitted under Sec. 107.1830(c) to 
determine whether you have a condition of Capital Impairment.
    (b) Preliminary impairment test. If you satisfy the preliminary 
impairment test, your Capital Impairment Percentage is zero and you do 
not have to perform any more procedures in this Sec. 107.1840. 
Otherwise, you must continue with paragraph (c) of this section. You 
satisfy the test if the following amounts are both zero or greater:
    (1) The sum of Undistributed Net Realized Earnings, as reported on 
SBA Form 468, and Includible Non-Cash Gains.
    (2) Unrealized Gain (Loss) on Securities Held.
    (c) How to compute your Capital Impairment Percentage. (1) If you 
have an Unrealized Gain on Securities Held, compute your Adjusted 
Unrealized Gain using paragraph (d) of this section. If you have an 
Unrealized Loss on Securities Held, continue with paragraph (c)(2) of 
this Section.
    (2) Add together your Undistributed Net Realized Earnings, your 
Includible Non-cash Gains, and either your Unrealized Loss on Securities 
Held or your Adjusted Unrealized Gain.
    (3) If the sum in paragraph (c)(2) of this section is zero or 
greater, your Capital Impairment Percentage is zero.
    (4) If the sum in paragraph (c)(2) of this section is less than 
zero, drop the negative sign, divide by your Regulatory Capital 
(excluding Treasury Stock), and multiply by 100. The result is your 
Capital Impairment Percentage.
    (d) How to compute your Adjusted Unrealized Gain. (1) Subtract 
Unrealized Depreciation from Unrealized Appreciation. This is your ``Net 
Appreciation''.
    (2) Determine your Unrealized Appreciation on Publicly Traded and 
Marketable securities. This is your ``Class 1 Appreciation''.
    (3) Determine your Unrealized Appreciation on securities that are 
not Publicly Traded and Marketable and meet the following criteria, 
which must be substantiated to the satisfaction of SBA (this is your 
``Class 2 Appreciation''):
    (i) The Small Business that issued the security received a 
significant subsequent equity financing by an investor whose objectives 
were not primarily strategic and at a price that conclusively supports 
the Unrealized Appreciation;
    (ii) Such financing represents a substantial investment in the form 
of an arm's length transaction by a sophisticated new investor in the 
issuer's securities; and
    (iii) Such financing occurred within 24 months of the date of the 
Capital Impairment computation, or the Small Business' pre-tax cash flow 
from operations for its most recent fiscal year was at least 10 percent 
of the Small Business' average contributed capital for such fiscal year.
    (4) Perform the appropriate computation from the following table:

[[Page 96]]



          Adjusted Unrealized Gain Before Estimated Tax Effects
------------------------------------------------------------------------
                                                       Then adjusted
              If:                      And:           unrealized gain
                                                      before taxes is:
------------------------------------------------------------------------
Class 1 Appreciation [le] Net   Class 1            (80% x Class 1
 Appreciation.                   Appreciation +     Appreciation) + (50%
                                 Class 2            x Class 2
                                 Appreciation       Appreciation).
                                 [le] Net
                                 Appreciation.
Class 1 Appreciation [le] Net   Class 1            (80% x Class 1
 Appreciation.                   Appreciation +     Appreciation) +
                                 Class 2            [(50% x (Net
                                 Appreciation  Net        1 Appreciation)].
                                 Appreciation.
Class 1 Appreciation  Net Appreciation.                              Appreciation.
------------------------------------------------------------------------

    (5) Reduce the gain computed in paragraph (d)(4) of this section by 
your estimate of related future income tax expense. Subject to any 
adjustment required by paragraph (d)(6) of this section, the result is 
your Adjusted Unrealized Gain for use in paragraph (c)(2) of this 
section.
    (6) If any securities that are the source of either Class 1 or Class 
2 Appreciation are pledged or encumbered in any way, you must reduce the 
Adjusted Unrealized Gain computed in paragraph (d)(5) of this section by 
the amount of the related borrowing or other obligation, up to the 
amount of the Unrealized Appreciation on the securities.



Sec. 107.1850  Exceptions to Capital Impairment provisions for Licensees with outstanding Participating Securities.

    The provisions in this Sec. 107.1850 apply only if at least two-
thirds of your outstanding Leverage consists of Participating 
Securities, and at least two-thirds of your Loans and Investments (at 
cost) consist of Equity Capital Investments.
    (a) Forbearance period for Participating Securities issuers. During 
the first forty-eight (48) months following your first issuance of 
Participating Securities, you will not have a condition of Capital 
Impairment if your Capital Impairment Percentage is below 85 percent.
    (b) Extended forbearance period for early stage investors. If at 
least two-thirds of your Loans and Investments (at cost) are in Start-Up 
Financings, the forbearance period in paragraph (a) of this section is 
extended to 60 months.
    (c) Forbearance based on actions by Licensee. The provisions of this 
paragraph (c) apply only during the fifth and sixth years following your 
first issuance of Participating Securities. If your Capital Impairment 
Percentage, as determined either by you or by SBA, exceeds the maximum 
permitted under Sec. 107.1830(c) but is below 85 percent, you will not 
have a condition of Capital Impairment if you do either of the following 
within thirty (30) days of such determination:
    (1) Increase your Regulatory Capital by a cash contribution placed 
in an escrow account or other account satisfactory to SBA, for its 
benefit. The contribution must equal, during the fifth year, 15 percent 
of your outstanding Leverage or, during the sixth year, 30 percent.
    (2) Provide a guarantee, satisfactory to SBA and for its benefit, 
for the amount of the cash contribution required in paragraph (c)(1) of 
this section. SBA will credit any escrowed funds or guarantee received 
in the fifth year toward the requirements for the sixth year.
    (d) Conditions for forbearance under paragraph (c) of this section. 
(1) You cannot count any funds placed in an escrow or other account 
under paragraph (c) of this section as Leverageable Capital.
    (2) Any fee and/or any claim to repayment by the party making the 
capital contribution or by the guarantor must be deferred and 
subordinate to all outstanding Leverage plus any unpaid Earned 
Prioritized Payments and earned Adjustments.
    (3) If there is an acceleration or mandatory redemption under 
Sec. 107.1810 or Sec. 107.1820, any funds in the escrow account and/or 
any guarantee received under paragraph (c) of this section will be 
applied toward repaying any amounts due SBA.
    (4) If you reduce your Capital Impairment Percentage to zero, SBA 
will release and return any escrowed funds

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and/or any guarantee received under paragraph (c) of this section.



               Subpart K--Ending Operations as a Licensee



Sec. 107.1900  Surrender of license.

    You may not surrender your license without SBA's prior written 
approval. Your request for approval must be accompanied by an offer of 
immediate repayment of all of your outstanding Leverage (including any 
prepayment penalties thereon), or by a plan satisfactory to SBA for the 
orderly liquidation of the Licensee.



                        Subpart L--Miscellaneous



Sec. 107.1910  Non-waiver of SBA's rights or terms of Leverage security.

    SBA's failure to exercise or delay in exercising any right or remedy 
under the Act or the regulations in this part does not constitute a 
waiver of such right or remedy. SBA's failure to require you to perform 
any term or provision of your Leverage does not affect SBA's right to 
enforce such term or provision. Similarly, SBA's waiver of, or failure 
to enforce, any term or provision of your Leverage or of any event or 
condition set forth in Sec. 107.1810 or Sec. 107.1820 does not 
constitute a waiver of any succeeding breach of such term or provision 
or condition.



Sec. 107.1920  Licensee's application for exemption from a regulation in 
this part 107.

    You may file an application in writing with SBA to have a proposed 
action exempted from any procedural or substantive requirement, 
restriction, or prohibition to which it is subject under this part, 
unless the provision is mandated by the Act. SBA may grant an exemption 
for such applicant, conditionally or unconditionally, provided the 
exemption would not be contrary to the purposes of the Act. Your 
application must be accompanied by supporting evidence which 
demonstrates to SBA's satisfaction that:
    (a) The proposed action is fair and equitable; and
    (b) The exemption requested is reasonably calculated to advance the 
best interests of the SBIC program in a manner consonant with the policy 
objectives of the Act and the regulations in this part.



Sec. 107.1930  Effect of changes in this part 107 on transactions previously consummated.

    The legality of a transaction covered by the regulations in this 
part is governed by the regulations in this part in effect at the time 
the transaction was consummated, regardless of later changes. Nothing in 
this part bars SBA enforcement action with respect to any transaction 
consummated in violation of provisions applicable at the time, but no 
longer in effect.



PART 108--NEW MARKETS VENTURE CAPITAL (``NMVC'') PROGRAM--Table of Contents


                   Subpart A--Introduction to Part 108

Sec.
108.10  Description of the New Markets Venture Capital Program.
108.20  Legal basis and applicability of this part 108.
108.30  Amendments to Act and regulations.
108.40  How to read this part 108.

          Subpart B--Definition of Terms Used in This Part 108

108.50  Definition of terms.

             Subpart C--Qualifications for the NMVC Program

                        Organizing a NMVC Company

108.100  Business form.
108.110  Qualified management.
108.120  Economic development primary mission.
108.130  Identified Low Income Geographic Areas.
108.140  SBA approval of initial Management Expenses.
108.150  Management and ownership diversity requirement.
108.160  Special rules for NMVC Companies formed as limited 
          partnerships.

                       Capitalizing a NMVC Company

108.200  Adequate capital for NMVC Companies.
108.210  Minimum capital requirements for NMVC Companies.
108.230  Private Capital for NMVC Companies.

[[Page 98]]

Subpart D--Application and Approval Process for NMVC Company Designation

108.300  When and how to apply for designation as a NMVC Company.
108.310  Contents of application.
108.320  Contents of comprehensive business plan.
108.330   Grant issuance fee.

          Subpart E--Evaluation and Selection of NMVC Companies

108.340   Evaluation and selection--general.
108.350   Eligibility and completeness.
108.360   Evaluation criteria.
108.370   Conditional approval.
108.380   Final approval as a NMVC Company.

         Subpart F--Changes in Ownership, Structure, or Control

             Changes in Control or Ownership of NMVC Company

108.400   Changes in ownership of 10 percent or more of NMVC Company but 
          no change of Control.
108.410   Changes in Control of NMVC Company (through change in 
          ownership or otherwise).
108.420   Prohibition on exercise of ownership or Control rights in NMVC 
          Company before SBA approval.
108.430   Notification to SBA of transactions that may change ownership 
          or Control.
108.440   Standards governing prior SBA approval for a proposed transfer 
          of Control.
108.450   Notification to SBA of pledge of NMVC Company's shares.

    Restrictions on Common Control or Ownership of Two or More NMVC 
                                Companies

108.460   Restrictions on Common Control or ownership of two (or more) 
          NMVC Companies.

                   Change in Structure of NMVC Company

108.470   SBA approval of merger, consolidation, or reorganization of 
          NMVC Company.

          Subpart G--Managing the Operations of a NMVC Company

                          General Requirements

108.500   Lawful operations under the Act.
108.502   Representations to the public.
108.503   NMVC Company's adoption of an approved valuation policy.
108.504   Equipment and office requirements.
108.506   Safeguarding the NMVC Company's assets/Internal controls.
108.507   Violations based on false filings and nonperformance of 
          agreements with SBA.
108.509   Employment of SBA officials.

                       Management and Compensation

108.510   SBA approval of NMVC Company's Investment Adviser/Manager.
108.520   Management Expenses of a NMVC Company.

                    Cash Management by a NMVC Company

108.530   Restrictions on investments of idle funds by NMVC Companies.

            Borrowing by NMVC Companies From Non-SBA Sources

108.550   Prior approval of secured third-party debt of NMVC companies.

                Voluntary Decrease in Regulatory Capital

108.585  Voluntary decrease in NMVC Company's Regulatory Capital.

 Subpart H--Recordkeeping, Reporting, and Examination Requirements for 
                             NMVC Companies

              Recordkeeping Requirements For NMVC Companies

108.600   General requirement for NMVC Company to maintain and preserve 
          records.
108.610   Required certifications for Loans and Investments.
108.620   Requirements to obtain information from Portfolio Concerns.

                Reporting Requirements for NMVC Companies

108.630   Requirement for NMVC companies to file financial statements 
          and supplementary information with SBA (SBA Form 468).
108.640   Requirement to file portfolio financing reports (SBA Form 
          1031).
108.650   Requirement to report portfolio valuations to SBA.
108.660   Other items required to be filed by NMVC Company with SBA.
108.680   Reporting changes in NMVC Company not subject to prior SBA 
          approval.

     Examinations of NMVC Companies by SBA for Regulatory Compliance

108.690   Examinations.
108.691   Responsibilities of NMVC Company during examination.
108.692   Examination fees.

[[Page 99]]

       Subpart I--Financing of Small Businesses by NMVC Companies

   Determining the Eligibility of a Small Business for NMVC Financing

108.700   Compliance with size standards in part 121 of this chapter as 
          a condition of Assistance.
108.710   Requirement to finance Low-Income Enterprises.
108.720   Small Businesses that may be ineligible for financing.
108.730   Financings which constitute conflicts of interest.
108.740   Portfolio diversification (``overline'' limitation).
108.760   How a change in size or activity of a Portfolio Concern 
          affects the NMVC Company and the Portfolio Concern.

    Structuring NMVC Company's Financing of Eligible Small Businesses

108.800   Financings in the form of equity interests.
108.820   Financings in the form of guarantees.
108.825   Purchasing securities from an underwriter or other third 
          party.

                  Limitations on Disposition of Assets

108.885   Disposition of assets to NMVC Company's Associates.

                      Management Services and Fees

108.900  Fees for management services provided to a Small Business by a 
          NMVC Company or its Associate.

    Subpart J--SBA Financial Assistance for NMVC Companies (Leverage)

              General Information About Obtaining Leverage

108.1100   Type of Leverage and application procedures.
108.1120   General eligibility requirement for Leverage.
108.1130   Leverage fees payable by NMVC Company.
108.1140   NMVC Company's acceptance of SBA remedies under 
          Sec. 108.1810.

     Maximum Amount of Leverage for Which a NMVC Company is Eligible

108.1150   Maximum amount of Leverage for a NMVC Company.

  Conditional Commitments by SBA to Reserve Leverage for a NMVC Company

108.1200   SBA's Leverage commitment to a NMVC Company'application 
          procedure, amount, and term.
108.1220   Requirement for NMVC Company to file financial statements at 
          the time of request for a draw.
108.1230   Draw-downs by NMVC Company under SBA's Leverage commitment.
108.1240   Funding of NMVC Company's draw request through sale to third-
          party.

 Funding Leverage by Use of SBA Guaranteed Trust Certificates (``TCs'')

108.1600   SBA authority to issue and guarantee Trust Certificates.
108.1610   Effect of prepayment or early redemption of Leverage on a 
          Trust Certificate.
108.1620   Functions of agents, including Central Registration Agent, 
          Selling Agent and Fiscal Agent.
108.1630   SBA regulation of Brokers and Dealers and disclosure to 
          purchasers of Leverage or Trust Certificates.
108.1640   SBA access to records of the CRA, Brokers, Dealers and Pool 
          or Trust assemblers.

                              Miscellaneous

108.1700   Transfer by SBA of its interest in a NMVC Company's Leverage 
          security.
108.1710   SBA authority to collect or compromise its claims.
108.1720   Characteristics of SBA's guarantee.

     Subpart K--NMVC Company's Noncompliance With Terms of Leverage

108.1810   Events of default and SBA's remedies for NMVC Company's 
          noncompliance with terms of Debentures.

            Computation of NMVC Company's Capital Impairment

108.1830   NMVC Company's Capital Impairment definition and general 
          requirements.
108.1840   Computation of NMVC Company's Capital Impairment Percentage.

             Subpart L--Ending Operations as a NMVC Company

108.1900   Termination of participation as a NMVC Company.

                        Subpart M--Miscellaneous

108.1910   Non-waiver of SBA's rights or terms of Leverage security.
108.1920   NMVC Company's application for exemption from a regulation in 
          this part 108.
108.1930   Effect of changes in this part 108 on transactions previously 
          consummated.

[[Page 100]]

108.1940   Procedures for designation of additional Low-Income 
          Geographic Areas

Subpart N--Requirements and Procedures for Operational Assistance Grants 
                      to NMVC Companies and SSBICs

108.2000  Operational Assistance grants to NMVC Companies and SSBICs.
108.2001  When and how SSBICs may apply for Operational Assistance 
          grants.
108.2002  Eligibility of SSBICs to apply for Operational Assistance 
          grants.
108.2003  Grant issuance fee for SSBICs.
108.2004  Contents of application submitted by SSBICs.
108.2005  Contents of plan submitted by SSBICs.
108.2006  Evaluation and selection of SSBICs.
108.2007  Grant award to SSBICs.
108.2010   Restrictions on use of Operational Assistance grant funds.
108.2020   Amount of Operational Assistance grant.
108.2030   Matching requirements.
108.2040   Reporting and recordkeeping requirements.

    Authority: 15 U.S.C. 689-689q.

    Source: 66 FR 28609, May 23, 2001, unless otherwise noted.



                   Subpart A--Introduction to Part 108



Sec. 108.10  Description of the New Markets Venture Capital Program.

    The New Markets Venture Capital (``NMVC'') Program is a 
developmental venture capital program for the purpose of promoting 
economic development and the creation of wealth and job opportunities in 
low-income geographic areas and among individuals living in such areas. 
SBA selects and then enters into participation agreements with selected 
newly formed venture capital companies, and provides leverage in the 
form of debenture guarantees to such companies to allow them to make 
equity capital investments in smaller enterprises located in low-income 
geographic areas. SBA also awards grants to such companies and to 
Specialized Small Business Investment Companies so that they can provide 
operational assistance to such smaller enterprises in connection with 
such investments.



Sec. 108.20  Legal basis and applicability of this part 108.

    The regulations in this part implement Part B of Title III of the 
Small Business Investment Act of 1958, as amended (15 U.S.C. 661 et 
seq.). All NMVC Companies must comply with all applicable SBA 
regulations, accounting guidelines and valuation guidelines for NMVC 
Companies, available from SBA.



Sec. 108.30  Amendments to Act and regulations.

    A NMVC Company is subject to all provisions of the Act and parts 108 
and 112 of title 13 of the Code of Federal Regulations.



Sec. 108.40  How to read this part 108.

    (a) Center headings. All references in this part to SBA forms, and 
instructions for their preparation, are to the current issue of such 
forms (available from Investment Division, SBA). Center headings are 
descriptive and are used for convenience only. They have no regulatory 
effect.
    (b) Capitalizing defined terms. Terms defined in Sec. 108.50 have 
initial capitalization in this part 108.
    (c) ``You.'' The pronoun ``you'' as used in this part 108 means a 
NMVC Company unless otherwise noted.



          Subpart B--Definition of Terms Used in This Part 108



Sec. 108.50  Definition of terms.

    The following definitions apply to this part 108:
    Act means the Small Business Investment Act of 1958, as amended (15 
U.S.C. 661 et seq.).
    Affiliate or Affiliates has the meaning set forth in Sec. 121.103 of 
this chapter.
    Applicant means any entity submitting an application to SBA for 
designation as a NMVC Company under this part.
    Articles mean articles of incorporation or charter for a Corporate 
NMVC Company, the partnership agreement or certificate for a Partnership 
NMVC Company, and the operating agreement or other organizational 
documents for a LLC NMVC Company.

[[Page 101]]

    Assistance or Assisted means Financing of or management services 
rendered to a Small Business by or through a NMVC Company pursuant to 
the Act and this part.
    Associate of a NMVC Company means any of the following:
    (1)(i) An officer, director, employee or agent of a Corporate NMVC 
Company;
    (ii) A Control Person, employee or agent of a Partnership NMVC 
Company;
    (iii) A managing member of a LLC NMVC Company;
    (iv) An Investment Adviser/Manager of any NMVC Company, including 
any Person who contracts with a Control Person of a Partnership NMVC 
Company to be the Investment Adviser/Manager of such NMVC Company; or
    (v) Any Person regularly serving a NMVC Company on retainer in the 
capacity of attorney at law.
    (2) Any Person who owns or controls, or who has entered into an 
agreement to own or control, directly or indirectly, at least 10 percent 
of any class of stock of a Corporate NMVC Company or 10 percent of the 
membership interests of an LLC NMVC Company, or a limited partner's 
interest of at least 10 percent of the partnership capital of a 
Partnership NMVC Company. However, neither a limited partner in a 
Partnership NMVC Company nor a non-managing member in an LLC NMVC 
Company is considered an Associate if such Person is an entity 
Institutional Investor whose investment in the Partnership, including 
commitments, represents no more than 33 percent of the capital of the 
NMVC Company and no more than five percent of such Person's net worth.
    (3) Any officer, director, partner (other than a limited partner), 
manager, agent, or employee of any Associate described in paragraph (1) 
or (2) of this definition.
    (4) Any Person that directly or indirectly Controls, or is 
Controlled by, or is under Common Control with, a NMVC Company.
    (5) Any Person that directly or indirectly Controls, or is 
Controlled by, or is under Common Control with, any Person described in 
paragraphs (1) and (2) of this definition.
    (6) Any Close Relative of any Person described in paragraphs (1), 
(2), (4), and (5) of this definition.
    (7) Any Secondary Relative of any Person described in paragraphs 
(1), (2), (4), and (5) of this definition.
    (8) Any concern in which--
    (i) Any person described in paragraphs (1) through (6) of this 
definition is an officer; general partner, or managing member; or
    (ii) Any such Person(s) singly or collectively Control or own, 
directly or indirectly, an equity interest of at least 10 percent 
(excluding interests that such Person(s) own indirectly through 
ownership interests in the NMVC Company).
    (9) Any concern in which any Person(s) described in paragraph (7) of 
this definition singly or collectively own (including beneficial 
ownership) a majority equity interest, or otherwise have Control. As 
used in this paragraph (9), ``collectively'' means together with any 
Person(s) described in paragraphs (1) though (7) of this definition.
    (10) For the purposes of this definition, if any Associate 
relationship described in paragraphs (1) through (7) of this definition 
exists at any time within six months before or after the date that a 
NMVC Company provides Financing, then that Associate relationship is 
considered to exist on the date of the Financing.
    (11) If any NMVC Company has any ownership interest in another NMVC 
Company, the two NMVC companies are Associates of each other.
    Capital Impairment has the meaning set forth in Sec. 108.1830(b).
    Central Registration Agent or CRA means one or more agents appointed 
by SBA for the purpose of issuing TCs and performing the functions 
enumerated in Sec. 108.1620 and performing similar functions for 
Debentures funded outside the pooling process.
    Close Relative of an individual means:
    (1) A current or former spouse;
    (2) A father, mother, guardian, brother, sister, son, daughter; or
    (3) A father-in-law, mother-in-law, brother-in-law, sister-in-law, 
son-in-law, or daughter-in-law.
    Commitment means a written agreement between a NMVC Company and

[[Page 102]]

an eligible Small Business that obligates the NMVC Company to provide 
Financing (except a guarantee) to that Small Business in a fixed or 
determinable sum, by a fixed or determinable future date. In this 
context the term ``agreement'' means that there has been agreement on 
the principal economic terms of the Financing. The agreement may include 
reasonable conditions precedent to the NMVC Company's obligation to fund 
the commitment, but these conditions must be outside the NMVC Company's 
control.
    Common Control means a condition where two or more Persons, either 
through ownership, management, contract, or otherwise, are under the 
Control of one group or Person. Two or more NMVC companies are presumed 
to be under Common Control if they are Affiliates of each other by 
reason of common ownership or common officers, directors, or general 
partners; or if they are managed or their investments are significantly 
directed either by a common independent investment advisor or managerial 
contractor, or by two or more such advisors or contractors that are 
Affiliates of each other. This presumption may be rebutted by evidence 
satisfactory to SBA.
    Community Development Finance means debt and equity-type investments 
in low-income communities.
    Conditionally Approved NMVC Company means a company that--
    (1) Has applied for participation as a NMVC Company, and
    (2) SBA has conditionally approved to participate in the NMVC 
program for a specified period of time not to exceed two years, subject 
to the company fulfilling the requirements to be a NMVC Company within 
that specified period of time.
    Control means the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a NMVC 
Company or other concern, whether through the ownership of voting 
securities, by contract, or otherwise.
    Control Person means any Person that controls a NMVC Company, either 
directly or through an intervening entity. A Control Person includes:
    (1) A general partner of a Partnership NMVC Company;
    (2) Any Person serving as the general partner, officer, director, or 
manager (in the case of a limited liability company) of any entity that 
controls a NMVC Company, either directly or through an intervening 
entity;
    (3) Any Person that--
    (i) Controls or owns, directly or through an intervening entity, at 
least 10 percent of a Partnership NMVC Company or any entity described 
in paragraphs (1) or (2) of this definition; and
    (ii) Participates in the investment decisions of the general partner 
of such Partnership NMVC Company;
    (4) Any Person that controls or owns, directly or through an 
intervening entity, at least 50 percent of a Partnership NMVC Company or 
any entity described in paragraphs (1) or (2) of this definition.
    Corporate NMVC Company. See definition of NMVC Company in this 
section.
    Debentures means debt obligations issued by NMVC companies pursuant 
to section 355 of the Act and held or guaranteed by SBA.
    Debt Securities are instruments evidencing a loan with an option or 
any other right to acquire Equity Securities in a Small Business or its 
Affiliates, or a loan which by its terms is convertible into an equity 
position. Consideration must be paid for all options that you acquire.
    Developmental Venture Capital means capital in the form of Equity 
Capital Investments in Smaller Enterprises made with a primary objective 
of fostering economic development in Low-Income Geographic Areas.
    Distribution means any transfer of cash or non-cash assets to SBA, 
its agent or Trustee, or to partners in a Partnership NMVC Company, or 
to shareholders in a Corporate NMVC Company, or to members in an LLC 
NMVC Company. Capitalization of Retained Earnings Available for 
Distribution constitutes a Distribution to the NMVC Company's non-SBA 
partners, shareholders, or members.
    Equity Capital Investments means investments in the form of common 
or preferred stock, limited partnership interests, options, warrants, or 
similar equity instruments, including subordinated debt with equity 
features if such

[[Page 103]]

debt provides only for interest payments contingent upon and limited to 
the extent of earnings. Equity Capital Investments must not require 
amortization. Equity Capital Investments may be guaranteed by one or 
more third parties; however, neither Equity Capital Investments nor such 
guarantee may be collateralized or otherwise secured. Investments 
classified as Debt Securities are not precluded from qualifying as 
Equity Capital Investments. Equity Capital Investments may provide for 
royalty payments only if the royalty payments are based on the earnings 
of the concern.
    Equity Securities means stock of any class in a corporation, stock 
options, warrants, limited partnership interests in a limited 
partnership, membership interests in a limited liability company, or 
joint venture interests.
    Financing or Financed means outstanding financial assistance 
provided to a Small Business by a NMVC Company, whether through:
    (1) Loans;
    (2) Debt Securities;
    (3) Equity Securities;
    (4) Guarantees; or
    (5) Purchases of securities of a Small Business through or from an 
underwriter (see Sec. 108.825).
    Guaranty Agreement means the contract entered into by SBA which is a 
guarantee backed by the full faith and credit of the United States 
Government as to timely payment of principal and interest on Debentures 
and SBA's rights in connection with such guarantee.
    Includible Non-Cash Gains means those non-cash gains (as reported on 
SBA Form 468) that are realized in the form of Publicly Traded and 
Marketable securities or investment grade debt instruments. For purposes 
of this definition, investment grade debt instruments means those 
instruments that are rated ``BBB'' or ``Baa'', or better, by Standard & 
Poor's Corporation or Moody's Investors Service, respectively. Non-rated 
debt may be considered to be investment grade if a NMVC Company obtains 
a written opinion from an investment banking firm acceptable to SBA 
stating that the non-rated debt instrument is equivalent in risk to the 
issuer's investment grade debt.
    Institutional Investor means:
    (1) Entities. Any of the following entities if the entity has a net 
worth (exclusive of unfunded commitments from investors) of at least $1 
million, or such higher amount as is specified in this paragraph (1). 
(See also Sec. 108.230(c)(4) for limitations on the amount of an 
Institutional Investor's commitment that may be included in Private 
Capital.)
    (i) A State or National bank, trust company, savings bank, or 
savings and loan association.
    (ii) An insurance company.
    (iii) A 1940 Act Investment Company or Business Development Company 
(each as defined in the Investment Company Act of 1940, as amended (15 
U.S.C. 8a-1 et seq.).
    (iv) A holding company of any entity described in paragraph (l)(i), 
(ii) or (iii) of this definition.
    (v) An employee benefit or pension plan established for the benefit 
of employees of the Federal government, any State or political 
subdivision of a State, or any agency or instrumentality of such 
government unit.
    (vi) An employee benefit or pension plan (as defined in the Employee 
Retirement Income Security Act of 1974, as amended (Public Law 93-406, 
88 Stat. 829), excluding plans established under section 401(k) of the 
Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended).
    (vii) A trust, foundation or endowment exempt from Federal income 
taxation under the Internal Revenue Code of 1986, as amended.
    (viii) A corporation, partnership or other entity with a net worth 
(exclusive of unfunded commitments from investors) of more than $10 
million.
    (ix) A State, a political subdivision of a State, or an agency or 
instrumentality of a State or its political subdivision.
    (x) An entity whose primary purpose is to manage and invest non-
Federal funds on behalf of at least three Institutional Investors 
described in paragraphs (l)(i) through (l)(ix) of this definition, each 
of whom must have at least a 10 percent ownership interest in the 
entity.

[[Page 104]]

    (xi) Any other entity that SBA determines to be an Institutional 
Investor.
    (2) Individuals. (i) Any of the following individuals if he/she is 
also a permanent resident of the United States:
    (A) An individual who is an Accredited Investor (as defined in the 
Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose 
commitment to the NMVC Company is backed by a letter of credit from a 
State or National bank acceptable to SBA.
    (B) An individual whose personal net worth is at least $2 million 
and at least ten times the amount of his or her commitment to the NMVC 
Company. The individual's personal net worth must not include the value 
of any equity in his or her most valuable residence.
    (C) An individual whose personal net worth, not including the value 
of any equity in his or her most valuable residence, is at least $10 
million.
    (ii) Any individual who is not a permanent resident of the United 
States but who otherwise satisfies paragraph (2)(i) of this definition 
provided such individual has irrevocably appointed an agent within the 
United States for the service of process.
    Investment Adviser/Manager means any Person who furnishes advice or 
assistance with respect to operations of a NMVC Company under a written 
contract executed in accordance with the provisions of Sec. 108.510.
    Lending Institution means a concern that is operating under 
regulations of a state or Federal licensing, supervising, or examining 
body, or whose shares are publicly traded and listed on a recognized 
stock exchange or NASDAQ and which has assets in excess of $500 million; 
and which, in either case, holds itself out to the public as engaged in 
the making of commercial and industrial loans and whose lending 
operations are not for the purpose of financing its own or an 
Associate's sales or business operations.
    Leverage means financial assistance provided to a NMVC Company by 
SBA through the guaranty of a NMVC Company's Debentures, and any other 
SBA financial assistance evidenced by a security of the NMVC Company.
    Leverageable Capital means Regulatory Capital, excluding unfunded 
commitments.
    LLC NMVC Company. See definition of NMVC Company in this section.
    Loan means a transaction evidenced by a debt instrument with no 
provision for you to acquire Equity Securities.
    Loans and Investments means Portfolio securities, assets acquired in 
liquidation of Portfolio securities, operating concerns acquired, and 
notes and other securities received, as set forth in the Statement of 
Financial Position of SBA Form 468.
    Low-Income Enterprise means a Smaller Enterprise that, as of the 
time of the initial Financing, has its Principal Office located in a 
Low-Income Geographic Area.
    Low-Income Geographic Area (``LI Area'') means--
    (1) Any population census tract (or in the case of an area that is 
not tracted for population census tracts, the equivalent county 
division, as defined by the Bureau of the Census of the United States 
Department of Commerce for purposes of defining poverty areas), if--
    (i) The poverty rate for that census tract is not less than 20 
percent;
    (ii) In the case of a tract--
    (A) That is located within a metropolitan area, 50 percent or more 
of the households in that census tract have an income equal to less than 
60 percent of the area median gross income; or
    (B) That is not located within a metropolitan area, the median 
household income for such tract does not exceed 80 percent of the 
statewide median household income; or
    (C) As determined by the Administrator in accordance with 
Sec. 108.1940 of this part, a substantial population of Low-Income 
Individuals reside, an inadequate access to investment capital exists, 
or other indications of economic distress exist in that census tract; or
    (2) Any area located within--
    (i) A Historically Underutilized Business Zone (``HUBZone'') as 
defined in section 3(p) of the Small Business Act and 13 CFR 126.103;
    (ii) An Urban Empowerment Zone or Urban Enterprise Community (as 
designated by the Secretary of the United States Department of Housing 
and Urban Development); or

[[Page 105]]

    (iii) A Rural Empowerment Zone or Rural Enterprise Community (as 
designated by the Secretary of the United States Department of 
Agriculture).
    Low-Income Individual means an individual whose income (adjusted for 
family size) does not exceed--
    (1) For metropolitan areas, 80 percent of the area median income; 
and
    (2) For nonmetropolitan areas, the greater of--
    (i) 80 percent of the area median income, or
    (ii) 80 percent of the statewide nonmetropolitan area median income.
    Low-Income Investment means an Equity Capital Investment in a Low-
Income Enterprise.
    Management Expenses has the meaning set forth in Sec. 108.520.
    NAICS Manual means the latest issue of the North American Industrial 
Classification System Manual, prepared by the Office of Management and 
Budget, and available from the U.S. Government Printing Office, 
Superintendent of Documents, P.O. Box 371954, Pittsburgh, Pa., 15250-
7954.
    New Markets Tax Credit program means the tax credit created by the 
Consolidated Appropriations Act of 2001, Public Law 106-554 (114 Stat. 
2762A), enacted December 21, 2000, to be implemented by the Internal 
Revenue Service, United States Department of Treasury.
    New Markets Venture Capital Company or NMVC Company means a 
corporation (Corporate NMVC Company), a limited partnership organized as 
required by Sec. 108.160 (Partnership NMVC Company), or a limited 
liability company (LLC NMVC Company) that--
    (1) Has been granted final approval by SBA under Sec. 108.380, and
    (2) Has entered into a Participation Agreement with SBA. For certain 
purposes, the Entity General Partner of a Partnership NMVC Company is 
treated as if it were a NMVC Company (see Sec. 108.160(a)).
    1940 Act Company means a NMVC Company which is registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).
    1980 Act Company means a NMVC Company which is registered under the 
Small Business Investment Incentive Act of 1980 (Public Law 96-447, 94 
Stat. 2275).
    Operational Assistance means management, marketing, and other 
technical assistance that assists a Small Business with its business 
development.
    Original Issue Price means the price paid by the purchaser for 
securities at the time of issuance.
    Participation Agreement means an agreement between SBA and a company 
to which SBA has granted final approval under Sec. 108.380, that--
    (1) Details the company's operating plan and investment criteria; 
and
    (2) Requires the company to make investments in Smaller Enterprises 
at least 80 percent of which Smaller Enterprises are located in LI 
Areas.
    Partnership NMVC Company. See definition of NMVC Company in this 
section.
    Person means a natural person or legal entity.
    Pool means an aggregation of SBA guaranteed Debentures approved by 
SBA.
    Portfolio means the securities representing a NMVC Company's total 
outstanding Financing of Smaller Enterprises. It does not include idle 
funds or assets acquired in liquidation of Portfolio securities.
    Portfolio Concern means a Small Business Assisted by a NMVC Company.
    Principal Office means the location where the greatest number of the 
concern's employees at any one location perform their work. However, for 
those concerns whose ``primary industry'' (see 13 CFR 121.107) is 
service or construction (see 13 CFR 121.201), the determination of 
principal office excludes the concern's employees who perform the 
majority of their work at job-site locations to fulfill specific 
contract obligations.
    Private Capital has the meaning set forth in Sec. 108.230.
    Publicly Traded and Marketable means securities that are salable 
without restriction or that are salable within 12 months pursuant to 
Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by 
the holder thereof, and are of a class which is traded on a regulated 
stock exchange, or is listed in the Automated Quotation System of the 
National Association of Securities

[[Page 106]]

Dealers (NASDAQ), or has, at a minimum, at least two market makers as 
defined in the relevant sections of the Securities Exchange Act of 1934, 
as amended (15 U.S.C. 77b et seq.), and in all cases the quantity of 
which can be sold over a reasonable period of time without having an 
adverse impact upon the price of the stock.
    Regulatory Capital means Private Capital, excluding any portion of 
Private Capital that is designated as matching resources in accordance 
with Sec. 108.2030(b)(3).
    Relevant Venture Capital Finance means Equity Capital Investments in 
small businesses in low-income communities or benefiting low-income 
communities.
    Retained Earnings Available for Distribution means Undistributed Net 
Realized Earnings less any Unrealized Depreciation on Loans and 
Investments (as reported on SBA Form 468), and represents the amount 
that a NMVC Company may distribute to investors (including SBA) as a 
profit Distribution, or transfer to Private Capital.
    SBA means the Small Business Administration, 409 Third Street, SW., 
Washington, DC 20416.
    Secondary Relative of an individual means:
    (1) A grandparent, grandchild, or any other ancestor or lineal 
descendent who is not a Close Relative;
    (2) An uncle, aunt, nephew, niece, or first cousin; or
    (3) A spouse of any person described in paragraph (1) or (2) of this 
definition.
    Small Business means a small business concern as defined in section 
103(5) of the Act (including its Affiliates), and which meets the 
criteria applicable to the Small Business Investment Company program as 
set forth in part 121 of this chapter.
    Small Business Investment Company (SBIC) means a Licensee, as that 
term is defined in Sec. 107.50 of this chapter.
    Smaller Enterprise means any Small Business that:
    (1) Together with its Affiliates has a net worth of not more than 
$6.0 million and average net income after Federal income taxes 
(excluding any carry-over losses) for the preceding two years no greater 
than $2.0 million; or
    (2) Both together with its Affiliates, and by itself, meets the size 
standard of Sec. 121.201 of this chapter at the time of Financing for 
the industry in which it is then primarily engaged.
    Specialized Small Business Investment Companies (SSBICs) means any 
Small Business Investment Company that--
    (1) Invests solely in small business concerns that contribute to a 
well-balanced national economy by facilitating ownership in such 
concerns by persons whose participation in the free enterprise system is 
hampered because of social or economic disadvantages; and
    (2) Was licensed under section 301(d) of the Small Business 
Investment Act, as in effect before September 30, 1996.
    Trust means the legal entity created for the purpose of holding 
guaranteed Debentures and the guaranty agreement related thereto, 
receiving, holding and making any related payments, and accounting for 
such payments.
    Trust Certificate Rate means a fixed rate determined at the time 
Debentures are pooled.
    Trust Certificates (TCs) means certificates issued by SBA, its agent 
or Trustee and representing ownership of all or a fractional part of a 
Trust or Pool of Debentures.
    Trustee means the trustee or trustees of a Trust.
    Undistributed Net Realized Earnings means Undistributed Realized 
Earnings less Non-cash Gains/Income, each as reported on SBA Form 468.
    Unrealized Appreciation means the amount by which a NMVC Company's 
valuation of each of its Loans and Investments, as determined by its 
Board of Directors or General Partner(s) in accordance with NMVC 
Company's valuation policies, exceeds the cost basis thereof.
    Unrealized Depreciation means the amount by which a NMVC Company's 
valuation of each of its Loans and Investments, as determined by its 
Board of Directors or General Partner(s) in accordance with NMVC 
Company's valuation policies, is below the cost basis thereof.
    Unrealized Gain (Loss) on Securities Held means the sum of the 
Unrealized Appreciation and Unrealized Depreciation on all of a NMVC 
Company's Loans and Investments, less estimated

[[Page 107]]

future income tax expense or estimated realizable future income tax 
benefit, as appropriate.

[66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002]



             Subpart C--Qualifications for the NMVC Program

                        Organizing a NMVC Company



Sec. 108.100  Business form.

    A NMVC Company must be a newly formed for-profit entity or, subject 
to Sec. 108.150, a newly formed for-profit subsidiary of an existing 
entity. It must be organized under State law solely for the purpose of 
performing the functions and conducting the activities contemplated 
under the Act. It may be organized as a corporation (``Corporate NMVC 
Company''), a limited partnership (``Partnership NMVC Company''), or a 
limited liability company (``LLC NMVC Company'').



Sec. 108.110  Qualified management.

    An Applicant must show, to the satisfaction of SBA, that its current 
or proposed management team is qualified and has the knowledge, 
experience, and capability in Community Development Finance or Relevant 
Venture Capital Finance, necessary for investing in the types of 
businesses contemplated by the Act, the regulations in this part and its 
business plan. In determining whether an Applicant's current or proposed 
management team has sufficient qualifications, SBA will consider 
information provided by the Applicant and third parties concerning the 
background, capability, education, training and reputation of its 
general partners, managers, officers, key personnel, and investment 
committee and governing board members. The Applicant must designate at 
least one individual as the official responsible for contact with SBA.



Sec. 108.120  Economic development primary mission.

    The primary mission of a NMVC Company must be economic development 
of one or more LI Areas.



Sec. 108.130  Identified Low Income Geographic Areas.

    A NMVC Company must identify the specific LI Areas in which it 
intends to make Developmental Venture Capital investments and provide 
Operational Assistance under the NMVC program.



Sec. 108.140  SBA approval of initial Management Expenses.

    A NMVC Company must have its Management Expenses approved by SBA at 
the time of designation as a NMVC Company. (See Sec. 108.520 for the 
definition of Management Expenses.)



Sec. 108.150  Management and ownership diversity requirement.

    (a) Diversity requirement. You must have diversity between 
management and ownership in order to be a NMVC Company. To establish 
diversity, you must meet the requirements in paragraphs (b) and (c) of 
this section.
    (b) Percentage ownership requirement. 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.
    (c) Non-affiliation requirement. At least 30 percent of your 
Regulatory Capital and Leverageable Capital must be owned and controlled 
by three Persons unaffiliated with your management and unaffiliated with 
each other, whose investments are significant in dollar and percentage 
terms as determined by SBA. Such Persons must not be your Associates 
(except for their status as your shareholders, limited partners or 
members) and must not Control, be Controlled by, or be under Common 
Control with any of your Associates. A single ``acceptable'' 
Institutional Investor may be substituted for two or three of the three 
investors who are otherwise required. The following Institutional 
Investors are ``acceptable'' for this purpose:
    (1) Entities whose overall activities are regulated and periodically 
examined by state, Federal or other governmental authorities 
satisfactory to SBA;
    (2) Entities listed on the New York Stock Exchange;

[[Page 108]]

    (3) Entities that are publicly-traded and that meet both the minimum 
numerical listing standards and the corporate governance listing 
standards of the New York Stock Exchange:
    (4) Public or private employee pension funds;
    (5) Trusts, foundations, or endowments, but only if exempt from 
Federal income taxation; and
    (6) Other Institutional Investors satisfactory to SBA.
    (d) Voting requirement. The investors required for you to satisfy 
diversity may not delegate their voting rights to any Person who is your 
Associate, or who Controls, is Controlled by, or is under Common Control 
with any of your Associates, without prior SBA approval.
    (e) Requirement to maintain diversity. You must maintain management-
ownership diversity while you are a NMVC Company. If, at any time, you 
no longer have the required management-ownership diversity, you must:
    (1) Notify SBA within 10 days; and
    (2) Re-establish diversity within six months.

[66 FR 28609, May 23, 2001; 66 FR 32894, June 19, 2001]



Sec. 108.160  Special rules for NMVC Companies formed as limited 
partnerships.

    (a) Entity General Partner. (1) A general partner which is a 
corporation, limited liability company or partnership (an ``Entity 
General Partner'') shall be organized under state law solely for the 
purpose of serving as the general partner of one or more NMVC companies.
    (2) SBA must approve any person who will serve as an officer, 
director, manager, or general partner of the Entity General Partner. 
This provision must be stated in an Entity General Partner's Certificate 
of Incorporation, operating agreement, limited partnership agreement or 
other similar governing instrument.
    (3) An Entity General Partner is subject to the same examination and 
reporting requirements as a NMVC Company under sections 361 and 362 of 
the Act. The restrictions and obligations imposed upon a NMVC Company by 
Secs. 108.1810, 108.30, 108.410 through 108.450, 108.470, 108.500, 
108.510, 108.585, 108.600, 108.680, 108.690 through 108.692, and 
108.1910 apply also to an Entity General Partner of a NMVC Company.
    (4) The general partner(s) of your Entity General Partner(s) will be 
considered your general partner.
    (5) If your Entity General Partner is a limited partnership, its 
limited partners may be considered your Control Person(s) if they meet 
the definition for Control Person in Sec. 108.50.
    (b) Other requirements for Partnership NMVC Companies. If you are a 
Partnership NMVC Company:
    (1) You must have a minimum duration of 10 years or two years 
following the maturity of your last-maturing Leverage security, 
whichever is longer. After 10 years, if all Leverage has been repaid or 
redeemed and all amounts due SBA, its agent, or Trustee have been paid, 
the Partnership NMVC Company may be terminated by a vote of your 
partners;
    (2) None of your general partner(s) may be removed or replaced by 
your limited partners without prior written approval of SBA;
    (3) Any transferee of, or successor in interest to, your general 
partner shall have only the rights and liabilities of a limited partner 
pending SBA's written approval of such transfer or succession; and
    (4) You must incorporate all the provisions in this paragraph (b) in 
your limited partnership agreement.
    (c) Obligations of a Control Person. All Control Persons are bound 
by the disciplinary provisions of sections 365 and 366 of the Act and by 
the conflict-of-interest rules under Sec. 108.730. The term NMVC 
Company, as used in Secs. 108.30, 108.460, and 108.680, includes all of 
the NMVC Company's Control Persons. The conditions specified in 
Sec. 108.1810 and Sec. 108.1910 apply to all general partners.
    (d) Liability of general partner for partnership debts to SBA. 
Subject to section 365 of the Act, your general partner is not liable 
solely by reason of its status as a general partner for repayment of any 
Leverage or debts you owe to SBA unless SBA, in the exercise of 
reasonable investment prudence, and with regard to your financial 
soundness, determines otherwise prior to the purchase or guaranty of 
your Leverage.

[[Page 109]]

    (e) Special Leverage requirement. Before your first issuance of 
Leverage, you must furnish SBA with evidence that you qualify as a 
partnership for tax purposes, either by a ruling from the Internal 
Revenue Service or by an opinion of counsel.

                       Capitalizing a NMVC Company



Sec. 108.200  Adequate capital for NMVC Companies.

    You must meet the requirements of Secs. 108.200-108.230 in order to 
qualify for designation as a NMVC Company and to receive Leverage.



Sec. 108.210  Minimum capital requirements for NMVC Companies.

    You must have Regulatory Capital of at least $5,000,000 and 
Leverageable Capital of at least $500,000 to become a NMVC Company.



Sec. 108.230  Private Capital for NMVC Companies.

    (a) General. Private Capital means the contributed capital of a NMVC 
Company, plus unfunded binding commitments by Institutional Investors 
(including commitments evidenced by a promissory note) to contribute 
capital to a NMVC Company.
    (b) Contributed capital. For purposes of this section, contributed 
capital means the paid-in capital and paid-in surplus of a Corporate 
NMVC Company, the members' paid-in capital of a LLC NMVC Company, or the 
partners' paid-in capital of a Partnership NMVC Company, in each case 
subject to the limitations in paragraph (c) of this section.
    (c) Exclusions from Private Capital. Private Capital does not 
include:
    (1) Funds borrowed by a NMVC Company from any source.
    (2) Funds obtained through the issuance of Leverage.
    (3) Funds obtained directly from any Federal agency or department.
    (4) Any portion of a commitment from an Institutional Investor with 
a net worth of less than $10 million that exceeds 10 percent of such 
Institutional Investor's net worth.
    (5) A commitment from an investor if SBA determines that the 
collectability of the commitment is questionable.
    (d) Limitations on including non-cash capital contributions in 
Private Capital. Private Capital does not include capital contributions 
in a form other than cash, except as provided in this paragraph (d). 
Subject to SBA's prior approval, Private Capital may include payments 
made on behalf of an Applicant or Conditionally Approved NMVC Company 
before the Applicant or Conditionally Approved NMVC Company becomes a 
NMVC Company for organizational expenses and Management Expenses 
incurred by the Applicant or the Conditionally Approved NMVC Company 
prior to its becoming a NMVC Company.
    (e) Contributions with borrowed funds. You may not accept any 
capital contribution made with funds borrowed by a Person seeking to own 
an equity interest (whether direct or indirect, beneficial or of record) 
of at least 10 percent of your Private Capital. This exclusion does not 
apply if:
    (1) Such Person's net worth is at least twice the amount borrowed; 
or
    (2) SBA gives its prior written approval of the capital 
contribution.

[66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002]



Subpart D--Application and Approval Process for NMVC Company Designation



Sec. 108.300  When and how to apply for designation as a NMVC Company.

    (a) Notice of Funds Availability (``NOFA''). SBA will publish a NOFA 
in the Federal Register, advising potential applicants of the 
availability of funds for the NMVC program. An entity may then submit an 
application for designation as a NMVC Company. When submitting its 
application, an Applicant must comply with both these regulations and 
any requirements specified in the NOFA, including submission deadlines. 
The NOFA may specify limitations, special rules, procedures, and 
restrictions for a particular funding round.
    (b) Application form. An Applicant must apply for designation as a 
NMVC Company using the application packet provided by SBA. Upon receipt 
of an

[[Page 110]]

application, SBA may request clarifying or technical information on the 
materials submitted as part of the application.



Sec. 108.310  Contents of application.

    Each Applicant must submit a complete application, including the 
following:
    (a) Amounts. The Applicant must indicate--
    (1) The specific amount of Regulatory Capital it proposes to raise 
(which amount must be at least $5,000,000); and
    (2) The specific amount of binding commitments for contributions in 
cash or in-kind it proposes to raise, and/or an annuity it proposes to 
purchase, in accordance with the requirements of Sec. 108.2030, as its 
matching resources for its Operational Assistance grant award (the 
aggregate of which must be not less than $1,500,000 or 30 percent of the 
Regulatory Capital it proposes to raise under paragraph (a)(1) of this 
section, whichever is greater).
    (b) Comprehensive business plan. The Applicant must submit a 
comprehensive business plan covering at least a five-year period, 
addressing the specific items described in Sec. 108.320, and which 
demonstrates that the Applicant has the capacity to operate successfully 
as a NMVC Company.
    (c) New Markets Tax Credit program. Applicant must address if and to 
what extent it intends to conform its activities to the New Markets Tax 
Credit laws. If Applicant plans to seek a New Markets Tax Credit, 
Applicant also must state the amount of tax credit allocation it intends 
to seek.

[66 FR 28609, May 23, 2001, as amended at 67 FR 68502, Nov. 12, 2002]



Sec. 108.320  Contents of comprehensive business plan.

    (a) Executive summary. The executive summary must include a 
description of--
    (1) The Applicant;
    (2) Its strategy for how it proposes to make successful 
Developmental Venture Capital investments in identified LI Areas;
    (3) The markets in the LI Areas it proposes to serve; and
    (4) How it intends to work with community organizations in and be 
accountable to the residents of identified LI Areas in order to 
facilitate its Developmental Venture Capital investments.
    (b) Capacity, skills, and experience of the management team. An 
Applicant must provide information generally as to the background, 
capability, education, reputation and training of its general partners, 
managers, officers, key personnel, investment committee and governing 
board members. The Applicant also must provide information specifically 
on these individuals' qualifications and reputation in the areas of 
Community Development Finance and/or Relevant Venture Capital Finance, 
including the impact of these individuals' activities in these areas.
    (c) Market analysis. An Applicant must provide an analysis of the LI 
Areas in which it intends to focus its Developmental Venture Capital 
investments and Operational Assistance to Smaller Enterprises, 
demonstrating that the Applicant understands the market and the unmet 
capital needs in such areas and how its activities will meet these unmet 
capital needs through Developmental Venture Capital investments and will 
have a positive economic impact on those areas. The analysis must 
include a description of the extent of the economic distress in the 
identified LI Areas. An Applicant also must analyze the extent of the 
demand in such areas for Developmental Venture Capital investments and 
any factors or trends that may affect the Applicant's ability to make 
effective Developmental Venture Capital investments.
    (d) Operational capacity and investment strategies. An Applicant 
must submit information concerning its policies and procedures for 
underwriting and approving its Developmental Venture Capital 
investments, monitoring its portfolio, and maintaining internal controls 
and operations.
    (e) Regulatory Capital. An Applicant must include a detailed 
description of how it plans to raise its Regulatory Capital. An 
Applicant must discuss its potential sources of Regulatory Capital, the 
estimated timing on raising such funds, and the extent of the 
expressions of interest to commit such funds to the Applicant.

[[Page 111]]

    (f) Plan for providing Operational Assistance. An Applicant must 
describe how it plans to use its grant funds to provide Operational 
Assistance to Smaller Enterprises in which it will make Developmental 
Venture Capital investments. Its plan must address the types of 
Operational Assistance it proposes to provide, and how it plans to 
provide the Operational Assistance through the use of licensed 
professionals, when necessary, either from its own staff or from outside 
entities.
    (g) Matching resources for Operational Assistance grant. An 
Applicant must include a detailed description of how it plans to obtain 
binding commitments for cash or in-kind contributions, and/or to 
purchase an annuity, to match the funds requested from SBA for the 
Applicant's Operational Assistance grant. If it proposes to obtain 
commitments for cash and in-kind contributions, it also must estimate 
the ratio of cash to in-kind contributions (in no event may in-kind 
contributions exceed 50 percent of the total contributions). Applicant 
must discuss its potential sources of matching resources, the estimated 
timing on raising such funds, and the extent of the expressions of 
interest to commit such funds to the Applicant. Potential sources of 
matching resources must satisfy the requirements in Sec. 108.2030(b)(1).
    (h) Projected amount of investment in LI Areas. An Applicant must 
describe the amount of its total Regulatory Capital and Leverage that it 
proposes to invest in Smaller Enterprises located in LI Areas, as 
compared to the amount that it proposes to invest in Small Businesses 
located outside of LI Areas.
    (i) Projected impact. An Applicant must describe the criteria and 
economic measurements to be used to evaluate whether and to what extent 
it has met the objectives of the NMVC program. It must include:
    (1) A description of the extent to which it will concentrate its 
Developmental Venture Capital investments and Operational Assistance 
activities in identified LI Areas;
    (2) An estimate of the social, economic, and community development 
benefits to be created within identified LI Areas over the next five 
years or more as a result of its activities;
    (3) A description of the criteria to be used to measure the benefits 
created as a result of its activities;
    (4) A discussion about the amount of such benefits created that it 
will consider to constitute successfully meeting the objectives of the 
NMVC program.
    (j) Affiliates and business relationships. Applicant must submit 
information regarding the management and financial strength of any 
parent or holding entity, affiliated firm or entity, or any other firm 
or entity essential to the success of the Applicant's business plan.

[66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002]



Sec. 108.330  Grant issuance fee.

    An Applicant must pay to SBA a grant issuance fee of $5,000. An 
Applicant must submit this fee in advance, at the time of application 
submission. If SBA does not select an Applicant as a Conditionally 
Approved NMVC Company or designate an Applicant as a NMVC Company, SBA 
will refund this fee to the Applicant.



          Subpart E--Evaluation and Selection of NMVC Companies



Sec. 108.340  Evaluation and selection--general.

    SBA will evaluate and select an Applicant to participate in the NMVC 
program solely at SBA's discretion, based on SBA's review of the 
Applicant's application materials, interviews or site visits with the 
Applicant (if any), and background investigations conducted by SBA and 
other Federal agencies. SBA's evaluation and selection process is 
intended to--
    (a) Ensure that Applicants are evaluated on a competitive basis and 
in a fair and consistent manner;
    (b) Take into consideration the unique proposals presented by 
Applicants;
    (c) Ensure that each Applicant that SBA designates as a NMVC Company 
can fulfill successfully the goals of its comprehensive business plan; 
and

[[Page 112]]

    (d) Ensure that SBA selects Applicants in such a way as to promote 
Developmental Venture Capital investments nationwide and in both urban 
and rural areas.



Sec. 108.350  Eligibility and completeness.

    SBA will not consider any application that is not complete or that 
is submitted by an Applicant that does not meet the eligibility criteria 
described in subpart C of this part. SBA, at its sole discretion, may 
request from an Applicant additional information concerning eligibility 
criteria or easily completed portions of the application in order to 
allow SBA to consider that Applicant's application.



Sec. 108.360  Evaluation criteria.

    SBA will evaluate and select an Applicant for participation in the 
NMVC program by considering the following criteria--
    (a) The quality of the Applicant's comprehensive business plan in 
terms of meeting the objectives of the NMVC program;
    (b) The likelihood that the Applicant will fulfill the goals 
described in its comprehensive business plan;
    (c) The capability of the Applicant's management team;
    (d) The strength and likelihood for success of the Applicant's 
operations and investment strategies;
    (e) The need for Developmental Venture Capital investments in the LI 
Areas in which the Applicant intends to invest;
    (f) The extent to which the Applicant will concentrate its 
activities on serving the LI Areas in which it intends to invest, 
including the ratio of resources that it proposes to invest in such 
areas as compared to other areas;
    (g) The Applicant's demonstrated understanding of the markets in the 
LI Areas in which it intends to focus its activities;
    (h) The likelihood that and the time frame within which the 
Applicant will be able to--
    (1) Raise the Regulatory Capital it proposes to raise for its 
investments, and
    (2) Obtain the binding commitments for contributions in cash or in-
kind and/or an annuity it proposes to obtain as its matching resources 
for its Operational Assistance grant award;
    (i) The strength of the Applicant's proposal to provide Operational 
Assistance to Smaller Enterprises in which it plans to invest;
    (j) The extent to which the activities proposed by the Applicant 
will promote economic development and the creation of wealth and job 
opportunities in the LI Areas in which it intends to invest and among 
individuals living in LI Areas; and
    (k) The strength of the Applicant's application compared to 
applications submitted by other Applicants and by SSBICs intending to 
invest in the same or proximate LI Areas.

[66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002]



Sec. 108.370  Conditional approval.

    From among the Applicants submitting eligible and complete 
applications, SBA will select a number of Applicants and will 
conditionally approve such selected Applicants to participate in the 
NMVC program. SBA will give each such Conditionally Approved NMVC 
Company a specific period of time, not to exceed two years, to satisfy 
the requirements to become a NMVC Company.



Sec. 108.380  Final approval as a NMVC Company.

    (a) General rule. With respect to each Conditionally Approved NMVC 
Company, SBA will either:
    (1) Grant final approval to participate in the NMVC program and 
designate such company as a NMVC Company, if such Conditionally Approved 
NMVC Company:
    (i) Within the specific period of time SBA gave to it when SBA 
conditionally approved it for participation in the NMVC program, has 
raised:
    (A) The amount of Regulatory Capital set forth in its application, 
pursuant to Sec. 108.310(a)(1); and
    (B) The amount of matching resources for its Operational Assistance 
grant award set forth in its application, pursuant to 
Sec. 108.310(a)(2); and
    (ii) Enters into a Participation Agreement with SBA; or
    (2) Revoke SBA's conditional approval of the company, at which time

[[Page 113]]

it is no longer a Conditionally Approved NMVC Company and must not 
participate in the NMVC program or represent itself as a Conditionally 
Approved NMVC Company.
    (b) Exception to requirement to raise matching resources. (1) 
General. At its discretion and based upon a showing of good cause, SBA 
may consider a Conditionally Approved NMVC Company to have satisfied the 
requirement in paragraph (a)(1)(i)(B) of this section to raise matching 
resources in the amount of at least 30 percent of its Regulatory Capital 
if the Conditionally Approved NMVC Company--
    (i) Already has raised at least 20 percent of the total amount of 
required matching resources; and
    (ii) Has a viable plan that reasonably projects its capacity to 
raise the remainder of the required amount of matching resources.
    (2) Request for exception. Before the expiration of the time period 
given to it by SBA to meet the requirements to become a NMVC Company, a 
Conditionally Approved NMVC Company may submit to SBA a request that SBA 
grant the exception described in paragraph (b)(1) of this section. Such 
Conditionally Approved NMVC must present to SBA evidence of good cause 
for such request, as well as evidence supporting the elements of the 
exception described in paragraph (b)(1) of this section.
    (3) No applicability to Regulatory Capital. The exception described 
in this section applies only to matching resources for the Operational 
Assistance grant award. Under no circumstances will SBA designate a 
Conditionally Approved NMVC Company as a NMVC Company if such 
Conditionally Approved NMVC Company does not raise the required amount 
of Regulatory Capital within the time period SBA gave it to do so.

[66 FR 28609, May 23, 2001, as amended at 67 FR 68503, Nov. 12, 2002]



         Subpart F--Changes in Ownership, Structure, or Control

             Changes in Control or Ownership of NMVC Company



Sec. 108.400  Changes in ownership of 10 percent or more of NMVC Company but no change of Control.

    You must obtain SBA's prior written approval for any proposed 
transfer or issuance of ownership interests that results in the 
ownership (beneficial or of record) by any Person, or group of Persons 
acting in concert, of at least 10 percent of any class of your stock, 
partnership capital or membership interests.



Sec. 108.410  Changes in Control of NMVC Company (through change in 
ownership or otherwise).

    You must obtain SBA's prior written approval for any proposed 
transaction or event that results in Control by any Person(s) not 
previously approved by SBA.



Sec. 108.420  Prohibition on exercise of ownership or Control rights in 
NMVC Company before SBA approval.

    Without prior written SBA approval, no change of ownership or 
Control may take effect and no officer, director, employee or other 
Person acting on your behalf shall:
    (a) Register on your books any transfer of ownership interest to the 
proposed new owner(s);
    (b) Permit the proposed new owner(s) to exercise voting rights with 
respect to such ownership interest (including directly or indirectly 
procuring or voting any proxy, consent or authorization as to such 
voting rights at any meeting of shareholders, partners or members);
    (c) Permit the proposed new owner(s) to participate in any manner in 
the conduct of your affairs (including exercising control over your 
books, records, funds or other assets; participating directly or 
indirectly in any disposition thereof; or serving as an officer, 
director, partner, manager, employee or agent); or
    (d) Allow ownership or Control to pass to another Person.

[[Page 114]]



Sec. 108.430  Notification to SBA of transactions that may change ownership 
or Control.

    You must promptly notify SBA as soon as you have knowledge of 
transactions or events that may result in a transfer of Control or 
ownership of at least 10 percent of your capital. If there is any doubt 
as to whether a particular transaction or event will result in such a 
change, report the facts to SBA.



Sec. 108.440  Standards governing prior SBA approval for a proposed transfer of Control.

    SBA approval is contingent upon full disclosure of the real parties 
in interest, the source of funds for the new owners' interest, and other 
data requested by SBA. As a condition of approving a proposed transfer 
of control, SBA may:
    (a) Require an increase in your Regulatory Capital;
    (b) Require the new owners or the transferee's Control Person(s) to 
assume, in writing, personal liability for your Leverage, effective only 
in the event of their direct or indirect participation in any transfer 
of Control not approved by SBA; or
    (c) Require compliance with any other conditions set by SBA, 
including compliance with the requirements for minimum capital and 
management-ownership diversity as in effect at such time for new NMVC 
Companies.



Sec. 108.450  Notification to SBA of pledge of NMVC Company's shares.

    (a) You must notify SBA in writing, within 30 calendar days, of the 
terms of any transaction in which:
    (1) Any Person, or group of Persons acting in concert, pledges 
shares of your stock (or equivalent ownership interests) as collateral 
for indebtedness; and
    (2) The shares pledged are at least 10 percent of your Regulatory 
Capital.
    (b) If the transaction creates a change of ownership or Control, you 
must comply with Sec. 108.400 or Sec. 108.410, as appropriate.

    Restrictions on Common Control or Ownership of Two or More NMVC 
                                Companies



Sec. 108.460  Restrictions on Common Control or ownership of two (or more) NMVC Companies.

    Without SBA's prior written approval, you must not have an officer, 
director, manager, Control Person, or owner (with a direct or indirect 
ownership interest of at least 10 percent) who is also:
    (a) An officer, director, manager, Control Person, or owner (with a 
direct or indirect ownership interest of at least 10 percent) of another 
NMVC Company; or
    (b) An officer or director of any Person that directly or indirectly 
controls, or is controlled by, or is under Common Control with, another 
NMVC Company.

                   Change in Structure of NMVC Company



Sec. 108.470  SBA approval of merger, consolidation, or reorganization of NMVC Company.

    You may not merge, consolidate, change form of organization 
(corporation or partnership) or reorganize without SBA's prior written 
approval. Any such merger or consolidation will be subject to 
Sec. 108.440.



          Subpart G--Managing the Operations of a NMVC Company

                          General Requirements



Sec. 108.500  Lawful operations under the Act.

    You must engage only in the activities contemplated by the Act and 
in no other activities.



Sec. 108.502  Representations to the public.

    You may not represent or imply to anyone that the SBA, the U.S. 
Government or any of its agencies or officers has approved any ownership 
interests you have issued or obligations you have incurred. Be certain 
to include a statement to this effect in any solicitation to investors. 
Example: You may not represent or imply that ``SBA stands behind the 
NMVC Company'' or

[[Page 115]]

that ``Your capital is safe because SBA's experts review proposed 
investments to make sure they are safe for the NMVC Company.''



Sec. 108.503  NMVC Company's adoption of an approved valuation policy.

    (a) Valuation guidelines. You must prepare, document and report the 
valuations of your Loans and Investments in accordance with the 
Valuation Guidelines for SBICs issued by SBA. These guidelines may be 
obtained from SBA's Investment Division.
    (b) SBA approval of valuation policy. You must have a written 
valuation policy approved by SBA for use in determining the value of 
your Loans and Investments. You must either:
    (1) Adopt without change the model valuation policy set forth in 
section III of the Valuation Guidelines for SBICs; or
    (2) Obtain SBA's prior written approval of an alternative valuation 
policy.
    (c) Responsibility for valuations. Your board of directors, managing 
members, or general partner(s) will be solely responsible for adopting 
your valuation policy and for using it to prepare valuations of your 
Loans and Investments for submission to SBA. If SBA reasonably believes 
that your valuations, individually or in the aggregate, are materially 
misstated, it reserves the right to require you to engage, at your 
expense, an independent third party acceptable to SBA to substantiate 
the valuations.
    (d) Frequency of valuations. (1) You must value your Loans and 
Investments at the end of the second quarter of your fiscal year, and at 
the end of your fiscal year.
    (2) On a case-by-case basis, SBA may require you to perform 
valuations more frequently.
    (3) You must report material adverse changes in valuations at least 
quarterly, within thirty days following the close of the quarter.
    (e) Review of valuations by independent public accountant. (1) For 
valuations performed as of the end of your fiscal year, your independent 
public accountant must review your valuation procedures and the 
implementation of such procedures, including adequacy of documentation.
    (2) The independent public accountant's report on your audited 
annual financial statements (SBA Form 468) must include a statement that 
your valuations were prepared in accordance with your approved valuation 
policy.



Sec. 108.504  Equipment and office requirements.

    (a) Computer capability. You must have a personal computer with a 
modem, and be able to use this equipment to prepare reports (using SBA 
provided software) and transmit them to SBA. In addition, you must have 
access to the Internet and the capability to send and receive electronic 
mail via the Internet.
    (b) Facsimile capability. You must be able to receive facsimile 
messages 24 hours per day at your primary office.
    (c) Accessible office. You must maintain an office that is 
convenient to the public and is open for business during normal working 
hours.



Sec. 108.506  Safeguarding the NMVC Company's assets/Internal controls.

    You must adopt a plan to safeguard your assets and monitor the 
reliability of your financial data, personnel, Portfolio, funds and 
equipment. You must provide your bank and custodian with a certified 
copy of your resolution or other formal document describing your control 
procedures.



Sec. 108.507  Violations based on false filings and nonperformance of agreements with SBA.

    The following shall constitute a violation of this part:
    (a) Nonperformance. Nonperformance of any of the requirements of any 
Debenture or of any written agreement with SBA.
    (b) False statement. In any document submitted to SBA:
    (1) Any false statement knowingly made; or
    (2) Any misrepresentation of a material fact; or
    (3) Any failure to state a material fact. A material fact is any 
fact that is necessary to make a statement not

[[Page 116]]

misleading in light of the circumstances under which the statement was 
made.



Sec. 108.509  Employment of SBA officials.

    Without SBA's prior written approval, for a period of two years 
after the date of your most recent issuance of Leverage (or the receipt 
of any SBA Assistance as defined in part 105 of this chapter), you are 
not permitted to employ, offer employment to, or retain for professional 
services, any person who:
    (a) Served as an officer, attorney, agent, or employee of SBA on or 
within one year before such date; and
    (b) As such, occupied a position or engaged in activities which, in 
SBA's determination, involved discretion with respect to the granting of 
SBA Assistance.

                       Management and Compensation



Sec. 108.510  SBA approval of NMVC Company's Investment Adviser/Manager.

    You may employ an Investment Adviser/Manager who will be subject to 
the supervision of your board of directors, managing members, or general 
partner. If you have Leverage or plan to seek Leverage, you must obtain 
SBA's prior written approval of the management contract. SBA's approval 
of an Investment Adviser/Manager for one NMVC Company does not indicate 
approval of that manager for any other NMVC Company.
    (a) Management contract. The contract must:
    (1) Specify the services the Investment Adviser/Manager will render 
to you and to the Small Businesses in your Portfolio; and
    (2) Indicate the basis for computing Management Expenses.
    (b) Material change to approved management contract. If there is a 
material change, both you and SBA must approve such change in advance. 
If you are uncertain if the change is material, submit the proposed 
revision to SBA.



Sec. 108.520  Management Expenses of a NMVC Company.

    SBA must approve your initial Management Expenses and any increases 
in your Management Expenses.
    (a) Definition of Management Expenses. Management Expenses include:
    (1) Salaries;
    (2) Office expenses;
    (3) Travel;
    (4) Business development;
    (5) Office and equipment rental;
    (6) Bookkeeping; and
    (7) Expenses related to developing, investigating and monitoring 
investments.
    (b) Management Expenses do not include services provided by 
specialized outside consultants, outside lawyers and independent public 
accountants, if they perform services not generally performed by a 
venture capital company.

                    Cash Management by a NMVC Company



Sec. 108.530  Restrictions on investments of idle funds by NMVC Companies.

    (a) Permitted investments of idle funds. Funds not invested in Small 
Businesses must be maintained in:
    (1) Direct obligations of, or obligations guaranteed as to principal 
and interest by, the United States, which mature within 15 months from 
the date of the investment; or
    (2) Repurchase agreements with federally insured institutions, with 
a maturity of seven days or less. The securities underlying the 
repurchase agreements must be direct obligations of, or obligations 
guaranteed as to principal and interest by, the United States. The 
securities must be maintained in a custodial account at a federally 
insured institution; or
    (3) Certificates of deposit with a maturity of one year or less, 
issued by a federally insured institution; or
    (4) A deposit account in a federally insured institution, subject to 
a withdrawal restriction of one year or less; or
    (5) A checking account in a federally insured institution; or
    (6) A reasonable petty cash fund.
    (b) Deposit of funds in excess of the insured amount. (1) You are 
permitted to deposit funds in a federally insured institution in excess 
of the institution's insured amount, but only if the institution is 
``well capitalized'' in accordance with the definition set forth in 
regulations of the Federal Deposit Insurance

[[Page 117]]

Corporation, as amended (12 CFR 325.103).
    (2) Exception: You may make a temporary deposit (not to exceed 30 
days) in excess of the insured amount, in a transfer account established 
to facilitate the receipt and disbursement of funds or to hold funds 
necessary to honor Commitments issued.
    (c) Deposit of funds in Associate institution. A deposit in, or a 
repurchase agreement with, a federally insured institution that is your 
Associate is not considered a Financing of such Associate under 
Sec. 108.730, provided the terms of such deposit or repurchase agreement 
are no less favorable than those available to the general public.

            Borrowing by NMVC Companies From Non-SBA Sources



Sec. 108.550  Prior approval of secured third-party debt of NMVC companies.

    (a) Definition. In this section, ``secured third-party debt'' means 
any non-SBA debt secured by any of your assets, including secured 
guarantees and other contingent obligations that you voluntarily assume 
and secured lines of credit.
    (b) General rule. You must get SBA's written approval before you 
incur any secured third-party debt or refinance any debt with secured 
third-party debt, including any renewal of a secured line of credit, 
increase in the maximum amount available under a secured line of credit, 
or expansion of the scope of a security interest or lien. For purposes 
of this paragraph (b), ``expansion of the scope of a security interest 
or lien'' does not include the substitution of one asset or group of 
assets for another, provided the asset values (as reported on your most 
recent annual Form 468) are comparable.
    (c) Conditions for SBA approval. As a condition of granting its 
approval under this section, SBA may impose such restrictions or 
limitations as it deems appropriate, taking into account your historical 
performance, current financial position, proposed terms of the secured 
debt and amount of aggregate debt you will have outstanding (including 
Leverage). SBA will not favorably consider any requests for approval 
which include a blanket lien on all your assets, or a security interest 
in your investor commitments in excess of 125 percent of the proposed 
borrowing.
    (d) Thirty-day approval. Unless SBA notifies you otherwise within 30 
days after it receives your request, you may consider your request 
automatically approved if:
    (1) You are in regulatory compliance;
    (2) The security interest in your assets is limited to either those 
assets being acquired with the borrowed funds or an asset coverage ratio 
of no more than 2:1;
    (3) Your request is for approval of a secured line of credit that 
would not cause your total outstanding borrowings (not including 
Leverage) to exceed 50 percent of your Leverageable Capital.

                Voluntary Decrease in Regulatory Capital



Sec. 108.585  Voluntary decrease in NMVC Company's Regulatory Capital.

    You must obtain SBA's prior written approval to reduce your 
Regulatory Capital by more than two percent in any fiscal year. At all 
times, you must retain sufficient Regulatory Capital to meet the minimum 
capital requirements in the Act and Sec. 108.210, and sufficient 
Leverageable Capital to avoid having excess Leverage in violation of 
section 355(d) of the Act.



 Subpart H--Recordkeeping, Reporting, and Examination Requirements for 
                             NMVC Companies

              Recordkeeping Requirements for NMVC Companies



Sec. 108.600  General requirement for NMVC Company to maintain and preserve records.

    (a) Maintaining your accounting records. You must establish and 
maintain your accounting records using SBA's standard chart of accounts 
for SBICs, unless SBA approves otherwise. You may obtain this chart of 
accounts from SBA.
    (b) Location of records. You must keep the following records at your 
principal place of business or, in the case of

[[Page 118]]

paragraph (b)(3) of this section, at the branch office that is primarily 
responsible for the transaction:
    (1) All your accounting and other financial records;
    (2) All minutes of meetings of directors, stockholders, executive 
committees, partners, or other officials; and
    (3) All documents and supporting materials related to your business 
transactions, except for any items held by a custodian under a written 
agreement between you and a Portfolio Concern or non-SBA lender, or any 
securities held in a safe deposit box, or by a licensed securities 
broker in an amount not exceeding the broker's per-account insurance 
coverage.
    (c) Preservation of records. You must retain all the records that 
are the basis for your financial reports. Such records must be preserved 
for the periods specified in this paragraph (c), and must remain 
accessible for the first two years of the preservation period.
    (1) You must preserve for at least 15 years or, in the case of a 
Partnership NMVC Company or LLC NMVC Company, at least two years beyond 
the date of liquidation:
    (i) All your accounting ledgers and journals, and any other records 
of assets, asset valuations, liabilities, equity, income, and expenses.
    (ii) Your Articles, bylaws, minute books, and NMVC Company 
application.
    (iii) All documents evidencing ownership of the NMVC Company 
including ownership ledgers, and ownership transfer registers.
    (2) You must preserve for at least six years all supporting 
documentation (such as vouchers, bank statements, or canceled checks) 
for the records listed in paragraph (b)(1) of this section.
    (3) After final disposition of any item in your Portfolio, you must 
preserve for at least six years:
    (i) Financing applications and Financing instruments.
    (ii) All loan, participation, and escrow agreements.
    (iii) Size status declarations (SBA Form 480).
    (iv) Any capital stock certificates and warrants of the Portfolio 
Concern that you did not surrender or exercise.
    (v) All other documents and supporting material relating to the 
Portfolio Concern, including correspondence.
    (4) You may substitute a microfilm or computer-scanned or generated 
copy for the original of any record covered by this paragraph (c).
    (d) Additional requirement. You must comply with the recordkeeping 
and record retention requirements set forth in Circular A-110 of the 
Office of Management and Budget. (OMB circulars are available from the 
addresses in 5 CFR 1310.3.)



Sec. 108.610  Required certifications for Loans and Investments.

    For each of your Loans and Investments, you must have the documents 
listed in this section. You must keep these documents in your files and 
make them available to SBA upon request.
    (a) SBA Form 480, the Size Status Declaration, executed both by you 
and by the concern you are financing. By executing this document, both 
parties certify that the concern is a Small Business. For securities 
purchased from an underwriter in a public offering, you may substitute a 
prospectus showing that the concern is a Small Business.
    (b) SBA Form 652, a certification by the concern you are financing 
that it will not illegally discriminate (see part 112 of this chapter).
    (c) A certification by the concern you are financing of the intended 
use of the proceeds. For securities purchased from an underwriter in a 
public offering, you may substitute a prospectus indicating the intended 
use of proceeds.
    (d) For each Low-Income Investment, a certification by the concern 
you are financing as to the basis for its qualification as a Low-Income 
Enterprise.



Sec. 108.620  Requirements to obtain information from Portfolio Concerns.

    All the information required by this section is subject to the 
requirements of Sec. 108.600 and must be in English.
    (a) Information for initial Financing decision. Before extending any 
Financing, you must require the applicant to submit such financial 
statements, plans of

[[Page 119]]

operation (including intended use of financing proceeds), cash flow 
analyses, projections, and such community economic development 
information about the company, as are necessary to support your 
investment decision. The information submitted must be consistent with 
the size and type of the business and the amount of the proposed 
Financing.
    (b) Updated financial and community economic development 
information. (1) The terms of each Financing must require the Portfolio 
Concern to provide, at least annually, sufficient financial and 
community economic development information to enable you to perform the 
following required procedures:
    (i) Evaluate the financial condition of the Portfolio Concern for 
the purpose of valuing your investment;
    (ii) Determine the continued eligibility of the Portfolio Concern;
    (iii) Verify the use of Financing proceeds; and
    (iv) Evaluate the community economic development impact of the 
Financing.
    (2) The president, chief executive officer, treasurer, chief 
financial officer, general partner, or proprietor of the Portfolio 
Concern must certify the information submitted to you.
    (3) For financial and valuation purposes, you may accept a complete 
copy of the Federal income tax return filed by the Portfolio Concern (or 
its proprietor) in lieu of financial statements, but only if appropriate 
for the size and type of the business involved.
    (4) The requirements in this paragraph (b) do not apply when you 
acquire securities from an underwriter in a public offering (see 
Sec. 108.825). In that case, you must keep copies of all reports 
furnished by the Portfolio Concern to the holders of its securities.
    (c) Information required for examination purposes. You must obtain 
any information requested by SBA's examiners for the purpose of 
verifying the certifications made by a Portfolio Concern under 
Sec. 108.610. In this regard, your Financing documents must contain 
provisions requiring the Portfolio Concern to give you and/or SBA's 
examiners access to its books and records for such purpose.

                Reporting Requirements for NMVC Companies



Sec. 108.630  Requirement for NMVC companies to file financial statements and supplementary information with SBA (SBA Form 468).

    (a) Annual filing of Form 468. For each fiscal year, you must submit 
to SBA financial statements and supplementary information prepared on 
SBA Form 468. You must file Form 468 on or before the last day of the 
third month following the end of your fiscal year, except for the 
information required under paragraphs (e) and (f) of this section, which 
must be filed on or before the last day of the fifth month following the 
end of your fiscal year.
    (1) Audit of Form 468. An independent public accountant acceptable 
to SBA must audit the annual Form 468.
    (2) Insurance requirement for public accountant. Unless SBA approves 
otherwise, your independent public accountant must carry at least 
$1,000,000 of Errors and Omissions insurance, or be self-insured and 
have a net worth of at least $1,000,000.
    (b) Interim filings of Form 468. When requested by SBA, you must 
file interim reports on Form 468. SBA may require you to file the entire 
form or only certain statements and schedules. You must file such 
reports on or before the last day of the month following the end of the 
reporting period. When you submit a request for a draw under an SBA 
Leverage commitment, you must also comply with any applicable filing 
requirements set forth in Sec. 108.1220.
    (c) Standards for preparation of Form 468. You must prepare SBA Form 
468 in accordance with SBA's Accounting Standards and Financial 
Reporting Requirements for Small Business Investment Companies, which 
you may obtain from SBA.
    (d) Where to file Form 468. Submit all filings of Form 468 to the 
Office of New Markets Venture Capital in the Investment Division of SBA.
    (e) Reporting of social, economic, or community development impact 
information on Form 468. Your annual filing of SBA Form 468 must include 
an assessment of the social, economic, or community development impact 
of each Financing. This assessment must specify

[[Page 120]]

the fulltime equivalent jobs created, the impact of the Financing on the 
revenues and profits of the business and on taxes paid by the business 
and its employees, and a listing of the number and percentage of 
employees who reside in LI Areas.
    (f) Reporting of community development information. For each 
Financing of a Low-Income Enterprise, your Form 468 must include an 
assessment of such Financing with respect to:
    (1) The social, economic or community development benefits achieved 
as a result of the Financing;
    (2) How and to what extent such benefits fulfilled the goals of your 
comprehensive business plan and Participation Agreement;
    (3) Whether you consider the Financing or the results of the 
Financing to have fulfilled the objectives of the NMVC program; and
    (4) Whether, and if so, how you achieved accountability to the 
residents of the LI Area in connection with that Financing.



Sec. 108.640  Requirement to file portfolio financing reports (SBA Form 1031).

    For each Financing you make (excluding guarantees), you must submit 
a Portfolio Financing Report on SBA Form 1031 within 30 days of the 
closing date.



Sec. 108.650  Requirement to report portfolio valuations to SBA.

    You must determine the value of your Loans and Investments in 
accordance with Sec. 108.503. You must report such valuations to SBA 
within 90 days of the end of the fiscal year in the case of annual 
valuations, and within 30 days following the close of other reporting 
periods. You must report material adverse changes in valuations at least 
quarterly, within thirty days following the close of the quarter.



Sec. 108.660  Other items required to be filed by NMVC Company with SBA.

    (a) Reports to owners. You must give SBA a copy of any report you 
furnish to your investors, including any prospectus, letter, or other 
publication concerning your financial operations or those of any 
Portfolio Concern.
    (b) Documents filed with SEC. You must give SBA a copy of any 
report, application or document you file with the Securities and 
Exchange Commission.
    (c) Litigation reports. When you become a party to litigation or 
other proceedings, you must give SBA a report within 30 days that 
describes the proceedings and identifies the other parties involved and 
your relationship to them.
    (1) The proceedings covered by this paragraph (c) include any action 
by you, or by your security holder(s) in a personal or derivative 
capacity, against an officer, director, Investment Adviser or other 
Associate of yours for alleged breach of official duty.
    (2) SBA may require you to submit copies of the pleadings and other 
documents SBA may specify.
    (3) Where proceedings have been terminated by settlement or final 
judgment, you must promptly advise SBA of the terms.
    (4) This paragraph (c) does not apply to collection actions or 
proceedings to enforce your ordinary creditors' rights.
    (d) Notification of criminal charges. If any officer, director, or 
general partner of the NMVC Company, or any other person who was 
required by SBA to complete a personal history statement, is charged 
with or convicted of any criminal offense other than a misdemeanor 
involving a minor motor vehicle violation, you must report the incident 
to SBA within 5 calendar days. Such report must fully describe the facts 
that pertain to the incident.
    (e) Reports concerning Operational Assistance grant funds. You must 
comply with all reporting requirements set forth in Circular A-110 of 
the Office of Management and Budget and any grant award document 
executed between you and SBA.
    (f) Other reports. You must file any other reports SBA may require 
in writing.



Sec. 108.680  Reporting changes in NMVC Company not subject to prior SBA approval.

    (a) Changes to be reported for post-approval. This section applies 
to any changes in your Articles, ownership, capitalization, management, 
operating

[[Page 121]]

area, or investment policies that do not require SBA's prior approval. 
You must report such changes to SBA within 30 days for post approval.
    (b) Approval by SBA. You may consider any change submitted under 
this section to be approved unless SBA notifies you to the contrary 
within 90 days after receiving it. SBA's approval is contingent upon 
your full disclosure of all relevant facts and is subject to any 
conditions SBA may prescribe.

     Examinations of NMVC Companies by SBA for Regulatory Compliance



Sec. 108.690  Examinations.

    All NMVC companies must submit to annual examinations by or at the 
direction of SBA for the purpose of evaluating regulatory compliance.



Sec. 108.691  Responsibilities of NMVC Company during examination.

    You must make all books, records and other pertinent documents and 
materials available for the examination, including any information 
required by the examiner under Sec. 108.620(c). In addition, the 
agreement between you and the independent public accountant performing 
your audit must provide that any information in the accountant's working 
papers be made available to SBA upon request.



Sec. 108.692  Examination fees.

    (a) General. SBA will assess fees for examinations in accordance 
with this section. Unless SBA determines otherwise on a case by case 
basis, SBA will not assess fees for special examinations to obtain 
specific information.
    (b) Base fee. A base fee of $3,500 will be assessed, subject to 
adjustment in accordance with paragraph (c) of this section.
    (c) Adjustments to base fee. The base fee will be decreased based on 
the following criteria:
    (1) If you have no outstanding regulatory violations at the time of 
the commencement of the examination and SBA did not identify any 
violations as a result of the most recent prior examination, you will 
receive a 15% discount on your base fee; and
    (2) If you were fully responsive to the letter of notification of 
examination (that is, you provided all requested documents and 
information within the time period stipulated in the notification letter 
in a complete and accurate manner, and you prepared and had available 
all information requested by the examiner for on-site review), you will 
receive a 10% discount on your base fee.
    (d) Delay fee. If, in the judgment of SBA, the time required to 
complete your examination is delayed due to your lack of cooperation or 
the condition of your records, SBA may assess an additional fee of up to 
$500 per day.



       Subpart I--Financing of Small Businesses by NMVC Companies

   Determining the Eligibility of a Small Business for NMVC Financing



Sec. 108.700  Compliance with size standards in part 121 of this chapter 
as a condition of Assistance.

    You are permitted to provide financial assistance and management 
services only to a Small Business. To determine whether an applicant 
meets the size standards for a Small Business, you may use either the 
financial size standards in Sec. 121.301(c)(1) of this chapter or the 
industry standard covering the industry in which the applicant is 
primarily engaged, as set forth in Sec. 121.301(c)(2) of this chapter.



Sec. 108.710  Requirement to finance Low-Income Enterprises.

    (a) Low-Income Enterprise Financings. At the close of each of your 
fiscal years--
    (1) At least 80 percent of your Portfolio Concerns must be Low-
Income Enterprises in which you have an Equity Capital Investment; and
    (2) For all Financings you have extended, you must have invested at 
least 80 percent (in total dollars) in Equity Capital Investments in 
Low-Income Enterprises.
    (b) Non-compliance with this section. If you have not reached the 
percentages required in paragraph (a) of this section at the end of any 
fiscal year, then you must be in compliance by the end of the following 
fiscal year. However, you will not be eligible for additional

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Leverage until such time as you reach the required percentages (see 
Sec. 108.1120).



Sec. 108.720  Small Businesses that may be ineligible for financing.

    (a) Relenders or reinvestors. You are not permitted to finance any 
business that is a relender or reinvestor. Relenders or reinvestors are 
businesses whose primary business activity involves, directly or 
indirectly, providing funds to others, purchasing debt obligations, 
factoring, or long-term leasing of equipment with no provision for 
maintenance or repair.
    (b) Passive Businesses. You are not permitted to finance a passive 
business.
    (1) Definition. A business is passive if:
    (i) It is not engaged in a regular and continuous business operation 
(for purposes of this paragraph (b), the mere receipt of payments such 
as dividends, rents, lease payments, or royalties is not considered a 
regular and continuous business operation); or
    (ii) Its employees are not carrying on the majority of day to day 
operations, and the company does not provide effective control and 
supervision, on a day to day basis, over persons employed under 
contract; or
    (iii) It passes through substantially all of the proceeds of the 
Financing to another entity.
    (2) Exception for pass-through of proceeds to subsidiary. With the 
prior written approval of SBA, you may finance a passive business if it 
is a Small Business and it passes substantially all the proceeds through 
to one or more subsidiary companies, each of which is an eligible Small 
Business that is not passive. For the purpose of this paragraph (b) (2), 
``subsidiary company'' means a company in which at least 50 percent of 
the outstanding voting securities are owned by the Financed passive 
business.
    (3) Exception for certain Partnership NMVC companies. With the prior 
written approval of SBA, if you are a Partnership NMVC Company, you may 
form one or more wholly owned corporations in accordance with this 
paragraph (b) (3). The sole purpose of such corporation(s) must be to 
provide Financing to one or more eligible, unincorporated Small 
Businesses. You may form such corporation(s) only if a direct Financing 
to such Small Businesses would cause any of your investors to incur 
unrelated business taxable income under section 511 of the Internal 
Revenue Code of 1986, as amended (26 U.S.C. 511). Your investment of 
funds in such corporation(s) will not constitute a violation of 
Sec. 108.730(a).
    (c) Real Estate Businesses. (1) You are not permitted to finance:
    (i) Any business classified under subsector 5311 (Lessors of Real 
Estate) of the NAICS Manual; or
    (ii) Any business listed under subsector 5312 (Offices of Real 
Estate Agents and Brokers) unless at least 80 percent of the revenue is 
derived from non-Affiliate sources.
    (2) You are not permitted to finance a business, regardless of NAICS 
classification, if the Financing is to be used to acquire or refinance 
real property, unless the Small Business:
    (i) Is acquiring an existing property and will use at least 51 
percent of the usable square footage for an eligible business purpose; 
or
    (ii) Is building or renovating a building and will use at least 67 
percent of the usable square footage for an eligible business purpose; 
or
    (iii) Occupies the subject property and uses at least 67 percent of 
the usable square footage for an eligible business purpose.
    (d) Project Financing. You are not permitted to finance a business 
if:
    (1) The assets of the business are to be reduced or consumed, 
generally without replacement, as the life of the business progresses, 
and the nature of the business requires that a stream of cash payments 
be made to the business's financing sources, on a basis associated with 
the continuing sale of assets. Examples include real estate development 
projects and oil and gas wells; or
    (2) The primary purpose of the Financing is to fund production of a 
single item or defined limited number of items, generally over a defined 
production period, and such production will constitute the majority of 
the activities of the Small Business. Examples include motion pictures 
and electric generating plants.

[[Page 123]]

    (e) Farm land purchases. You are not permitted to finance the 
acquisition of farmland. Farmland means land, which is or is intended to 
be used for agricultural or forestry purposes, such as the production of 
food, fiber, or wood, or is so taxed or zoned.
    (f) Public interest. You are not permitted to finance any business 
if the proceeds are to be used for purposes contrary to the public 
interest, including but not limited to activities which are in violation 
of law, or inconsistent with free competitive enterprise.
    (g) Foreign investment. (1) General rule. You are not permitted to 
finance a business if:
    (i) The funds will be used substantially for a foreign operation; or
    (ii) At the time of the Financing or within one year thereafter, 
more than 49 percent of the employees or tangible assets of the Small 
Business are located outside the United States (unless you can show, to 
SBA's satisfaction, that the Financing was used for a specific domestic 
purpose).
    (2) Exception. This paragraph (g) does not prohibit a Financing used 
to acquire foreign materials and equipment or foreign property rights 
for use or sale in the United States.
    (h) Financing NMVC companies or SBICs. You are not permitted to 
provide funds, directly or indirectly, that the Small Business will use:
    (1) To purchase stock in or provide capital to a NMVC Company or 
SBIC; or
    (2) To repay an indebtedness incurred for the purpose of investing 
in a NMVC Company or SBIC.



Sec. 108.730  Financings which constitute conflicts of interest.

    (a) General rule. You must not self-deal to the prejudice of a Small 
Business, the NMVC Company, its shareholders or partners, or SBA. Unless 
you obtain a prior written exemption from SBA for special instances in 
which a Financing may further the purposes of the Act despite presenting 
a conflict of interest, you must not directly or indirectly:
    (1) Provide Financing to any of your Associates, except for a Small 
Business that satisfies all of the following conditions:
    (i) Your Associate relationship with the Small Business is described 
by paragraph (8) or (9) of the definition of Associate in Sec. 108.50;
    (ii) No Person triggering the Associate relationship identified in 
paragraph (a)(1)(i) of this section is a Close Relative or Secondary 
Relative of any Person described in paragraph (1), (2), (4), or (5) of 
the definition of Associate in Sec. 108.50; and
    (iii) No single Associate of yours has either a voting interest or 
an economic interest in the Small Business exceeding 20 percent, and no 
two or more of your Associates have either a voting interest or an 
economic interest exceeding 33 percent. Economic interests shall be 
computed on a fully diluted basis, and both voting and economic 
interests shall exclude any interest owned through the NMVC Company.
    (2) Provide Financing to an Associate of another NMVC Company if one 
of your Associates has received or will receive any direct or indirect 
Financing or a Commitment from that NMVC Company or a third NMVC Company 
(including Financing or Commitments received under any understanding, 
agreement, or cross dealing, reciprocal or circular arrangement).
    (3) Borrow money from:
    (i) A Small Business Financed by you;
    (ii) An officer, director, or owner of at least a 10 percent equity 
interest in such business; or
    (iii) A Close Relative of any such officer, director, or equity 
owner.
    (4) Provide Financing to a Small Business to discharge an obligation 
to your Associate or free other funds to pay such obligation. This 
paragraph (a)(4) does not apply if the obligation is to an Associate 
Lending Institution and is a line of credit or other obligation incurred 
in the normal course of business.
    (b) Rules applicable to Associates. Without SBA' s prior written 
approval, your Associates must not, directly or indirectly:
    (1) Borrow money from any Person described in paragraph (a)(3) of 
this section.
    (2) Receive from a Small Business any compensation in connection 
with

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Assistance you provide (except as permitted under Sec. 108.825(c)), or 
anything of value for procuring, attempting to procure, or influencing 
your action with respect to such Assistance.
    (c) Applicability of other laws. You are also bound by any 
restrictions in Federal or State laws governing conflicts of interest 
and fiduciary obligations.
    (d) Financings with Associates. (1) Financings with Associates 
requiring prior approval. Without SBA's prior written approval, you may 
not Finance any business in which your Associate has either a voting 
equity interest or total equity interests (including potential 
interests) of at least five percent, except as otherwise permitted under 
paragraph (a)(1) of this section.
    (2) Other Financings with Associates. If you and an Associate 
provide Financing to the same Small Business, either at the same time or 
at different times, you must be able to demonstrate to SBA's 
satisfaction that the terms and conditions are (or were) fair and 
equitable to you, taking into account any differences in the timing of 
each party's financing transactions.
    (3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. A 
Financing that falls into one of the following categories is exempt from 
the prior approval requirement in paragraph (d)(1) of this section or is 
presumed to be fair and equitable to you for the purposes of paragraph 
(d)(2) of this section, as appropriate:
    (i) Your Associate is a Lending Institution that is providing 
financing under a credit facility in order to meet the operational needs 
of the Small Business, and the terms of such financing are usual and 
customary.
    (ii) Your Associate invests in the Small Business on the same terms 
and conditions and at the same time as you.
    (iii) Both you and your Associate are NMVC companies.
    (e) Use of Associates to manage Portfolio Concerns. To protect your 
investment, you may designate an Associate to serve as an officer, 
director, or other participant in the management of a Small Business. 
You must identify any such Associate in your records available for SBA's 
review under Sec. 108.600. Without SBA's prior written approval, the 
Associate must not:
    (1) Have any other direct or indirect financial interest in the 
Portfolio Concern that exceeds, or has the potential to exceed, the 
percentages of the Portfolio Concern's equity set forth in paragraph 
(a)(1) of this section.
    (2) Receive any income or anything of value from the Portfolio 
Concern unless it is for your benefit, with the exception of director's 
fees, expenses, and distributions based upon the Associate's ownership 
interest in the Concern.
    (f) 1940 and 1980 Act Companies: SEC exemptions. If you are a 1940 
or 1980 Act Company and you receive an exemption from the Securities and 
Exchange Commission for a transaction described in this section, you 
need not obtain SBA's approval of the transaction. However, you must 
promptly notify SBA of the transaction.
    (g) Restriction on options obtained by NMVC Company's management and 
employees. Your employees, officers, directors, managing members or 
general partners, or the general partners of the management company that 
is providing services to you or to your general partner, may obtain 
options in a Financed Small Business only if:
    (1) They participate in the Financing on a pari passu basis with 
you; or
    (2) SBA gives its prior written approval; or
    (3) The options received are compensation for service as a member of 
the board of directors of the Small Business, and such compensation does 
not exceed that paid to other outside directors. In the absence of such 
directors, fees must be reasonable when compared with amounts paid to 
outside directors of similar companies.



Sec. 108.740  Portfolio diversification (``overline'' limitation).

    (a) Without SBA's prior written approval, you may provide Financing 
or a Commitment to a Small Business only if the resulting amount of your 
aggregate outstanding Financings and Commitments to such Small Business 
and its Affiliates does not exceed 20 percent of the sum of:

[[Page 125]]

    (1) Your Regulatory Capital as of the date of the Financing or 
Commitment; plus
    (2) Any permitted Distribution(s) you made during the five years 
preceding the date of the Financing or Commitment which reduced your 
Regulatory Capital.
    (b) For the purposes of paragraph (a) of this section, you must 
measure each outstanding Financing at its current cost plus any amount 
of the Financing that was previously written off.



Sec. 108.760  How a change in size or activity of a Portfolio Concern 
affects the NMVC Company and the Portfolio Concern.

    (a) Effect on NMVC Company of a change in size of a Portfolio 
Concern. If a Portfolio Concern no longer qualifies as a Small Business 
you may keep your investment in the concern and:
    (1) Subject to the overline limitations of Sec. 108.740, you may 
provide additional Financing to the concern up to the time it makes a 
public offering of its securities.
    (2) Even after the concern makes a public offering, you may exercise 
any stock options, warrants, or other rights to purchase Equity 
Securities which you acquired before the public offering, or fund 
Commitments you made before the public offering.
    (b) Effect of a change in business activity occurring within one 
year of NMVC Company's initial Financing. (1) Retention of Investment. 
Unless you receive SBA's written approval, you may not keep your 
investment in a Portfolio Concern, small or otherwise, which becomes 
ineligible by reason of a change in its business activity within one 
year of your initial investment.
    (2) Request for SBA 's approval to retain investment. If you request 
that SBA approve the retention of your investment, your request must 
include sufficient evidence to demonstrate that the change in business 
activity was caused by an unforeseen change in circumstances and was not 
contemplated at the time the Financing was made.
    (3) Additional Financing. If SBA approves your request to retain an 
investment under paragraph (b)(2) of this section, you may provide 
additional Financing to the Portfolio Concern to the extent necessary to 
protect against the loss of the amount of your original investment, 
subject to the overline limitations of Sec. 108.740.
    (c) Effect of a change in business activity occurring more than one 
year after the initial Financing. If a Portfolio Concern becomes 
ineligible because of a change in business activity more than one year 
after your initial Financing you may:
    (1) Retain your investment; and
    (2) Provide additional Financing to the Portfolio Concern to the 
extent necessary to protect against the loss of the amount of your 
original investment, subject to the overline limitations of 
Sec. 108.740.

    Structuring NMVC Company's Financing of Eligible Small Businesses



Sec. 108.800  Financings in the form of equity interests.

    You may not, inadvertently or otherwise:
    (a) Become a general partner in any unincorporated business; or
    (b) Become jointly or severally liable for any obligations of an 
unincorporated business.



Sec. 108.820  Financings in the form of guarantees.

    (a) General rule. At the request of a Small Business or where 
necessary to protect your existing investment, you may guarantee the 
monetary obligation of a Small Business to any non-Associate creditor.
    (b) Exception. You may not issue a guaranty if:
    (1) You would become subject to State regulation as an insurance, 
guaranty or surety business; or
    (2) The amount of the guaranty plus any direct Financings to the 
Small Business exceed the overline limitations of Sec. 108.740, except 
that a pledge of the Equity Securities of the issuer or a subordination 
of your lien or creditor position does not count toward your overline.
    (c) Pledge of NMVC Company's assets as guaranty. For purposes of 
this section, a guaranty with recourse only to specific asset(s) you 
have pledged is equal to the fair market value of such

[[Page 126]]

asset(s) or the amount of the debt guaranteed, whichever is less.



Sec. 108.825  Purchasing securities from an underwriter or other third 
party.

    (a) Securities purchased through or from an underwriter. You may 
purchase the securities of a Small Business through or from an 
underwriter if:
    (1) You purchase such securities within 90 days of the date the 
public offering is first made;
    (2) Your purchase price is no more than the original public offering 
price; and
    (3) The amount paid by you for the securities (less ordinary and 
reasonable underwriting charges and commissions) has been, or will be, 
paid to the Small Business, and the underwriter certifies in writing 
that this requirement has been met.
    (b) Recordkeeping requirements. You must keep records available for 
SBA's inspection which show the relevant details of the transaction, 
including, but not limited to, date, price, commissions, and the 
underwriter's certifications required under paragraphs (a)(3) and (c) of 
this section.
    (c) Underwriter's requirements. The underwriter must certify whether 
it is your Associate. You may pay reasonable and customary commissions 
and expenses to an Associate underwriter for the portion of an offering 
that you purchase.
    (d) Securities purchased from another NMVC Company or from SBA. You 
may purchase from, or exchange with, another NMVC Company, Portfolio 
securities (or any interest therein). Such purchase or exchange may only 
be made on a non-recourse basis. You may not have more than one-third of 
your total assets (valued at cost) invested in such securities. If you 
have previously sold Portfolio securities (or any interest therein) on a 
recourse basis, you shall include the amount for which you may be 
contingently liable in your overline computation.
    (e) Purchases of securities from other non-issuers. You may purchase 
securities of a Small Business from a non-issuer not previously 
described in this section if such acquisition is a reasonably necessary 
part of the overall sound Financing of the Small Business.

                  Limitations on Disposition of Assets



Sec. 108.885  Disposition of assets to NMVC Company's Associates.

    Except with SBA's prior written approval, you are not permitted to 
dispose of assets (including assets acquired in liquidation) to any 
Associate. As a prerequisite to such approval, you must demonstrate that 
the proposed terms of disposal are at least as favorable to you as the 
terms obtainable elsewhere.

                      Management Services and Fees



Sec. 108.900  Fees for management services provided to a Small Business 
by a NMVC Company or its Associate.

    (a) General. This section applies to management services that you or 
your Associate provide to a Small Business during the term of a 
Financing or prior to a Financing. It does not apply to management 
services that your Associate provides to a Small Business that you do 
not finance. It also does not apply to Operational Assistance that you 
or your Associate provide to a Smaller Enterprise that you have Financed 
or in which you expect to make a Financing, for which neither you nor 
your Associate may charge the Smaller Enterprise.
    (b) SBA approval. You must obtain SBA's prior written approval of 
any management services fees and other fees described in this section 
that you or your Associate charge.
    (c) Permitted management services fees. You or your Associate may 
provide management services to a Small Business financed by you if:
    (1) You or your Associate have entered into a written contract with 
the Small Business;
    (2) The fees charged are for services actually performed;
    (3) Services are provided on an hourly fee, project fee, or other 
reasonable basis;
    (4) You can demonstrate to SBA, upon request, that the rate does not 
exceed the prevailing rate charged for

[[Page 127]]

comparable services by other organizations in the geographic area of the 
Small Business; and
    (5) At least 50 percent of any management services fees paid to your 
Associate by a Small Business for management services provided by the 
Associate is allocated back to you for your benefit.
    (d) Fees for service as a board member. You or your Associate may 
charge a Small Business Financed by you for services provided as members 
of the Small Business' board of directors. The fees must not exceed 
those paid to other outside board members. In the absence of such board 
members, fees must be reasonable when compared with amounts paid to 
outside directors of similar companies. Fees may be in the form of cash, 
warrants, or other payments. At least 50 percent of any such fees paid 
to your Associate by a Small Business for service by the Associate as a 
board member must be allocated back to you for your benefit.
    (e) Transaction fees. (1) You or your Associate may charge 
reasonable transaction fees for work performed such as preparing a Small 
Business for a public offering, private offering, or sale of all or part 
of the business, and for assisting with the transaction. Fees may be in 
the form of cash, notes, stock, and/or options. At least 50 percent of 
any such fees paid to your Associate by a Small Business for 
transactions work done by the Associate must be allocated back to you 
for your benefit.
    (2) Your Associate may charge market rate investment banking fees to 
a Small Business on that portion of a Financing that you do not provide.
    (f) Recordkeeping requirements. You must keep a record of hours 
spent and amounts charged to the Small Business, including expenses 
charged.

[67 FR 68503, Nov. 12, 2002]



    Subpart J--SBA Financial Assistance for NMVC Companies (Leverage)

              General Information About Obtaining Leverage



Sec. 108.1100  Type of Leverage and application procedures.

    (a) Type of Leverage available. You may apply for Leverage from SBA 
in the form of a guarantee of your Debentures.
    (b) Applying for Leverage. The Leverage application process has two 
parts. You must first apply for SBA's conditional commitment to reserve 
a specific amount of Leverage for your future use. You may then apply to 
draw down Leverage against the commitment. See Secs. 108.1200 through 
108.1240.
    (c) Where to send your application. Send all Leverage applications 
to SBA, Investment Division Office of New Markets Venture Capital, 409 
Third Street, SW., Washington, DC 20416.



Sec. 108.1120  General eligibility requirement for Leverage.

    To be eligible for Leverage, you must be in compliance with the Act, 
the regulations in this part, and your Participation Agreement.



Sec. 108.1130  Leverage fees payable by NMVC Company.

    There is no fee for the issuance of Debentures by a NMVC Company.



Sec. 108.1140  NMVC Company's acceptance of SBA remedies under Sec. 108.1810.

    If you issue Leverage, you automatically agree to the terms and 
conditions in Sec. 108.1810 as it exists at the time of issuance. The 
effect of these terms and conditions is the same as if they were fully 
incorporated in the terms of your Leverage.

     Maximum Amount of Leverage for Which a NMVC Company Is Eligible



Sec. 108.1150  Maximum amount of Leverage for a NMVC Company.

    The face amount of a NMVC Company's outstanding Debentures may not 
exceed 150 percent of its Leverageable Capital.

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  Conditional Commitments by SBA To Reserve Leverage for a NMVC Company



Sec. 108.1200  SBA's Leverage commitment to a NMVC Company--application procedure, amount, and term.

    (a) General. Under the provisions in Secs. 108.1200 through 
108.1240, you may apply for SBA's conditional commitment to reserve a 
specific amount and type of Leverage for your future use. You may then 
apply to draw down Leverage against the commitment.
    (b) Applying for a Leverage commitment. SBA will notify you when it 
is accepting requests for Leverage commitments. Upon receipt of your 
request, SBA will send you a complete application package.
    (c) Limitations on the amount of a Leverage commitment. The amount 
of a Leverage commitment must be a multiple of $5,000. SBA, in its 
discretion, may determine a minimum dollar amount for Leverage 
commitments. Any such minimum amounts will be published in Notices in 
the Federal Register from time to time.
    (d) Term of Leverage commitment. SBA's Leverage commitment will 
automatically lapse on the expiration date stated in the commitment 
letter issued to you by SBA.



Sec. 108.1220  Requirement for NMVC Company to file financial statements at the time of request for a draw.

    (a) If you submit a request for a draw against SBA's Leverage 
commitment more than 90 days since your submission of an annual Form 468 
or a Form 468 (Short Form), you must:
    (1) Give SBA a financial statement on Form 468 (Short Form); and
    (2) File a statement of no material adverse change in your financial 
condition since your last filing of Form 468.
    (b) You will not be eligible for a draw if you are not in compliance 
with this section.



Sec. 108.1230  Draw-downs by NMVC Company under SBA's Leverage commitment.

    (a) NMVC Company's authorization of SBA to guarantee securities. By 
submitting a request for a draw against SBA's Leverage commitment, you 
authorize SBA, or any agent or trustee SBA designates, to guarantee your 
Debenture and to sell it with SBA's guarantee.
    (b) Limitations on amount of draw. The amount of a draw must be a 
multiple of $5,000. SBA, in its discretion, may determine a minimum 
dollar amount for draws against SBA's Leverage commitments. Any such 
minimum amounts will be published in Notices in the Federal Register 
from time to time.
    (c) Effect of regulatory violations on NMVC Company's eligibility 
for draws. (1) General rule. You are eligible to make a draw against 
SBA's Leverage commitment only if you are in compliance with all 
applicable provisions of the Act and SBA regulations (i.e., no 
unresolved statutory or regulatory violations) and your Participation 
Agreement.
    (2) Exception to general rule. If you are not in compliance, you may 
still be eligible for draws if:
    (i) SBA determines that your outstanding violations are of non-
substantive provisions of the Act or regulations or your Participation 
Agreement and that you have not repeatedly violated any non-substantive 
provisions; or
    (ii) You have agreed with SBA on a course of action to resolve your 
violations and such agreement does not prevent you from issuing 
Leverage.
    (d) Procedures for funding draws. You may request a draw at any time 
during the term of the commitment. With each request, submit the 
following documentation:
    (1) A statement certifying that there has been no material adverse 
change in your financial condition since your last filing of SBA Form 
468 (see also Sec. 108.1220 for SBA Form 468 filing requirements).
    (2) If your request is submitted more than 30 days following the end 
of your fiscal year, but before you have submitted your annual filing of 
SBA Form 468 (Long Form) in accordance with Sec. 108.630(a), a 
preliminary unaudited annual financial statement on SBA Form 468 (Short 
Form).
    (3) A statement certifying that to the best of your knowledge and 
belief, you are in compliance with all provisions of the Act and SBA 
regulations (i.e., no

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unresolved regulatory or statutory violations) and your Participation 
Agreement, or a statement listing any specific violations you are aware 
of. Either statement must be executed by one of the following:
    (i) An officer of the NMVC Company;
    (ii) An officer of a corporate general partner of the NMVC Company;
    (iii) An individual who is authorized to act as or for a general 
partner of the NMVC Company; or
    (iv) An individual who is authorized to act as or for a member-
manager of the NMVC Company.
    (4) A statement that the proceeds are needed to fund one or more 
particular Small Businesses or to provide liquidity for your operations. 
If required by SBA, the statement must include the name and address of 
each Small Business, and the amount and anticipated closing date of each 
proposed Financing.
    (e) Reporting requirements after drawing funds. (1) Within 30 
calendar days after the actual closing date of each Financing funded 
with the proceeds of your draw, you must file an SBA Form 1031 
confirming the closing of the transaction.
    (2) If SBA required you to provide information concerning a specific 
planned Financing under paragraph (d)(4) of this section, and such 
Financing has not closed within 60 calendar days after the anticipated 
closing date, you must give SBA a written explanation of the failure to 
close.
    (3) If you do not comply with this paragraph (e), you will not be 
eligible for additional draws. SBA may also determine that you are not 
in compliance with the terms of your Leverage under Sec. 108.1810.



Sec. 108.1240  Funding of NMVC Company's draw request through sale to third-party.

    (a) NMVC Company's authorization of SBA to arrange sale of 
securities to third-party. By submitting a request for a draw of 
Debenture Leverage, you authorize SBA, or any agent or trustee SBA 
designates, to enter into any agreements (and to bind you to such 
agreements) necessary to accomplish:
    (1) The sale of your Debenture to a third-party at a rate approved 
by SBA; and
    (2) The purchase of your security from the third-party and the 
pooling of your security with other securities with the same maturity 
date.
    (b) Sale of Debentures to a third-party. If SBA arranges for the 
sale of your Debenture to a third-party, the sale price may be an amount 
discounted from the face amount of the Debenture.

 Funding Leverage by use of SBA Guaranteed Trust Certificates (``TCs'')



Sec. 108.1600  SBA authority to issue and guarantee Trust Certificates.

    (a) Authorization. Section 356 of the Act authorizes SBA to issue 
TCs and to guarantee the timely payment of the principal and interest 
thereon. Any guarantee by SBA of such TC is limited to the principal and 
interest due on the Debentures in any Trust or Pool backing such TC. The 
full faith and credit of the United States is pledged to the payment of 
all amounts due under the guarantee of any TC.
    (b) SBA authority to arrange public or private fundings of Leverage. 
SBA in its discretion may arrange for public or private financing under 
its guarantee authority. Such financing arranged by SBA may be 
accomplished by the sale of individual Debentures, aggregations of 
Debentures, or Pools or Trusts of Debentures.
    (c) Pass-through provisions. TCs shall provide for a pass-through to 
their holders of all amounts of principal and interest paid on the 
Debentures in the Pool or Trust against which they are issued.
    (d) Formation of a Pool or Trust holding Leverage Securities. SBA 
shall approve the formation of each Pool or Trust. SBA may, in its 
discretion, establish the size of the Pools and their composition, the 
interest rate on the TCs issued against Trusts or Pools, fees, 
discounts, premiums and other charges made in connection with the Pools, 
Trusts, and TCs, and any other characteristics of a Pool or Trust it 
deems appropriate.

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Sec. 108.1610  Effect of prepayment or early redemption of Leverage on a Trust Certificate.

    (a) The rights, if any, of a NMVC Company to prepay any Debenture is 
established by the terms of such security, and no such right is created 
or denied by the regulations in this part.
    (b) SBA's rights to purchase or prepay any Debenture without premium 
are established by the terms of the Guaranty Agreement relating to the 
Debenture.
    (c) Any prepayment of a Debenture pursuant to the terms of the 
Guaranty Agreement relating to such security shall reduce the SBA 
guarantee of timely payment of principal and interest on a TC in 
proportion to the amount of principal that such prepaid Debenture 
represents in the Trust or Pool backing such TC.
    (d) SBA shall be discharged from its guarantee obligation to the 
holder or holders of any TC, or any successor or transferee of such 
holder, to the extent of any such prepayment. whether or not such 
successor or transferee shall have notice of any such prepayment.
    (e) Interest on prepaid Debentures shall accrue only through the 
date of prepayment.
    (f) In the event that all Debentures constituting a Trust or Pool 
are prepaid, the TCs backed by such Trust or Pool shall be redeemed by 
payment of the unpaid principal and interest on the TCs; provided, 
however, that in the case of the prepayment of a Debenture pursuant to 
the provisions of the Guaranty Agreement relating to the Debenture, the 
CRA shall pass through pro rata to the holders of the TCs any such 
prepayments including any prepayment penalty paid by the obligor NMVC 
Company pursuant to the terms of the Debenture.



Sec. 108.1620  Functions of agents, including Central Registration Agent, Selling Agent and Fiscal Agent.

    (a) Agents. SBA may appoint or cause to be appointed agent(s) to 
perform functions necessary to market and service Debentures or TCs 
pursuant to this part.
    (1) Selling Agent. As a condition of guaranteeing a Debenture, SBA 
may cause each NMVC Company to appoint a Selling Agent to perform 
functions that include, but are not limited to:
    (i) Selecting qualified entities to become pool or Trust assemblers 
(``Poolers'').
    (ii) Receiving guaranteed Debentures as well as negotiating the 
terms and conditions of sales or periodic offerings of Debentures and/or 
TCs on behalf of NMVC companies.
    (iii) Directing and coordinating periodic sales of Debentures and/or 
TCs.
    (iv) Arranging for the production of Offering Circulars, 
certificates, and such other documents as may be required from time to 
time.
    (2) Fiscal Agent. SBA shall appoint a Fiscal Agent to:
    (i) Establish performance criteria for Poolers.
    (ii) Monitor and evaluate the financial markets to determine those 
factors that will minimize or reduce the cost of funding Debentures.
    (iii) Monitor the performance of the Selling Agent, Poolers, CRA, 
and the Trustee.
    (iv) Perform such other functions as SBA, from time to time, may 
prescribe.
    (3) Central Registration Agent. Pursuant to a contract entered into 
with SBA, the CRA, as SBA's agent, will do the following with respect to 
the Pools or Trust Certificates for the Debentures:
    (i) Form an SBA-approved Pool or Trust;
    (ii) Issue the TCs in the form prescribed by SBA;
    (iii) Transfer the TCs upon the sale of original issue TCs in any 
secondary market transaction;
    (iv) Receive payments from NMVC companies;
    (v) Make periodic payments as scheduled or required by the terms of 
the TCs, and pay all amounts required to be paid upon prepayment of 
Debentures;
    (vi) Hold, safeguard, and release all Debentures constituting Trusts 
or Pools upon instructions from SBA;
    (vii) Remain custodian of such other documentation as SBA shall 
direct by written instructions;
    (viii) Provide for the registration of all pooled Debentures, all 
Pools and Trusts, and all TCs;

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    (ix) Perform such other functions as SBA may deem necessary to 
implement the provisions of this section.
    (b) Functions. Either SBA or an agent appointed by SBA may perform 
the function of locating purchasers, and negotiating and closing the 
sale of Debentures and TCs. Nothing in the regulations in this part 
shall be interpreted to prevent the CRA from acting as SBA's agent for 
this purpose.



Sec. 108.1630  SBA regulation of Brokers and Dealers and disclosure to purchasers of Leverage or Trust Certificates.

    (a) Brokers and Dealers. Each broker, dealer, and Pool or Trust 
assembler approved by SBA pursuant to these regulations shall either be 
regulated by a Federal financial regulatory agency, or be a member of 
the National Association of Securities Dealers (NASD), and shall be in 
good standing in respect to compliance with the financial, ethical, and 
reporting requirements of such body. They also shall be in good standing 
with SBA as determined by the SBA Associate Administrator for Investment 
(see paragraph (c) of this section) and shall provide a fidelity bond or 
insurance in such amount as SBA may require.
    (b) Suspension and/or termination of Broker or Dealer. SBA shall 
exclude from the sale and all other dealings in Debentures or TCs any 
broker or dealer:
    (1) If such broker's or dealer's authority to engage in the 
securities business has been revoked or suspended by a supervisory 
agency. When such authority has been suspended, SBA will suspend such 
broker or dealer for the duration of such suspension by the supervisory 
agency.
    (2) If such broker or dealer has been indicted or otherwise formally 
charged with a misdemeanor or felony bearing on its fitness, such broker 
or dealer may be suspended while the charge is pending. Upon conviction, 
participation may be terminated.
    (3) If such broker or dealer has suffered an adverse final civil 
judgment holding that such broker or dealer has committed a breach of 
trust or violation of law or regulation protecting the integrity of 
business transactions or relationships, participation in the market for 
Debentures or TCs may be terminated.
    (c) Termination/suspension proceedings. A broker's or dealer's 
participation in the market for Debentures or TCs will be conducted in 
accordance with part 134 of this chapter. SBA may, for any of the 
reasons stated in paragraphs (b)(1) through (b)(3) of this section, 
suspend the privilege of any broker or dealer to participate in this 
market. SBA shall give written notice at least ten (10) business days 
prior to the effective date of such suspension. Such notice shall inform 
the broker or dealer of the opportunity for a hearing pursuant to part 
134 of this chapter.



Sec. 108.1640  SBA access to records of the CRA, Brokers, Dealers and Pool 
or Trust assemblers.

    The CRA and any broker, dealer and Pool or Trust assembler operating 
under the regulations in this part shall make all books, records and 
related materials associated with Debentures and TCs available to SBA 
for review and copying purposes. Such access shall be at such party's 
primary place of business during normal business hours.

                              Miscellaneous



Sec. 108.1700  Transfer by SBA of its interest in a NMVC Company's Leverage security.

    Upon such conditions and for such consideration as it deems 
reasonable, SBA may sell, assign, transfer, or otherwise dispose of any 
Debenture held by or on behalf of SBA. Upon notice by SBA, a NMVC 
Company will make all payments of principal and interest as shall be 
directed by SBA. A NMVC Company will be liable for all damage or loss 
which SBA may sustain by reason of such disposal, up to the amount of 
the NMVC Company's liability under such security, plus court costs and 
reasonable attorney's fees incurred by SBA.



Sec. 108.1710  SBA authority to collect or compromise its claims.

    SBA may, upon such conditions and for such consideration as it deems 
reasonable, collect or compromise all claims relating to obligations 
held or

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guaranteed by SBA, and all legal or equitable rights accruing to SBA.



Sec. 108.1720  Characteristics of SBA's guarantee.

    If SBA agrees to guarantee a NMVC Company's Debentures, such 
guarantee will be unconditional, irrespective of the validity, 
regularity or enforceability of the Debentures or any other 
circumstances that might constitute a legal or equitable discharge or 
defense of a guarantor. Pursuant to its guarantee, SBA will make timely 
payments of principal and interest on the Debentures.



     Subpart K--NMVC Company's Noncompliance With Terms of Leverage



Sec. 108.1810  Events of default and SBA's remedies for NMVC Company's noncompliance with terms of Debentures.

    (a) Applicability of this section. By issuing Debentures, you 
automatically agree to the terms, conditions and remedies in this 
section, as in effect at the time of issuance and as if fully set forth 
in the Debentures.
    (b) Automatic events of default. The occurrence of one or more of 
the events in this paragraph (b) causes the remedies in paragraph (c) of 
this section to take effect immediately.
    (1) Insolvency. You become equitably or legally insolvent.
    (2) Voluntary assignment. You make a voluntary assignment for the 
benefit of creditors without SBA's prior written approval.
    (3) Bankruptcy. You file a petition to begin any bankruptcy or 
reorganization proceeding, receivership, dissolution or other similar 
creditors' rights proceeding, or such action is initiated against you 
and is not dismissed within 60 days.
    (c) SBA remedies for automatic events of default. Upon the 
occurrence of one or more of the events in paragraph (b) of this 
section:
    (1) Without notice, presentation or demand, the entire indebtedness 
evidenced by your Debentures, including accrued interest, and any other 
amounts owed SBA with respect to your Debentures, is immediately due and 
payable; and
    (2) You automatically consent to the appointment of SBA or its 
designee as your receiver under section 363(c) of the Act.
    (d) Events of default with notice. For any occurrence (as determined 
by SBA) of one or more of the events in this paragraph (d), SBA may 
avail itself of one or more of the remedies in paragraph (e) of this 
section.
    (1) Fraud. You commit a fraudulent act that causes detriment to 
SBA's position as a creditor or guarantor.
    (2) Fraudulent transfers. You make any transfer or incur any 
obligation that is fraudulent under the terms of 11 U.S.C. 548.
    (3) Willful conflicts of interest. You willfully violate 
Sec. 108.730.
    (4) Willful non-compliance. You willfully violate one or more of the 
substantive provisions of the Act or any substantive regulation 
promulgated under the Act or any substantive provision of your 
Participation Agreement.
    (5) Repeated Events of Default. At any time after being notified by 
SBA of the occurrence of an event of default under paragraph (f) of this 
section, you engage in similar behavior that results in another 
occurrence of the same event of default.
    (6) Transfer of Control. You willfully violate Sec. 108.410, and as 
a result of such violation you undergo a transfer of Control.
    (7) Non-cooperation under paragraph (h) of this section. You fail to 
take appropriate steps, satisfactory to SBA, to accomplish any action 
SBA may have required under paragraph (h) of this section.
    (8) Non-notification of Events of Default. You fail to notify SBA as 
soon as you know or reasonably should have known that any event of 
default exists under this section.
    (9) Non-notification of defaults to others. You fail to notify SBA 
in writing within ten days from the date of a declaration of an event of 
default or nonperformance under any note, debenture or indebtedness of 
yours, issued to or held by anyone other than SBA.
    (e) SBA remedies for events of default with notice. Upon written 
notice to you of the occurrence (as determined by

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SBA) of one or more of the events in paragraph (d) of this section:
    (1) SBA may declare the entire indebtedness evidenced by your 
Debentures, including accrued interest. and/or any other amounts owed 
SBA with respect to your Debentures, immediately due and payable; and
    (2) SBA may avail itself of any remedy available under the Act, 
specifically including institution of proceedings for the appointment of 
SBA or its designee as your receiver under section 363 (c) of the Act.
    (f) Events of default with opportunity to cure. For any occurrence 
(as determined by SBA) of one or more of the events in this paragraph 
(f), SBA may avail itself of one or more of the remedies in paragraph 
(g) of this section.
    (1) Excessive Management Expenses. Without the prior written consent 
of SBA, you incur Management Expenses in excess of those permitted under 
Secs. 108.510 and 108.520.
    (2) Improper Distributions. You make any Distribution to your 
shareholders or partners, except with the prior written consent of SBA, 
other than:
    (i) Distributions permitted under Sec. 108.585; and
    (ii) Payments from Retained Earnings Available for Distribution 
based on either the shareholders' or members' pro-rata interests or the 
provisions for profit distributions in your partnership agreement, as 
appropriate.
    (3) Failure to make payment. Unless otherwise approved by SBA, you 
fail to make timely payment of any amount due under any security or 
obligation of yours that is issued to, held or guaranteed by SBA.
    (4) Failure to maintain Regulatory Capital. You fail to maintain the 
minimum Regulatory Capital required under these regulations or, without 
the prior written consent of SBA, you reduce your Regulatory Capital 
except as permitted by Sec. 108.585.
    (5) Capital Impairment. You have a condition of Capital Impairment 
as determined under Sec. 108.1830.
    (6) Cross-default. An obligation of yours that is greater than 
$100,000 becomes due or payable (with or without notice) before its 
stated maturity date, for any reason including your failure to pay any 
amount when due. This provision does not apply if you pay the amount due 
within any applicable grace period or contest the payment of the 
obligation in good faith by appropriate proceedings.
    (7) Nonperformance. You violate or fail to perform one or more of 
the terms and conditions of any security or obligation of yours that is 
issued to, held or guaranteed by SBA, or of any agreement (including 
your Participation Agreement) with or conditions imposed by SBA in its 
administration of the Act and the regulations promulgated under the Act.
    (8) Noncompliance. Except as otherwise provided in paragraph (d) (5) 
of this section, SBA determines that you have violated one or more of 
the substantive provisions of the Act or any substantive regulation 
promulgated under the Act.
    (9) Failure to maintain diversity. You fail to maintain diversity 
between management and ownership as required by Sec. 108.150.
    (g) SBA remedies for events of default with opportunity to cure. (1) 
Upon written notice to you of the occurrence (as determined by SBA) of 
one or more of the events of default in paragraph (f) of this section, 
and subject to the conditions in paragraph (g)(2) of this section:
    (i) SBA may declare the entire indebtedness evidenced by your 
Debentures, including accrued interest, and/ or any other amounts owed 
SBA with respect to your Debentures, immediately due and payable; and
    (ii) SBA may avail itself of any remedy available under the Act, 
specifically including institution of proceedings for the appointment of 
SBA or its designee as your receiver under section 363(c) of the Act.
    (2) SBA may invoke the remedies in paragraph (g)(l) of this section 
only if:
    (i) It has given you at least 15 days to cure the default(s); and
    (ii) You fail to cure the default(s) to SBA's satisfaction within 
the allotted time.
    (h) Repeated non-substantive violations. If you repeatedly fail to 
comply with one or more of the non-substantive provisions of the Act or 
any non-substantive regulation promulgated under the Act, SBA, after 
written notification to you and until you cure such

[[Page 134]]

condition to SBA's satisfaction, may deny you additional Leverage and/or 
require you to take such actions as SBA may determine to be appropriate 
under the circumstances.
    (i) Consent to removal of officers, directors, or general partners 
and/or appointment of receiver. The Articles of each NMVC Company must 
include the following provisions as a condition to the purchase or 
guarantee by SBA of Leverage. Upon the occurrence of any of the events 
specified in paragraphs (d)(1) through (d)(6) or (f)(1) through (f)(3) 
of this section as determined by SBA, SBA shall have the right, and you 
consent to SBA's exercise of such right:
    (1) With respect to a Corporate NMVC Company, upon written notice, 
to require you to replace, with individuals approved by SBA, one or more 
of your officers and/or such number of directors of your board of 
directors as is sufficient to constitute a majority of such board; or
    (2) With respect to a Partnership NMVC Company or an LLC NMVC 
Company, upon written notice, to require you to remove the person(s) 
responsible for such occurrence and/or to remove the general partner or 
manager of the NMVC Company, which general partner or manager shall then 
be replaced in accordance with NMVC Company's Articles by a new general 
partner or manager approved by SBA; and/or
    (3) With respect to a Corporate or Partnership or LLC NMVC Company, 
to obtain the appointment of SBA or its designee as your receiver under 
section 363(c) of the Act for the purpose of continuing your operations. 
The appointment of a receiver to liquidate a NMVC Company is not within 
such consent, but is governed instead by the relevant provisions of the 
Act.

            Computation of NMVC Company's Capital Impairment



Sec. 108.1830  NMVC Company's Capital Impairment definition and general requirements.

    (a) Significance of Capital Impairment condition. If you have a 
condition of Capital Impairment, you are not in compliance with the 
terms of your Leverage. As a result, SBA has the right to impose the 
applicable remedies for noncompliance in Sec. 108.1810(g).
    (b) Definition of Capital Impairment condition. You have a condition 
of Capital Impairment if your Capital Impairment Percentage, as computed 
in Sec. 108.1840, exceeds 70 percent.
    (c) Quarterly computation requirement and procedure. You must 
determine whether you have a condition of Capital Impairment as of the 
end of each fiscal quarter. You must notify SBA promptly if you are 
capitally impaired.
    (d) SBA's right to determine NMVC Company's Capital Impairment 
condition. SBA may make its own determination of your Capital Impairment 
condition at any time.



Sec. 108.1840  Computation of NMVC Company's Capital Impairment Percentage.

    (a) General. This section contains the procedures you must use to 
determine your Capital Impairment Percentage. You must compare your 
Capital Impairment Percentage to the maximum permitted under 
Sec. 108.1830(b) to determine whether you have a condition of Capital 
Impairment.
    (b) Preliminary impairment test. If you satisfy the preliminary 
impairment test, your Capital Impairment Percentage is zero and you do 
not have to perform any more procedures in this section. Otherwise, you 
must continue with paragraph (c) of this section. You satisfy the test 
if the following amounts are both zero or greater:
    (1) The sum of Undistributed Net Realized Earnings, as reported on 
SBA Form 468, and Includible Non-Cash Gains.
    (2) Unrealized Gain (Loss) on Securities Held.
    (c) How to compute your Capital Impairment Percentage. (1) If you 
have an Unrealized Gain on Securities Held, compute your Adjusted 
Unrealized Gain using paragraph (d) of this section. If you have an 
Unrealized Loss on Securities Held, continue with paragraph (c)(2) of 
this section.
    (2) Add together your Undistributed Net Realized Earnings, your 
Includible Non-cash Gains, and either your Unrealized Loss on Securities 
Held or your Adjusted Unrealized Gain.

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    (3) If the sum in paragraph (c)(2) of this section is zero or 
greater, your Capital Impairment Percentage is zero.
    (4) If the sum in paragraph (c)(2) of this section is less than 
zero, drop the negative sign, divide by your Regulatory Capital 
(excluding Treasury Stock), and multiply by 100. The result is your 
Capital Impairment Percentage.
    (d) How to compute your Adjusted Unrealized Gain. (1) Subtract 
Unrealized Depreciation from Unrealized Appreciation. This is your ``Net 
Appreciation''.
    (2) Determine your Unrealized Appreciation on Publicly Traded and 
Marketable securities. This is your ''Class I Appreciation''.
    (3) Determine your Unrealized Appreciation on securities that are 
not Publicly Traded and Marketable and meet the following criteria, 
which must be substantiated to the satisfaction of SBA (this is your 
``Class 2 Appreciation''):
    (i) The Small Business that issued the security received a 
significant subsequent equity financing by an investor whose objectives 
were not primarily strategic and at a price that conclusively supports 
the Unrealized Appreciation;
    (ii) Such financing represents a substantial investment in the form 
of an arm's length transaction by a sophisticated new investor in the 
issuer's securities; and
    (iii) Such financing occurred within 24 months of the date of the 
Capital Impairment computation, or the Small Business' pre-tax cash flow 
from operations for its most recent fiscal year was at least 10 percent 
of the Small Business' average contributed capital for such fiscal year.
    (4) Perform the appropriate computation from the table in 
Sec. 107.1840(d)(4) of this chapter.
    (5) Reduce the gain computed in paragraph (d) (4) of this section by 
your estimate of related future income tax expense. Subject to any 
adjustment required by paragraph (d)(6) of this section, the result is 
your Adjusted Unrealized Gain for use in paragraph (c)(2) of this 
section.
    (6) If any securities that are the source of either Class 1 or Class 
2 Appreciation are pledged or encumbered in any way, you must reduce the 
Adjusted Unrealized Gain computed in paragraph (d)(5) of this section by 
the amount of the related borrowing or other obligation, up to the 
amount of the Unrealized Appreciation on the securities.



             Subpart L--Ending Operations as a NMVC Company



Sec. 108.1900  Termination of participation as a NMVC Company.

    You may not terminate your participation as a NMVC Company without 
SBA's prior written approval. Your request for approval must be 
accompanied by an offer of immediate repayment of all of your 
outstanding Leverage (including any prepayment penalties thereon), or by 
a plan satisfactory to SBA for the orderly liquidation of the NMVC 
Company.



                        Subpart M--Miscellaneous



Sec. 108.1910  Non-waiver of SBA's rights or terms of Leverage security.

    SBA's failure to exercise or delay in exercising any right or remedy 
under the Act or the regulations in this part does not constitute a 
waiver of such right or remedy. SBA's failure to require you to perform 
any term or provision of your Leverage does not affect SBA's right to 
enforce such term or provision. Similarly, SBA's waiver of, or failure 
to enforce, any term or provision of your Leverage or of any event or 
condition set forth in Sec. 108.1810 does not constitute a waiver of any 
succeeding breach of such term or provision or condition.



Sec. 108.1920  NMVC Company's application for exemption from a regulation in this part 108.

    (a) General. You may file an application in writing with SBA to have 
a proposed action exempted from any procedural or substantive 
requirement, restriction, or prohibition to which it is subject under 
this part, unless the provision is mandated by the Act. SBA may grant an 
exemption for such applicant, conditionally or unconditionally, provided 
the exemption would not be contrary to the purposes of the Act.

[[Page 136]]

    (b) Contents of application. Your application must be accompanied by 
supporting evidence that demonstrates to SBA's satisfaction that:
    (1) The proposed action is fair and equitable; and
    (2) The exemption requested is reasonably calculated to advance the 
best interests of the NMVC program in a manner consistent with the 
policy objectives of the Act and the regulations in this part.



Sec. 108.1930  Effect of changes in this part 108 on transactions previously consummated.

    The legality of a transaction covered by the regulations in this 
part is governed by the regulations in this part in effect at the time 
the transaction was consummated, regardless of later changes. Nothing in 
this part bars SBA enforcement action with respect to any transaction 
consummated in violation of provisions applicable at the time, but no 
longer in effect.



Sec. 108.1940  Procedures for designation of additional Low-Income Geographic Areas

    (a) General. On its own initiative or upon written request by a 
Person which addresses the relevant factor(s) set forth in paragraph (b) 
of this section, SBA may consider whether to designate additional census 
tracts (or equivalent county divisions) as LI Areas.
    (b) Criteria. SBA will consider one or more of the following factors 
in determining whether to designate a particular census tract (or 
equivalent county division) as an additional LI Area:
    (1) A substantial number of Low-Income Individuals reside in that 
census tract (or equivalent county division).
    (2) As adequately supported by studies or other analyses or reliable 
data, that census tract (or equivalent county division) has a pattern of 
unmet needs for investment capital.
    (3) As adequately supported by studies or other analyses or reliable 
data, that census tract (or equivalent county division) has indications 
of economic distress.
    (c) Procedure for designation. (1) If SBA decides to consider the 
designation of an additional LI Area, SBA will publish in the Federal 
Register a notice that it is considering such designation. SBA will 
advise the public that it will consider any comments supporting or 
opposing the designation, submitted within a specified time period.
    (2) In making a final decision on whether to designate a particular 
census tract (or equivalent county division) as an additional LI Area, 
SBA will consider evidence submitted by any requester, SBA's own 
research, any public comments submitted, and any other information 
deemed relevant by SBA.
    (3) If SBA designates a particular census tract (or equivalent 
county division) as an additional LI Area, SBA will publish a notice in 
the Federal Register and, if appropriate, will amend this part to 
include the additional LI Area.



Subpart N--Requirements and Procedures for Operational Assistance Grants 
                      to NMVC Companies and SSBICs



Sec. 108.2000  Operational Assistance Grants to NMVC Companies and SSBICs.

    (a) NMVC Companies. Regulations governing Operational Assistance 
grants to NMVC Companies may be found in subparts D and E of this part 
108, and in Secs. 108.2010 through 108.2040.
    (b) SSBICs. Regulations governing Operational Assistance grants to 
SSBICs may be found in Secs. 108.2001 through 108.2040.

[67 FR 68503, Nov. 12, 2002]



Sec. 108.2001  When and how SSBICs may apply for Operational Assistance grants.

    (a) Notice of Funds Availability (``NOFA''). SBA will publish a NOFA 
in the Federal Register, advising SSBICs of the availability of funds 
for Operational Assistance grants to SSBICs. This NOFA will be the same 
NOFA described in Sec. 108.300(a), or will be published simultaneously 
with that NOFA. An SSBIC may submit an application for an Operational 
Assistance grant only during the time period specified for such purpose 
in the NOFA.

[[Page 137]]

    (b) Application form. An SSBIC must apply for an Operational 
Assistance grant using the application packet provided by SBA. Upon 
receipt of an application, SBA may request clarifying or technical 
information on the materials submitted as part of the application.

[67 FR 68503, Nov. 12, 2002]



Sec. 108.2002  Eligibility of SSBICs to apply for Operational Assistance grants.

    An SSBIC is eligible to apply for an Operational Assistance grant 
if:
    (a) It intends to increase its Regulatory Capital, as in effect on 
December 21, 2000, and to make Low-Income Investments in the amount of 
such increase;
    (b) It intends to raise binding commitments for contributions in 
cash or in-kind, and/or to purchase an annuity, in an amount not less 
than 30 percent of the intended increase in its Regulatory Capital 
described in paragraph (a) of this section; and
    (c) It has a plan describing how it intends to use the requested 
grant funds to provide Operational Assistance to Smaller Enterprises in 
which it has made or expects to make Low-Income Investments after 
December 21, 2000.

[67 FR 68503, Nov. 12, 2002]



Sec. 108.2003  Grant issuance fee for SSBICs.

    An SSBIC must pay to SBA a grant issuance fee of $5,000. An SSBIC 
must submit this fee in advance, at the time of application submission. 
If SBA does not award a grant to the SSBIC, SBA will refund this fee to 
the SSBIC.

[67 FR 68503, Nov. 12, 2002]



Sec. 108.2004  Contents of application submitted by SSBICs.

    Each application submitted by an SSBIC for an Operational Assistance 
grant must contain the information specified in the application packet 
provided by SBA, including the following information:
    (a) Amounts. An SSBIC must specify the amount of Regulatory Capital 
it intends to raise after December 21, 2000, and the amount of 
Operational Assistance grant funds it seeks from SBA, which must be at 
least 30 percent of its intended increase in its Regulatory Capital 
since December 21, 2000.
    (b) Plan. An SSBIC must submit a plan addressing the specific items 
described in Sec. 108.2005.

[67 FR 68503, Nov. 12, 2002]



Sec. 108.2005  Contents of plan submitted by SSBICs.

    (a) Plan for providing Operational Assistance. The SSBIC must 
describe how it plans to use its grant funds to provide Operational 
Assistance to Smaller Enterprises in which it will make Low-Income 
Investments. Its plan must address the types of Operational Assistance 
it proposes to provide, and how it plans to provide the Operational 
Assistance through the use of licensed professionals, when necessary, 
either from its own staff or from outside entities.
    (b) Matching resources for Operational Assistance grant. The SSBIC 
must include a detailed description of how it plans to obtain binding 
commitments for contributions in cash or in-kind, and/or to purchase an 
annuity, to match the funds requested from SBA for the SSBIC's 
Operational Assistance grant. If it proposes to obtain commitments for 
cash and in-kind contributions, it also must estimate the ratio of cash 
to in-kind contributions (in no event may in-kind contributions exceed 
50 percent of the total contributions). The SSBIC must discuss its 
potential sources of matching resources, the estimated timing on raising 
such match, and the extent of the expressions of interest to commit such 
match to the SSBIC.
    (c) Identification of LI Areas. The SSBIC must identify the specific 
LI Areas in which it intends to make Low-Income Investments and provide 
Operational Assistance under the NMVC program.
    (d) Projected allocation of investments among identified LI Areas. 
The SSBIC must describe the amount of Low-Income Investments it intends 
to make in each of the identified LI Areas.
    (e) Track record of management team in obtaining public policy 
results through investments. The SSBIC must provide information 
concerning the past track record of the SSBIC in making investments that 
have had a demonstrable

[[Page 138]]

impact on the socially or economically disadvantaged businesses targeted 
by the SSBIC program (for example, new businesses created, jobs created, 
or wealth created). Such information might include case studies or 
examples of the SSBIC's successful Financings.
    (f) Market analysis. The SSBIC must provide an analysis of the LI 
Areas in which it intends to makes its Low-Income Investments and 
provide its Operational Assistance to Smaller Enterprises, demonstrating 
that the SSBIC understands the market and the unmet capital needs in 
such areas and how its activities will meet these unmet capital needs 
through Low-Income Investments and have a positive economic impact on 
those areas. The analysis must include a description of the extent of 
the economic distress in the identified LI Areas. The SSBIC also must 
analyze the extent of the demand in such areas for Low-Income 
Investments and any factors or trends that may affect the SSBIC's 
ability to make effective Low-Income Investments.
    (g) Regulatory Capital. The SSBIC must include a detailed 
description of how it plans to raise its Regulatory Capital. The SSBIC 
must discuss its potential sources of Regulatory Capital, the estimated 
timing on raising such funds, and the extent of the expressions of 
interest to commit such funds to the SSBIC.
    (h) Projected impact. The SSBIC must describe the criteria and 
economic measurements to be used to evaluate whether and to what extent 
it has met the objectives of the NMVC program. It must include:
    (1) An estimate of the social, economic, and community development 
benefits to be created within identified LI Areas over the next five 
years or more as a result of its activities;
    (2) A description of the criteria to be used to measure the benefits 
created as a result of its activities; and
    (3) A discussion about the amount of such benefits created that it 
will consider to constitute successfully meeting the objectives of the 
NMVC program.

[67 FR 68503, Nov. 12, 2002]



Sec. 108.2006  Evaluation and selection of SSBICs.

    SBA will evaluate and select an SSBIC for an Operational Assistance 
grant award under the NMVC program solely at SBA's discretion, based on 
SBA's review of the SSBIC's application materials, interviews or site 
visits with the SSBIC (if any), and information in SBA's records 
relating to the SSBIC's regulatory compliance status and track record as 
an SSBIC. SBA's evaluation and selection process is intended to ensure 
that SSBIC requests are evaluated on a competitive basis and in a fair 
and consistent manner. SBA will evaluate and select SSBICs for an 
Operational Assistance grant award by considering the following 
criteria:
    (a) The strength of the SSBIC's application, including the strength 
of its proposal to provide Operational Assistance to Smaller Enterprises 
in which it intends to invest;
    (b) The SSBIC's regulatory compliance status and past track record 
in being able to accomplish program goals through its investment 
activity;
    (c) The likelihood that and the time frame within which the SSBIC 
will be able to raise the Regulatory Capital it intends to raise and 
obtain the matching resources described in Sec. 108.2005(b) and (g);
    (d) The need for Low-Income Investments in the LI Areas in which the 
SSBIC intends to invest;
    (e) The SSBIC's demonstrated understanding of the markets in the LI 
Areas in which it intends to invest;
    (f) The extent to which the activities proposed by the SSBIC will 
promote economic development and the creation of wealth and job 
opportunities in the LI Areas in which it intends to invest and among 
individuals living in LI Areas;
    (g) The likelihood that the SSBIC will fulfill the goals described 
in its application and meet the objectives of the NMVC program; and
    (h) The strength of the SSBIC's application compared to applications 
submitted by other SSBICs and by Applicants intending to invest in the 
same or proximate LI Areas.

[67 FR 68503, Nov. 12, 2002]

[[Page 139]]



Sec. 108.2007  Grant award to SSBICs.

    An SSBIC selected for an Operational Assistance grant award will 
receive a grant award only if, by a date established by SBA, it 
increases its Regulatory Capital in the specific amount set forth in its 
application, pursuant to Sec. 108.2004(a), and raises matching resources 
for the grant in the amount required by Sec. 108.2030(d)(2).

[67 FR 68503, Nov. 12, 2002]



Sec. 108.2010  Restrictions on use of Operational Assistance grant funds.

    (a) Restrictions applicable only to SSBICs. An SSBIC that receives 
an Operational Assistance grant must use both grant funds awarded by SBA 
and its matching resources only to provide Operational Assistance in 
connection with a Low-Income Investment made by the SSBIC with 
Regulatory Capital raised after December 21, 2000.
    (b) Restrictions applicable only to NMVC Companies. A NMVC Company 
must use at least 80 percent of both grant funds awarded by SBA and its 
matching resources to provide Operational Assistance to Smaller 
Enterprises whose Principal Office at the time the Operational 
Assistance commences is located in an LI Area.
    (c) Restrictions applicable to NMVC Companies and SSBICs. A NMVC 
Company or a SSBIC that receives an Operational Assistance grant must 
not use either grant funds awarded by SBA or its matching resources for 
``general and administrative expense,'' as defined in the Federal 
Acquisition Regulations, ``Definitions of Words and Terms,'' 48 CFR 
2.101.

[66 FR 28609, May 23, 2001; 66 FR 32894, June 19, 2001, as amended at 67 
FR 68505, Nov. 12, 2002]



Sec. 108.2020  Amount of Operational Assistance grant.

    (a) Amount of grant to NMVC Company. NMVC Companies are eligible for 
an Operational Assistance grant award equal to the amount of matching 
resources raised by the NMVC Company in accordance with 
Secs. 108.380(a)(1)(i)(B) and 108.2030.
    (b) Amount of grant to SSBIC. SSBICs are eligible for an Operational 
Assistance grant award equal to the amount of matching resources raised 
by the SSBIC in accordance with Secs. 108.2007 and 108.2030.
    (c) Pro rata reductions. In the event that the total amount of funds 
available to SBA for purposes of making Operational Assistance grant 
awards to NMVC Companies and SSBICs is not sufficient to award grants in 
the amounts described in paragraphs (a) and (b) of this section, SBA 
will make pro rata reductions in the amounts otherwise awarded to each 
such NMVC Company and SSBIC.

[66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002]



Sec. 108.2030  Matching requirements.

    (a) General. All Operational Assistance grant funds SBA awards to an 
NMVC Company or a SSBIC must be matched on a dollar for dollar basis 
with funds or other resources raised by the NMVC Company or SSBIC.
    (b) Allowable sources. (1) Any source other than SBA is an allowable 
source of matching resources for an Operational Assistance grant award.
    (2) Neither a NMVC Company nor a SSBIC may use funds or other 
resources that it has used to satisfy a legal requirement for obtaining 
funds under any other Federal program, to satisfy the matching resources 
requirements described in this part.
    (3) A portion of Private Capital may be designated as matching 
resources if the designated funds are used to purchase an annuity 
pursuant to paragraph (c)(2)(iv) of this section or are otherwise 
segregated in a manner acceptable to SBA.
    (c) Type and form of matching resources. (1) Matching resources may 
come from cash contributions or in-kind contributions. In-kind 
contributions cannot exceed 50 percent of the total amount of match 
raised by the NMVC Company or SSBIC.
    (2) Matching resources may be in the form of:
    (i) Cash;
    (ii) In-kind contributions;
    (iii) Binding commitments for cash or in-kind contributions that may 
be payable over a multiyear period acceptable to SBA (but not to exceed 
the term of the Operational Assistance

[[Page 140]]

grant from SBA and in no event more than 10 years); and/or
    (iv) An annuity, purchased with funds other than Regulatory Capital, 
from an insurance company acceptable to SBA and that may be payable over 
a multiyear period acceptable to SBA (but not to exceed the term of the 
Operational Assistance grant from SBA and in no event more than 10 
years).
    (d) Amount of matching resources.
    (1) NMVC Companies. The amount of matching resources required of an 
NMVC Company is set forth in Sec. 108.380(a)(1)(i)(B).
    (2) SSBICs. The amount of matching resources required of an SSBIC is 
equal to the amount of Operational Assistance grant funds requested by 
the SSBIC, as set forth in its application pursuant to Sec. 108.2004(a).

[66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002]



Sec. 108.2040  Reporting and recordkeeping requirements.

    (a) NMVC Companies. Policies governing reporting, record retention, 
and recordkeeping requirements applicable to NMVC Companies may be found 
in subpart H of this part. NMVC Companies also must comply with all 
reporting, record retention, and recordkeeping requirements set forth in 
Circular A-110 of the Office of Management and Budget (for availability, 
see 5 CFR 1310.3) and any grant award document executed between SBA and 
the NMVC Company.
    (b) SSBICs. An SSBIC receiving an Operational Assistance grant award 
must comply with all reporting, record retention and recordkeeping 
requirements set forth in Circular A-110 of the Office of Management and 
Budget and any grant award document executed between SBA and the SSBIC, 
as well as the reporting requirements in Sec. 108.630(f) and the filing 
requirement in Sec. 108.640.

[66 FR 28609, May 23, 2001, as amended at 67 FR 68505, Nov. 12, 2002]



PART 112--NONDISCRIMINATION IN FEDERALLY ASSISTED PROGRAMS OF SBA--EFFECTUATION OF TITLE VI OF THE CIVIL RIGHTS ACT OF 1964--Table of Contents


Sec.
112.1  Purpose.
112.2  Application of this part.
112.3  Discrimination prohibited.
112.4  Discrimination in employment.
112.5  Discrimination in providing financial assistance.
112.6  Discrimination in accommodations or services.
112.7  Illustrative applications.
112.8  Assurances required.
112.9  Compliance information.
112.10  Conduct of investigations.
112.11  Procedure for effecting compliance.
112.12  Effect on other regulations; forms and instructions.

Appendix A to Part 112

    Authority: Sec. 602, 78 Stat. 252 (42 U.S.C. 2000d-1).

    Source: 30 FR 298, Jan. 9, 1965, unless otherwise noted.



Sec. 112.1  Purpose.

    The purpose of this part is to effectuate the provisions of Title VI 
of the Civil Rights Act of 1964 (hereinafter referred to as the Act) to 
the end that no person in the United States shall, on the ground of 
race, color, or national origin, be excluded from participation in, be 
denied the benefits of, or be otherwise subjected to discrimination 
under any financial assistance activities of the Small Business 
Administration to which the Act applies.



Sec. 112.2  Application of this part.

    (a) This part applies to all recipients of Federal financial 
assistance administered by the Small Business Administration. (See 
appendix A)
    (b) The term Federal financial assistance includes: (1) Grants and 
loans of Federal funds; (2) the grant or donation of Federal property 
and interests in property; (3) the detail of Federal personnel; (4) the 
sale and lease of, and the permission to use (on other than a casual or 
transient basis), Federal property or any interest in such property 
without consideration, or at a nominal consideration, or at a 
consideration which is reduced for the purpose of assisting the 
recipient, or in recognition

[[Page 141]]

of the public interest to be served by such sale or lease to the 
recipient; and (5) any Federal agreement, arrangement, or other contract 
which has as one of its purposes the provision of assistance.
    (c) This part does not apply to financial assistance extended by way 
of insurance or guarantee.
    (d) The terms applicant and recipient mean, respectively, one who 
applies for and one who receives any of the financial assistance under 
any of the statutes referred to in paragraph (a) of this section. The 
term recipient also shall be deemed to include subrecipients of SBA 
financial assistance, i.e., concerns which secondarily receive financial 
assistance from the primary recipients of such financial assistance.
    (e) The terms program or activity and program mean all of the 
operations of any entity described in paragraphs (e)(1) through (4) of 
this section, any part of which is extended Federal financial 
assistance:
    (1)(i) A department, agency, special purpose district, or other 
instrumentality of a State or of a local government; or
    (ii) The entity of such State or local government that distributes 
such assistance and each such department or agency (and each other State 
or local government entity) to which the assistance is extended, in the 
case of assistance to a State or local government;
    (2)(i) A college, university, or other postsecondary institution, or 
a public system of higher education; or
    (ii) A local educational agency (as defined in 20 U.S.C. 7801), 
system of vocational education, or other school system;
    (3)(i) An entire corporation, partnership, or other private 
organization, or an entire sole proprietorship--
    (A) If assistance is extended to such corporation, partnership, 
private organization, or sole proprietorship as a whole; or
    (B) Which is principally engaged in the business of providing 
education, health care, housing, social services, or parks and 
recreation; or
    (ii) The entire plant or other comparable, geographically separate 
facility to which Federal financial assistance is extended, in the case 
of any other corporation, partnership, private organization, or sole 
proprietorship; or
    (4) Any other entity which is established by two or more of the 
entities described in paragraph (e)(1),(2), or (3) of this section.

[30 FR 298, Jan. 9, 1965, as amended at 38 FR 17934, July 5, 1973; 50 FR 
1441 Jan. 11, 1985; 68 FR 51348, 51349, Aug. 26, 2003]



Sec. 112.3  Discrimination prohibited.

    (a) General. To the extent that this part applies, no person in the 
United States shall, on the ground of race, color or national origin be 
excluded from participation in, be denied the benefits of, or be 
otherwise subjected to discrimination by any business or other activity.
    (b) Specific discriminatory actions prohibited. (1) To the extent 
that this part applies, a business or other activity may not, directly 
or through contractual or other arrangements, on ground of race, color 
or national origin:
    (i) Deny an individual any services, financial aid or other benefit 
provided by the business or other activity;
    (ii) Provide any service, financial aid or other benefit to an 
individual which is different or is provided in a different manner, from 
that provided to others by the business or other activity;
    (iii) Subject an individual to segregation or separate treatment in 
any manner related to his receipt of any service, financial aid or other 
benefit from the business or other activity;
    (iv) Restrict an individual in any way in the enjoyment of any 
advantage or privilege enjoyed by others receiving any service, 
financial aid or other benefit from the business or other activity;
    (v) Treat an individual differently from others in determining 
whether he satisfies any admission, enrollment, quota, eligibility, 
membership or other requirement or condition which individuals must meet 
in order to be provided any service, financial aid or other benefit 
provided by the business or other activity.
    (2) The enumeration of specific forms of prohibited discrimination 
in this paragraph does not limit the generality of the prohibition in 
paragraph (a) of this section.

[[Page 142]]

    (3) This regulation does not prohibit the consideration of race, 
color, or national origin if the purpose and effect are to remove or 
overcome the consequences of practices or impediments which have 
restricted the availability of, or participation in, a program or 
activity receiving Federal financial assistance, on the grounds of race, 
color, or national origin. Where previous discriminatory practice or 
usage tends, on the grounds of race, color, or national origin, to 
exclude individuals from participation in, to deny them the benefits of, 
or to subject them to discrimination under any program or activity to 
which this regulation applies, the applicant or recipient has an 
obligation to take reasonable action to remove or overcome the 
consequences of the prior discriminatory practice or usage, and to 
accomplish the purposes of the Act.

[30 FR 298, Jan. 9, 1965, as amended at 38 FR 17934, July 5, 1973; 68 FR 
51349, Aug. 26, 2003]



Sec. 112.4  Discrimination in employment.

    Small business concerns and development companies which apply for or 
receive any financial assistance of the kind described in Sec. 112.2(a) 
(1) and (2), including concerns which are identifiable beneficiaries of 
loans made under Sec. 112.2(a)(2), may not discriminate on the grounds 
of race, color, or national origin in their employment practices. Such 
assistance is deemed to have as a primary objective the providing of 
employment. Where a primary objective of the Federal financial 
assistance is not to provide employment, but discrimination on the 
grounds of race, color, or national origin in the employment practices 
of the recipient or other persons subject to the regulation tends, on 
the grounds of race, color, or national origin, to exclude individuals 
from participation in, to deny them the benefits of, or to subject them 
to discrimination under any program to which this regulation applies, 
the provisions of Sec. 112.7(a) shall apply to the employment practices 
of the recipient or other persons subject to the regulation, to the 
extent necessary to assure equality of opportunity and nondiscriminatory 
treatment.

[38 FR 17934, July 5, 1973]



Sec. 112.5  Discrimination in providing financial assistance.

    Development companies and small business investment companies which 
apply for or receive any of the financial assistance described in 
Sec. 112.2(a) may not discriminate, on the ground of race, color or 
national origin, in providing financial assistance to small business 
concerns.



Sec. 112.6  Discrimination in accommodations or services.

    Small business concerns which apply for or receive any financial 
assistance of the kind described in Sec. 112.2(a)(1), concerns which are 
identifiable beneficiaries of loans made under Sec. 112.2(a)(2), and 
physicians, hospitals, schools, libraries, and other individuals or 
organizations which apply for or receive financial assistance of the 
kind described in Sec. 112.2(a)(5), may not discriminate in the 
treatment accommodations or services they provide to their patients, 
students, visitors, guests, members, passengers, or patrons in the 
conduct of such businesses or other enterprises, whether or not operated 
for profit.

[31 FR 2374, Feb. 4, 1966]



Sec. 112.7  Illustrative applications.

    (a) Employment. The discrimination prohibited by Sec. 112.4 includes 
but is not limited to any action (taken directly or through contractual 
or other arrangements) which subjects an individual to discrimination on 
the ground of race, color or national origin in any employment practice, 
including recruitment or recruitment advertising, employment, layoff or 
termination, upgrading, demotion, or transfer, rates of pay or other 
forms of compensation, and use of facilities.
    (b) Financial assistance. The discrimination prohibited by 
Sec. 112.5 includes but is not limited to the failure or refusal, 
because of the race, color, or national origin of a person, to extend a 
loan or equity financing to him or to any business concern of which he 
is an owner or employee; or, in the case of financing which has actually 
been extended, the failure or refusal, because of the race, color, or 
national origin of the borrower or of an owner or employee of

[[Page 143]]

the borrower, to accord the borrower fair treatment and the customary 
courtesies regarding such matters as default, grace periods and the 
like.
    (c) Accommodations or services. The discrimination prohibited by 
Sec. 112.6 includes but is not limited to the failure or refusal, 
because of the race, color, or national origin of a person, to accept 
him on a nonsegregated basis as a patient, student, visitor, guest, 
member, customer, passenger or patron.
    (d) Affirmative action. (1) In some situations even though past 
discriminatory practices have been abandoned, the consequences of such 
practices continue to impede the full availability of equal opportunity. 
If the efforts required of the applicant or recipient under 
Sec. 112.3(b)(3) to provide information as to the availability of equal 
opportunity, and the rights of individuals under this regulation, have 
failed to overcome these consequences, it will become necessary for such 
applicant or recipient to take additional steps to make equal 
opportunity fully available to racial and nationality groups previously 
subjected to discrimination.
    (2) Even though an applicant or recipient has never used 
discriminatory policies, the opportunities in the business it operates 
may not in fact be equally available to some racial or nationality 
groups. In such circumstances a recipient may properly give special 
consideration to race, color, or national origin to make opportunity 
more widely available to such groups.

[30 FR 298, Jan. 9, 1965, as amended at 38 FR 17934, July 5, 1973]



Sec. 112.8  Assurances required.

    An application for any of the financial assistance described in 
Sec. 112.2(a) shall, as a condition to its approval and the extension of 
such assistance, contain or be accompanied by an assurance that the 
recipient will comply with this part. Such an assurance shall contain 
provisions authorizing the acceleration of the maturity of the 
recipient's financial obligation to the SBA in the event of a failure to 
comply, and provisions which give the United States a right to seek 
judicial enforcement of the terms of the assurance. SBA shall specify 
the form of the foregoing assurance, and the extent to which like 
assurances will be required of contractors and subcontractors, 
transferees, successors in interest, and other participants.

[30 FR 298, Jan. 9, 1965, as amended at 68 FR 51349, Aug. 26, 2003]



Sec. 112.9  Compliance information.

    (a) Cooperation and assistance. SBA shall to the fullest extent 
practicable seek the cooperation of applicants and recipients in 
obtaining compliance with this part and shall provide assistance and 
guidance to applicants and recipients to help them comply voluntarily 
with this part.
    (b) Compliance reports. Each applicant or recipient shall keep such 
records and submit to SBA timely, complete and accurate compliance 
reports at such times, and in such form and containing such information, 
as SBA may determine to be necessary to enable SBA to ascertain whether 
the applicant or recipient has complied or is complying with this part. 
In the case of a small business concern which receives financial 
assistance from a development company or from a small business 
investment company, such concern shall submit to the company such 
information as may be necessary to enable the company to meet its 
reporting requirements under this part.
    (c) Access to sources of information. Each applicant or recipient 
shall permit access by SBA during normal business hours to such of its 
books, records, accounts, and other sources of information, and its 
facilities as may be pertinent to ascertain compliance with this part. 
Where any information required of an applicant or recipient is in the 
exclusive possession of any other agency, institution or person and this 
agency, institution or person shall fail or refuse to furnish this 
information, the applicant or recipient shall so certify in its report 
and shall set forth what efforts it has made to obtain this information.
    (d) Information to the public. Each recipient shall make available 
to persons entitled under the Act and under this part to protection 
against discrimination by the recipient such information

[[Page 144]]

as SBA may find necessary to apprise them of their rights to such 
protection.

[30 FR 298, Jan. 9, 1965, as amended at 38 FR 17934, July 5, 1973]



Sec. 112.10  Conduct of investigations.

    (a) Periodic compliance reviews. SBA shall from time to time review 
the practices of recipients to determine whether they are complying with 
this part.
    (b) Complaints. Any person who believes himself or any specific 
class of individuals to be subjected to discrimination prohibited by 
this part may, by himself or by a representative, file with SBA a 
written complaint. A complaint must be filed not later than 180 days 
from the date of the alleged discrimination, unless the time for filing 
is extended by SBA.
    (c) Investigations. SBA will make a prompt investigation whenever a 
compliance review, report, complaint, or any other information indicates 
a possible failure to comply with this part. The investigation should 
include, where appropriate, a review of the pertinent practices and 
policies of the applicant or recipient, the circumstances under which 
the possible noncompliance with this part occurred, and other factors 
relevant to a determination as to whether the applicant or recipient has 
failed to comply with this part.
    (d) Resolution of matters. (1) If an investigation pursuant to 
paragraph (c) of this section indicates a failure to comply with this 
part, SBA will so inform the applicant or recipient and the matter will 
be resolved by informal means whenever possible. If it has been 
determined that the matter cannot be resolved by informal means, action 
will be taken as provided for in Sec. 112.11.
    (2) If an investigation does not warrant action pursuant to 
paragraph (d)(1) of this section, SBA will so inform the applicant or 
recipient and the complainant, if any, in writing.
    (e) Intimidatory or retaliatory acts prohibited. No applicant or 
recipient or other person shall intimidate, threaten, coerce, or 
discriminate against any individual for the purpose of interfering with 
any right or privilege secured by section 601 of the Act or by this part 
or because he has made a complaint, testified, assisted, or participated 
in any manner in an investigation, proceeding, or hearing under this 
part. The identity of complainants shall be kept confidential except to 
the extent necessary to carry out the purposes of this part, including 
the conduct of any investigation, hearing, or judicial proceeding 
arising thereunder.

[30 FR 298, Jan. 9, 1965, as amended at 38 FR 17934, July 5, 1973]



Sec. 112.11  Procedure for effecting compliance.

    (a) General. (1) If there appears to be a failure or threatened 
failure to comply with this part and if the noncompliance or threatened 
noncompliance cannot be corrected by informal means, compliance with 
this part may be effected by suspending, terminating, or refusing any 
financial assistance approved but not yet disbursed to an applicant or, 
in the case of a loan which has been partially disbursed, by refusing to 
make further disbursements. In addition, compliance may be effected by 
any other means authorized by law.
    (2) Such other means may include but are not limited to (i) legal 
action by SBA to enforce its right, embodied in the assurances described 
in Sec. 112.8, to accelerate the maturity of the recipient's obligation; 
(ii) a reference to the Department of Justice with a recommendation that 
appropriate proceedings be brought to enforce any rights of the United 
States under any law of the United States, including other titles of the 
Act; and (iii) any applicable proceedings under State or local law.
    (b) Noncompliance with Sec. 112.8. If an applicant fails or refuses 
to furnish an assurance required under Sec. 112.8 or otherwise fails or 
refuses to comply with a requirement imposed by or pursuant to that 
section Federal financial assistance may be refused in accordance with 
the procedures of paragraph (c) of this section. SBA shall not be 
required to provide assistance in such a case during the pendency of the 
administrative proceedings under such paragraph except that SBA shall 
continue assistance during the pendency of such proceedings where such 
assistance is due and payable pursuant to an application therefor 
approved prior to the effective date of this part. Such proceedings

[[Page 145]]

shall be conducted in accordance with the provisions of part 134 of this 
chapter by an Administrative Law Judge of the Office of Hearings and 
Appeals, who shall issue an initial decision in the case. The 
Administrator shall be the reviewing official for purposes of 
Sec. 134.228. The applicant's failure to file a timely motion in 
accordance with Secs. 134.222 and 134.211, requesting that the matter be 
scheduled for an oral hearing, shall constitute waiver of the right to 
an oral hearing but shall not prevent the submission of written 
information and argument for the record in accordance with the 
provisions of part 134.
    (c) Conditions precedent. No order suspending, terminating, or 
refusing financial assistance shall become effective until (1) SBA has 
advised the applicant or recipient of his failure to comply and has 
determined that compliance cannot be secured by voluntary means; (2) 
there has been an express finding on the record after an opportunity for 
an oral hearing, of a failure by the applicant or recipient to comply 
with a requirement imposed by or pursuant to this part; (3) the initial 
decision has become final pursuant to Sec. 134.227(b); and (4) the 
expiration of 30 days after SBA has filed with the committee of the 
House and the committee of the Senate having legislative jurisdiction of 
the form of financial assistance involved, a full written report of the 
circumstances and the grounds for such action.
    (d) Other means authorized by law. No action to effect compliance by 
any other means authorized by law shall be taken until (1) SBA has 
determined that compliance cannot be secured by voluntary means; (2) the 
action has been approved by the Administrator or his designee; (3) the 
applicant or recipient or other person has been notified of its failure 
to comply and of the action to be taken to effect compliance; and (4) 
the expiration of at least 10 days from the mailing of such notice to 
the applicant or recipient or other person. During this period of at 
least 10 days from the mailing of such notice to the applicant or 
recipient or other person. During this period of at least 10 days 
additional efforts shall be made to persuade the applicant or recipient 
or other person to comply with this part and to take such corrective 
action as may be appropriate.

[30 FR 298, Jan. 9, 1965, as amended at 38 FR 17934, July 5, 1973; 49 FR 
33629, Aug. 24, 1984; 61 FR 2691, Jan. 29, 1996]



Sec. 112.12  Effect on other regulations; forms and instructions.

    (a) Effect on other regulations. All regulations, orders or like 
directions heretofore issued by SBA which impose requirements designed 
to prohibit any discrimination against individuals on the grounds of 
race, color, or national origin and which authorize the suspension or 
termination of or refusal to grant to or to continue financial 
assistance to any applicant for or recipient of such assistance for 
failure to comply with such requirements, are hereby superseded to the 
extent that such discrimination is prohibited by this part, except that 
nothing in this part shall be deemed to relieve any person of any 
obligation assumed or imposed under any such superseded regulation, 
order, instruction, or like direction prior to the effective date of 
this part. Nothing in this part, however, shall be deemed to supersede 
any of the following (including future amendments thereof):
    (1) Executive Order 11246 and regulations issued thereunder, or (2) 
any other orders, regulations or instructions, insofar as such order, 
regulations, or instructions prohibit discrimination on the grounds of 
race, color, or national origin in any program or situation to which 
this part is inapplicable or prohibit discrimination on any other 
ground.
    (b) Forms and instructions. SBA shall issue and promptly make 
available to interested persons forms and detailed instructions and 
procedures for effectuating this part.
    (c) Supervision and coordination. The Administrator may from time to 
time assign to officials of SBA or to officials of other agencies of the 
Government with the consent of such agencies, responsibilities in 
connection with the effectuation of the purpose of Title VI of the Act 
and this part (other than responsibility for final decision as provided 
in Sec. 112.13), including the achievement of effective coordination and 
maximum uniformity within SBA and

[[Page 146]]

within the Executive Branch of the Government in the application of 
Title VI and this part to similar programs and in similar situations. 
Any action taken, determination made, or requirement imposed by an 
official of another Department or agency acting pursuant to an 
assignment of responsibility under this subsection shall have the same 
effect as though such action had been taken by the Administrator of SBA.

[30 FR 298, Jan. 9, 1965, as amended at 38 FR 17935, July 5, 1973. 
Redesignated at 49 FR 33629, Aug. 24, 1984]

                         Appendix A to Part 112

------------------------------------------------------------------------
   Name of Federal financial assistance               Authority
------------------------------------------------------------------------
         Federal Financial Assistance Involving Grants of Funds
------------------------------------------------------------------------
Regular business loans....................  Small Business Act, sec.
                                             7(a) and 7(a)(11).
Handicapped assistance loans..............  Small Business Act, sec.
                                             7(a)(10)
Small business energy loans...............  Small Business Act, sec.
                                             7(a)(12).
Small general contractors.................  Small Business Act, sec.
                                             7(a)(9).
Vietnam-era and Disabled Veterans Loan      Pub. L. 97-72.
 Program.
Debtor State development company loans      Small Business Investment
 (501) and their small business concerns.    Act, title V, and Small
                                             Business Act, sec.
                                             7(a)(13).
Debtor small business investment companies  Small Business Investment
 and their small business concerns.          Act, title III.
------------------------------------------------------------------------
                             Disaster Loans
------------------------------------------------------------------------
Physical..................................  Small Business Act, sec.
                                             7(b)(1).
Economic injury (EIDL)....................  Small Business Act, sec.
                                             7(b)(2).
Federal action--economic injury...........  Small Business Act, sec.
                                             7(b)(3).
Currency fluctuation--economic injury.....  Small Business Act, sec.
                                             7(b)(4).
------------------------------------------------------------------------
                   Other Federal Financial Assistance
------------------------------------------------------------------------
Women's business enterprise...............  Executive Order 12138.
Small business innovation and research....  Small Business Act, sec. 9.
Procurement automated source system.......  Small Business Act, sec. 8
                                             and Pub. L. 96-302.
Business Development Program..............  Small Business Act, sec.
                                             8(a) and Pub. L. 95-507, as
                                             amended by Pub. L. 96-481.
Small Business Institute Program..........  Small Business Act, sec.
                                             8(b)(1) and Pub. L. 85-536.
Certificate of competency.................  Small Business Act, sec.
                                             8(b)(7) and Pub. L 95-89.
Subcontracting Assistance Program.........  Small Business Act, sec.
                                             8(d) and and Pub. L. 95-
                                             507.
Technology Assistance Program.............  Small Business Act, sec. 9.
Small business development centers........  Small Business Act, sec. 21
                                             and Pub. L. 96-302.
International Trade Program...............  Small Business Act, sec. 22
                                             and Pub. L. 96-481.
Service Corps of Retired Executives and     Small Business Act, secs.
 Active Corps of Executives.                 101 and 8(b)(1) and Pub. L.
                                             95-510.
Veterans affairs programs.................  Pub. L. 93-237.
Private sector initiatives................  Small Business Act, sec.
                                             8(b)(1).
------------------------------------------------------------------------

    Note: All types of Federal financial assistance listed above are 
also covered by part 113 of title 13 of the Code of Federal Regulations.

[50 FR 1441, Jan. 11, 1985, as amended at 68 FR 51348, 51349, Aug. 26, 
2003]



PART 113--NONDISCRIMINATION IN FINANCIAL ASSISTANCE PROGRAMS OF SBA--EFFECTUATION OF POLICIES OF FEDERAL GOVERNMENT AND SBA ADMINISTRATOR--Table 
of Contents


                      Subpart A--General Provisions

Sec.
113.1  Purpose.
113.2  Definitions.
113.3  Discrimination prohibited.
113.3-1  Consideration of race, color, religion, sex, marital status, 
          handicap, or national origin.
113.3-2  Accommodations to religious observance and practice.
113.3-3  Structural accommodations for handicapped clients.
113.4  Assurances required.
113.5  Compliance information.
113.6  Conduct of investigations.
113.7  Procedure for effecting compliance.
113.8  Effect on other regulations, forms and instructions.

Appendix A to Subpart A of Part 113

 Subpart B--Nondiscrimination on the Basis of Sex in Education Programs 
          or Activities Receiving Federal Financial Assistance

                              Introduction

113.100  Purpose and effective date.
113.105  Definitions.
113.110  Remedial and affirmative action and self-evaluation.
113.115  Assurance required.
113.120  Transfers of property.
113.125  Effect of other requirements.
113.130  Effect of employment opportunities.
113.135  Designation of responsible employee and adoption of grievance 
          procedures.
113.140  Dissemination of policy.

[[Page 147]]

                                Coverage

113.200  Application.
113.205  Educational institutions and other entities controlled by 
          religious organizations.
113.210  Military and merchant marine educational institutions.
113.215  Membership practices of certain organizations.
113.220  Admissions.
113.225  Educational institutions eligible to submit transition plans.
113.230  Transition plans.
113.235  Statutory amendments.

    Discrimination on the Basis of Sex in Admission and Recruitment 
                               Prohibited

113.300  Admission.
113.305  Preference in admission.
113.310  Recruitment.

 Discrimination on the Basis of Sex in Education Programs or Activities 
                               Prohibited

113.400  Education programs or activities.
113.405  Housing.
113.410  Comparable facilities.
113.415  Access to course offerings.
113.420  Access to schools operated by LEAs.
113.425  Counseling and use of appraisal and counseling materials.
113.430  Financial assistance.
113.435  Employment assistance to students.
113.440  Health and insurance benefits and services.
113.445  Marital or parental status.
113.450  Athletics.
113.455  Textbooks and curricular material.

 Discrimination on the Basis of Sex in Employment in Education Programs 
                        or Activities Prohibited

113.500  Employment.
113.505  Employment criteria.
113.510  Recruitment.
113.515  Compensation.
113.520  Job classification and structure.
113.525  Fringe benefits.
113.530  Marital or parental status.
113.535  Effect of state or local law or other requirements.
113.540  Advertising.
113.545  Pre-employment inquiries.
113.550  Sex as a bona fide occupational qualification.

                               Procedures

113.600  Notice of covered programs.
113.605  Enforcement procedures.

    Authority: 15 U.S.C. 633, 634, 687, 1691; 20 U.S.C. 1681, 1682, 
1683, 1685, 1686, 1687, 1688; 29 U.S.C. 794; Sec. 5, Pub. L. 85-536, 72 
Stat. 385, as amended; Sec. 308, Pub. L. 85-699, 72 Stat. 694, as 
amended.

    Source: 44 FR 20068, Apr. 4, 1979, unless otherwise noted.



                      Subpart A--General Provisions



Sec. 113.1  Purpose.

    (a) Part 112 of this chapter, issued pursuant to Title VI of the 
Civil Rights Act of 1964, prohibits discrimination on the basis of race, 
color, or national origin by some recipients of financial assistance 
from SBA. The purpose of this part is to reflect to the fullest extent 
possible the nondiscrimination policies of the Federal Government as 
expressed in the several statutes, Executive Orders, and messages of the 
President dealing with civil rights and equality of opportunity, and in 
the previous determination of the Administrator of the Small Business 
Administration that discrimination based on race, color, religion, sex, 
marital status, handicap or national origin shall be prohibited, to the 
extent that it is not prohibited by part 112 of this chapter, to all 
recipients of financial assistance from SBA.
    (b) In accordance with Pub. L. 94-239, 15 U.S.C. 1691, cited as the 
Equal Credit Act Amendments of 1976, it is unlawful for any recipient 
creditor to discriminate against any applicant, with respect to any 
aspect of a credit transaction because of race, color, religion, 
national origin, sex, marital status, age: (Provided, the applicant has 
the capacity to contract), because all or part of the applicant's income 
derives from any public assistance program, or because the applicant has 
in good faith exercised any right under the Consumer Credit Protection 
Act.
    (c) It is the intention of the Administrator that the prohibitions 
in this part supplement those in part 112 of this chapter, that the two 
parts be read in pari materia, and that the procedures established 
herein be harmonized to the maximum extent feasible with those 
established in part 112 of this chapter.



Sec. 113.2  Definitions.

    As used in this part:
    (a) The term Federal financial assistance includes (1) grants and 
loans of Federal funds, (2) the grant or donation of Federal property 
and interests in

[[Page 148]]

property, (3) the detail of Federal personnel, (4) the sale and lease 
of, and the permission to use (on other than a casual or transient 
basis), Federal property or any interest in such property without 
consideration, or at a nominal consideration, or at a consideration 
which is reduced for the purpose of assisting the recipient, or in 
recognition of the public interest to be served by such sale or lease to 
the recipient, and (5) any Federal agreement, arrangement, or other 
contract which has as one of its purposes the provision of assistance.
    (b) The terms applicant and recipient mean, respectively, one who 
applies for and one who receives any of the financial assistance under 
any of the statutes referred to in paragraph (a) of this section. The 
term recipient also shall be deemed to include subrecipients of SBA 
financial assistance, i.e., concerns which secondarily receive financial 
assistance from the primary recipients of such financial assistance. For 
the purposes of this part, a paragraph (b) lender (13 CFR 120.4(b)) 
shall be deemed a recipient of financial assistance.
    (c) The term religion includes all aspects of religious observance 
and practice, as well as belief.
    (d) The term qualified handicapped person means (1) with respect to 
employment, a handicapped person who, with reasonable accommodation, can 
perform the essential functions of the job in question and (2) with 
respect to services, a handicapped person who meets the essential 
eligibility requirements for the receipt of such services.
    (e) The term handicapped person, as defined by the guideline set 
forth by the Department of Health, Education, and Welfare in Sec. 85.31 
of title 45 of the CFR (43 FR 2137, dated January 13, 1978), means any 
person who has a physical or mental impairment that substantially limits 
one or more major life activities, has a record of such an impairment, 
or is regarded as having such an impairment.
    (f) As used in paragraph (e) of this section, the phrase:
    (1) Physical or mental impairment means (i) any physiological 
disorder or condition, cosmetic disfigurement, or anatomical loss 
affecting one or more of the following body systems: Neurological; 
musculoskeletal; special sense organs; respiratory, including speech 
organs; cardiovascular; reproductive; digestive; genitourinary; hemic 
and lymphatic; skin; and endocrine; or (ii) any mental or psychological 
disorder, such as mental retardation, organic brain syndrome, emotional 
or mental illness, and specific learning disabilities. The term physical 
or mental impairment includes, but is not limited to, such diseases and 
conditions as orthopedic, visual, speech, and hearing impairments, 
cerebral palsy, epilepsy, muscular dystrophy, multiple sclerosis, 
cancer, heart disease, diabetes, mental retardation, emotional illness, 
drug addiction and alcoholism.
    (2) Major life activities means functions such as caring for one's 
self, performing manual tasks, walking, seeing, hearing, speaking, 
breathing, learning, and working.
    (3) Has a record of such an impairment means has a history of, or 
has been misclassified as having, a mental or physical impairment that 
substantially limits one or more major life activities.
    (4) Is regarded as having an impairment means (i) has a physical or 
mental impairment that does not substantially limit major life 
activities but is treated by a recipient as constituting such a 
limitation; (ii) has a physical or mental impairment that substantially 
limits major life activities only as a result of the attitudes of others 
toward such impairment; or (iii) has none of the impairments defined in 
paragraph (f)(1) of this section but is treated by a recipient as having 
such an impairment.
    (g) The term reasonable accommodation as used in these Regulations 
may include: (1) making facilities used by employees readily accessible 
to and usable by handicapped persons; and (2) job restructuring, part-
time or modified work schedules, acquisition or modification of 
equipment or devices, the provision of readers or interpreters, and 
other similar actions.
    (h) The term facility means all or any portion of buildings, 
structures, equipment, roads, walks, parking lots, or other real or 
personal property.

[44 FR 20068, Apr. 4, 1979, as amended at 48 FR 14891, Apr. 6, 1983]

[[Page 149]]



Sec. 113.3  Discrimination prohibited.

    To the extent not covered or prohibited by part 112 of this chapter, 
recipients of financial assistance may not:
    (a) Discriminate with regard to goods, services, or accommodations 
offered or provided by the aided business or other enterprise, whether 
or not operated for profit, because of race, color, religion, sex, 
handicap, or national origin of a person, or fail or refuse to accept a 
person on a nonsegregated basis as a patient, student, visitor, guest, 
customer, passenger, or patron.
    (b) With regard to employment practices within the aided business or 
other enterprise, whether or not operated for profit; fail or refuse, 
because of race, color, religion, sex or national origin of a person, to 
seek or retain the person's services, or to provide the person with 
opportunities for advancement or promotion, or accord an employee the 
rank and rate of compensation, including fringe benefits, merited by the 
employee's services and abilities.
    (c) With regard to employment practices within the aided business or 
other enterprise, whether or not operated for profit; discriminate 
against a qualified handicapped person; or because of handicap, fail or 
refuse to seek or retain the person's services or to provide the person 
with opportunities for advancement or promotion, or accord an employee 
the rank and rate of compensation, including fringe benefits, merited by 
the employee's services and abilities. All employment decisions shall be 
made in a manner which ensures that discrimination on the basis of 
handicap does not occur. Such decisions may not limit, segregate, or 
classify job applicants or employees in any way that adversely affects 
the opportunities or status of qualified handicapped individuals.
    (d) Participate in a contractual or other relationship that has the 
effect of subjecting job applicants or employees to discrimination 
prohibited by this part. The relationships referred to in this paragraph 
include those with employment and referral agencies, labor unions, 
organizations providing or administering fringe benefits to employees of 
the recipient, and organizations providing training and apprenticeship 
programs. Activities covered by this part are as follows:
    (1) Recruitment, advertising, and the processing of applications for 
employment;
    (2) Hiring, upgrading, promotion, award of tenure, demotion, 
transfer, layoff, termination, right of return from layoff, and 
rehiring;
    (3) Rates of pay or any other form of compensation and changes in 
compensation;
    (4) Job assignments, job classifications, organizational structures, 
position descriptions, lines of progression, and seniority lists;
    (5) Leaves of absence, sick leave, or any other leave;
    (6) Fringe benefits available by virtue of employment, whether or 
not administered by the recipient;
    (7) Selection and financial support for training, including 
apprenticeship, professional meetings, conferences, and other related 
activities, and selection for leaves of absence to pursue training;
    (8) Employer sponsored activities, including social or recreational 
programs; and
    (9) Any other term, condition, or privilege of employment.
    (e) Use employment tests or criteria that discriminate on the basis 
of race, color, religion, sex, marital status, handicap, or national 
origin. Employment tests which are used for all other job applicants 
shall be adapted in an appropriate mode for use by persons who have 
handicaps that impair sensory, manual, or speaking skills.
    (f) Conduct a preemployment medical examination, unless required of 
all job applicants, and subsequent to a conditional offer of employment. 
The results of all such medical examinations shall be kept confidential.
    (g) Make a preemployment inquiry as to whether a job applicant is a 
handicapped person or as to the nature or severity of a handicap: EXCEPT 
when a recipient is taking remedial action to overcome the effects of 
conditions which resulted in past discrimination, or when a recipient is 
taking affirmative action pursuant to section 503 of the Rehabilitation 
Act of 1973, as amended.

[[Page 150]]

    (1) Such preemployment inquiry may only be made after the job 
applicant has been informed that such disclosure is for the purposes set 
forth in paragraph (g) of this section; that the disclosure is voluntary 
and will be kept confidential; and that refusal of the job applicant to 
provide such information will not subject the applicant to any adverse 
action.
    (2) Information elicited from qualified handicapped job applicants 
concerning their medical history or condition shall be kept confidential 
EXCEPT that:
    (i) Supervisors and managers may be informed about restrictions on 
or accommodations to be made for the qualified handicapped individual;
    (ii) First aid and safety personnel may be informed, where 
appropriate, of the need for possible emergency treatment; and
    (iii) Compliance officials shall be given relevant information, if 
requested.
    (h) Discriminate on the basis of race, color, religion, handicap or 
national origin in the use of toilets or any facilities for rest or 
comfort. Discriminate on the basis of race, color, religion, sex, 
handicap or national origin in the use of cafeterias, recreational 
programs or other programs sponsored by the applicant or recipient.
    (i) With regard to all recipients offering credit, such as Small 
Business Investment Companies and Community Development Companies, 
discriminate against debtors on the basis of race, color, religion, sex, 
marital status, handicap, or national origin.
    (j) With regard to the granting of credit by all recipient 
creditors, discriminate against any credit applicant, with respect to 
any aspect of a credit transaction because of race, color, religion, 
national origin, sex, marital status, handicap, age (provided the 
applicant has the capacity to contract), because all or part of the 
applicant's income derives from any public assistance program, or 
because the applicant has in good faith exercised any right under the 
Consumer Credit Protection Act.



Sec. 113.3-1  Consideration of race, color, religion, sex, marital status, handicap, or national origin.

    (a) This regulation does not prohibit the consideration of race, 
color, religion, sex, marital status, handicap, or national origin if 
the purpose and effect are to remove or overcome the consequences of 
practices or impediments which have restricted the availability of, or 
participation in, the program or activity receiving Federal financial 
assistance, on the grounds of race, color, religion, sex, marital 
status, handicap, or national origin. Where previous discriminatory 
practices or usage tends, on the grounds of race, color, religion, sex, 
marital status, handicap, or national origin, to exclude individuals 
from participation in, to deny them the benefits of, or to subject them 
to discrimination under any program or activity to which this regulation 
applies, the applicant or recipient has an obligation to take reasonable 
action to remove or overcome the consequences of the prior 
discriminatory practice or usage, and to accomplish the purposes of this 
regulation. All programs and activities shall be administered in the 
most integrated setting possible.
    (b) Nothing in this part shall prohibit the restriction of certain 
jobs to members of one sex if a bona fide occupational qualification can 
be demonstrated by the applicant or recipient. Custom or tradition is 
not a bona fide occupational qualification.
    (c) Recipients shall take steps to ensure that communications with 
job applicants and employees who have vision and/or hearing disabilities 
are available in appropriate modes.
    (d) Recipients shall make reasonable accommodation to the known 
physical or mental limitations of an otherwise qualified handicapped job 
applicant or employee UNLESS the recipient can demonstrate that the 
accommodation would impose an undue hardship on the operation of the 
business. Factors to be considered in determining whether an 
accommodation would impose an undue hardship on the operation of a 
recipient's business include:
    (1) The overall size of the recipient's business with respect to 
number of employees, number and type of facilities,

[[Page 151]]

size of budget, and the financial condition of the business;
    (2) The type of the recipient's operation, including the composition 
and structure of the recipient's workforce; and
    (3) The nature and cost of the accommodation needed.
    (e) Such accommodation may include making facilities used by 
employees readily accessible to and usable by handicapped persons, job 
restructuring, part-time or modified work schedules, acquisition or 
modification of equipment or devices, the provision of readers or 
interpreters, and other similar actions.
    (f) The final decision, when making a review or investigation of a 
complaint, as to whether an accommodation would impose an undue hardship 
on the operation of a recipient business will be made by the compliance 
officials of the Small Business Administration.
    (g) Recipients shall administer programs and activities in the most 
integrated setting appropriate to the needs of qualified handicapped 
persons, and shall not participate in a contractual relationship that 
has the effect of subjecting qualified handicapped job applicants or 
employees to discrimination prohibited by this part. The relationships 
referred to in this paragraph include those with referral agencies, 
labor unions, organizations providing or administering fringe benefits 
to employees of the recipient, and organizations providing training and 
apprenticeship programs.
    (h) Nothing in this part shall apply to a religious corporation, 
association, educational institution or society with respect to the 
membership or the employment of individuals of a particular religion to 
perform work connected with the carrying on by such corporation, 
association, educational institution or society of its religious 
activities.



Sec. 113.3-2  Accommodations to religious observance and practice.

    A recipient of financial assistance must accommodate to the 
religious observances and practices of an employee or prospective 
employee unless the recipient demonstrates that it is unable to 
reasonably accommodate to an employee's or prospective employee's 
religious observance or practice without undue hardship on the conduct 
of the employer's business. As part of this obligation, recipient must 
make reasonable accommodations to the religious observances and 
practices of an employee or prospective employee who regularly observes 
Friday evening and Saturday, or some other day of the week, as Sabbath 
and/or who observes certain religious holidays during the year and who 
is conscientiously opposed to performing work or engaging in similar 
activity on such days, when such accommodations can be made without 
undue hardship on the conduct of the employer's business. In determining 
the extent of a recipient's obligations under this section, at least the 
following factors should be considered: (a) Business necessity, (b) 
financial costs and expenses, and (c) resulting personnel problems.



Sec. 113.3-3  Structural accommodations for handicapped clients.

    (a) Existing facilities. Recipients in preexisting structures shall 
make their goods or services accessible to and usable by handicapped 
clients. Where structural changes are necessary to make the recipient's 
goods or services accessible, such changes shall be made as soon as 
practicable, but in no event later than three years after the effective 
date of this Regulation. A plan setting forth the steps necessary to 
complete such structural changes shall be developed and submitted to 
SBA. If practical, interested persons, including handicapped persons or 
organizations representing handicapped persons, will be consulted.
    (b) Design, construction, and alteration. New facilities shall be 
designed and constructed to be readily accessible to and usable by 
persons with handicaps. Alterations to existing facilities that affect 
usability shall, to the maximum extent feasible, be designed and 
constructed to be readily accessible to and usable by handicapped 
persons.
    (c) Conformance with Uniform Federal Accessibility Standards. (1) 
Effective as of January 18, 1991, design, construction, or alteration of 
buildings in conformance with sections 3-8 of the Uniform Federal 
Accessibility Standards

[[Page 152]]

(UFAS) (appendix A to 41 CFR subpart 101-19.6) shall be deemed to comply 
with the requirements of this section with respect to those buildings. 
Departures from particular technical and scoping requirements of UFAS by 
the use of other methods are permitted where substantially equivalent or 
greater access to and usability of the building is provided.
    (2) For purposes of this section, section 4.1.6(1)(g) of UFAS shall 
be interpreted to exempt from the requirements of UFAS only mechanical 
rooms and other spaces that, because of their intended use, will not 
require accessibility to the public or beneficiaries or result in the 
employment or residence therein of persons with physical handicaps.
    (3) This section does not require recipients to make building 
alterations that have little likelihood of being accomplished without 
removing or altering a load-bearing structural member.

[44 FR 20068, Apr. 4, 1979, as amended at 45 FR 81734, Dec. 12, 1980; 55 
FR 52138, 52140, Dec. 19, 1990]



Sec. 113.4  Assurances required.

    An application for financial assistance shall, as a condition to its 
approval and the extension of such assistance, contain or be accompanied 
by an assurance that the recipient will comply with this part. Such an 
assurance shall contain provisions authorizing the acceleration of the 
maturity of the recipient's financial obligations to SBA in the event of 
a failure to comply, and provisions which give the United States a right 
to seek judicial enforcement of the terms of the assurance. SBA shall 
specify the form of the foregoing assurance for each program, and the 
extent to which like assurances will be required of contractors and 
subcontractors, transferees, successors in interest, and other 
participants in the program.



Sec. 113.5  Compliance information.

    (a) Cooperation and assistance: SBA shall to the fullest extent 
practicable seek the cooperation of applicants and recipients in 
obtaining compliance with this part and shall provide assistance and 
guidance to applicants and recipients to help them comply voluntarily 
with this part. Recipients are expected to continually evaluate their 
compliance status, with the assistance of interested persons, including 
handicapped persons or organizations representing handicapped persons.
    (b) Compliance reports: Each applicant or recipient shall keep such 
records and submit to SBA timely, complete and accurate compliance 
reports at such times, and in such form and containing such information, 
as SBA may determine to be necessary to enable SBA to ascertain whether 
the applicant or recipient has complied or is complying with this part. 
In the case of a small business concern which receives financial 
assistance from a development company or from a small business 
investment company, such concern shall submit to the company such 
information as may be necessary to enable the company to meet its 
reporting requirements under this part.
    (c) Access to sources of information: Each applicant or recipient 
shall permit access by SBA during normal business hours to such of its 
books, records, accounts and other sources of information, and its 
facilities as may be pertinent to ascertain compliance with this part. 
Where any information required of an applicant or recipient is in the 
exclusive possession of any other agency, institution or person; and 
such agency, institution or person shall fail or refuse to furnish this 
information, the applicant or recipient shall so certify in its report 
and shall set forth what efforts it has made to obtain this information.
    (d) Information to the Public. Each recipient shall make available 
to persons entitled under this part to protection against discrimination 
by the recipient such information as SBA may find necessary to apprise 
them of their rights to such protection.
    (1) In some situations even though past discriminatory practices 
have been abandoned, the consequences of such practices continue to 
impede the full availability of equal opportunity. If the efforts 
required of the applicant or recipient under Sec. 113.5(b) to provide 
information as to the availability of equal opportunity, and the rights 
of individuals under this regulation, have failed to overcome these 
consequences,

[[Page 153]]

it will become necessary for such applicant or recipient to take 
additional steps to make equal opportunity fully available to racial, 
qualified handicapped, nationality groups and persons who because of 
their sex were previously subjected to discrimination.
    (2) Even though an applicant or recipient has never used 
discriminatory policies, the opportunities in the business it operates 
may not in fact be equally available to some racial, qualified 
handicapped, or nationality groups. In such circumstances a recipient 
may properly give special consideration to race, color, religion, sex, 
marital status, qualified handicap or national origin to make the 
opportunities more widely available to such groups.



Sec. 113.6  Conduct of investigations.

    (a) Periodic compliance reviews. SBA shall from time to time review 
the practices of recipients to determine whether they are complying with 
this part.
    (b) Complaints. Any person who believes that he, she or any class of 
individuals has been subjected to discrimination prohibited by this part 
may, personally or through a representative, file with SBA a written 
complaint. A complaint must be filed not later than 180 days from the 
date of the alleged discrimination, unless the time for filing is 
extended by SBA.
    (c) Investigations. SBA will make a prompt investigation whenever a 
compliance review, report, complaint, or any other information indicates 
a possible failure to comply with this part. The investigation should 
include, where appropriate, a review of the pertinent practices and 
policies of the applicant or recipient, the circumstances under which 
the possible noncompliance with this part occurred, and other factors 
relevant to a determination as to whether the applicant or recipient has 
failed to comply with this part.
    (d) Resolution of matters. (1) If an investigation pursuant to 
paragraph (c) of this section indicates a failure to comply with this 
part, SBA will so inform the applicant or recipient and the matter will 
be resolved by informal means whenever possible. If it has been 
determined that the matter cannot be resolved by informal means, action 
will be taken as provided for in Sec. 113.7.
    (2) If an investigation does not warrant action pursuant to 
paragraph (d)(1) of this section, SBA will so inform the applicant or 
recipient and the complainant, if any, in writing.
    (e) Intimidatory or retaliatory acts prohibited. No applicant or 
recipient or other person shall intimidate, threaten, coerce, or 
discriminate against any individual for the purpose of interfering with 
any right or privilege secured by this part or because he has made a 
complaint, testified, assisted, or participated in any manner in an 
investigation, proceeding, or hearing under this part. The identity of 
complainants shall be kept confidential except to the extent necessary 
to carry out the purposes of this part, including the conduct of any 
investigation, hearing, or judicial proceeding arising thereunder.



Sec. 113.7  Procedure for effecting compliance.

    (a) General. (1) If there appears to be a failure or threatened 
failure to comply with this part and if the noncompliance or threatened 
noncompliance cannot be corrected by informal means, compliance with 
this part may be effected by suspending, terminating, or refusing any 
financial assistance approved but not yet disbursed to an applicant. In 
the case of loans partially or fully disbursed, compliance with this 
part may be effected by calling, canceling, terminating, accelerating 
repayment, or suspending in whole or in part the financial assistance 
provided. In addition compliance may be effected by any other means 
authorized by law.
    (2) Such other means may include but are not limited to (i) legal 
action by SBA to enforce its rights, embodied in the assurances 
described in Sec. 113.4; (ii) a reference to the Department of Justice 
with a recommendation that appropriate proceedings be brought to enforce 
any rights of the United States under any law of the United States; and 
(iii) any applicable proceedings under State or local law.
    (b) Noncompliance with Sec. 113.4. If an applicant fails or refuses 
to furnish an

[[Page 154]]

assurance required under Sec. 113.4 or otherwise fails or refuses to 
comply with a requirement imposed by or pursuant to that section, 
Federal financial assistance may be refused in accordance with the 
procedures of paragraph (c) of this section. SBA shall not be required 
to provide assistance in such a case during the pendency of the 
administrative proceedings under such paragraph except that SBA shall 
continue assistance during the pendency of such proceedings where such 
assistance is due and payable pursuant to an application therefor 
approved prior to the effective date of this part. Such proceedings 
shall be conducted in accordance with the provisions of part 134 of this 
chapter by an Administrative Law Judge of the Office of Hearings and 
Appeals, who shall issue an initial decision in the case. The 
Admininstrator shall be the reviewing official for purposes of 
Sec. 134.228. The applicant's failure to file a timely motion in 
accordance with Secs. 134.222 and 134.211, requesting that the matter be 
scheduled for an oral hearing, shall constitute waiver of the right to 
an oral hearing but shall not prevent the submission of written 
information and argument for the record in accordance with the 
provisions of part 134.
    (c) Condition precedent. Under this part 113, no order suspending, 
terminating, refusing, calling, canceling, or accelerating repayment of 
financial assistance in whole or in part shall become effective until 
(1) SBA has advised the applicant or recipient of his failure to comply 
and has determined that compliance cannot be secured by voluntary means; 
(2) there has been an express finding on the record after an opportunity 
for an oral hearing, of a failure by the applicant or recipient to 
comply with a requirement imposed by or pursuant to this part; and (3) 
the initial decision has become final pursuant to Sec. 134.227(b).
    (d) Other means authorized by law. No action to effect compliance by 
any other means authorized by law shall be taken until:
    (1) SBA has determined that compliance cannot be secured by 
voluntary means.
    (2) The action has been approved by the Administrator or the 
Administrator's designee.
    (3) The applicant or recipient or other person has been notified of 
its failure to comply and of the action to be taken to effect 
compliance.
    (4) The expiration of at least 10 days from the mailing of such 
notice to the applicant or recipient or other person. During this period 
of at least 10 days, additional efforts shall be made to persuade the 
applicant or recipient or other person to comply with this part and to 
take such corrective action as may be appropriate.

[44 FR 20068, Apr. 4, 1979, as amended at 49 FR 33629, Aug. 24, 1984; 61 
FR 2691, Jan. 29, 1996]



Sec. 113.8  Effect on other regulations, forms and instructions.

    (a) Effect on other regulations. All regulations, orders of like 
directions heretofore issued by SBA which impose requirements designed 
to prohibit any discrimination against individuals on the grounds of 
race, color, religion, sex, handicap, marital status, age, or national 
origin and which authorize the suspension or termination of a refusal to 
grant to or to continue financial assistance to any applicant for or 
recipient of such assistance for failure to comply with such 
requirements, are hereby superseded to the extent that such 
discrimination is prohibited by this part, except that nothing in this 
part shall be deemed to relieve any person of any obligation assumed or 
imposed under any such superseded regulation, order, instruction or like 
direction prior to the effective date of this part.
    (b) Forms and instructions. SBA shall issue and promptly make 
available to interested persons forms and detailed instructions and 
procedures for effectuating this part.
    (c) Supervision and coordination. The Administrator may from time-
to-time assign to officials of SBA or to officials of other agencies of 
the Government, with the consent of such agencies, responsibilities in 
connection with the effectuation of the purposes of this part (other 
than responsibility of first

[[Page 155]]

decisions as provided in Sec. 113.9) including the achievement of 
effective coordination and maximum uniformity within SBA and within the 
executive branch of the Government in the application of this part and 
of comparable regulations issued by other agencies of the Government to 
similar situations. Any action taken, determination made, or requirement 
imposed by an official of another department or agency acting pursuant 
to an assignment of responsibility under this subsection shall have the 
same effect as though such action had been taken by the Administrator of 
SBA.

[44 FR 20068, Apr. 4, 1979. Redesignated at 49 FR 33629, Aug. 24, 1984]

                   Appendix A to Subpart A of Part 113

------------------------------------------------------------------------
              Name of program                         Authority
------------------------------------------------------------------------
                           Financial Programs
------------------------------------------------------------------------
Regular business loans....................  Small Business Act, sec.
                                             7(a).
Handicapped assistance loans..............  Small Business Act, sec.
                                             7(a)(10).
Small business energy loans...............  Small Business Act, sec.
                                             7(a)(12).
Small general contractors loans...........  Small Business Act, sec.
                                             7(a)(9).
Export revolving line of credit...........  Small Business Act, sec.
                                             7(a)(14).
Vietnam-era and Disabled Veterans Loan      Pub. L. 97-72.
 Program.
Debtor State development company loans      Small Business Investment
 (501) and their small business concerns.    Act, Title V and Small
                                             Business Act, sec.
                                             7(a)(13).
Debtor State and local development company  Small Business Investment
 loans (502) and their small business        Act, Title V and Small
 concerns.                                   Business Act, sec.
                                             7(a)(13).
Debtor certified development companies      Small Business Investment
 (503) and their small business concerns.    Act, Title V and Small
                                             Business Act, sec.
                                             7(a)(13).
Debtor small business investment companies  Small Business Investment
 and their small business concerns.          Act, Title III.
Pollution Control.........................  Small Business Investment
                                             Act, Title IV, Part A.
Surety bond guarantees....................  Small Business Investment
                                             Act, Title IV, Part B.
Lease guarantees (not funded) disaster      Small Business Investment
 loans.                                      Act, Title IV.
Physical..................................  Small Business Act, sec.
                                             7(b)(1).
Economic injury (EIDL)....................  Small Business Act, sec.
                                             7(b)(2).
Federal action--economic injury...........  Small Business Act, sec.
                                             7(b)(3).
Currency fluctuation--economic injury.....  Small Business Act, sec
                                             7(b)(4).
------------------------------------------------------------------------
                          Nonfinancial Programs
------------------------------------------------------------------------
Women's business enterprise...............  Executive Order 12138.
Small business innovation and research....  Small Business Act, sec. 9.
Procurement automated source system.......  Small Business Act, sec. 8
                                             and Pub. L. 96-302.
Business Development Program..............  Small Business Act, sec.
                                             8(a) and Pub. L. 95-507, as
                                             amended by Pub. L. 96-481.
Small Business Institute..................  Small Business Act, sec.
                                             8(b)(1).
Certificate of competency.................  Small Business Act, sec.
                                             8(b)(7) and Pub. L. 95-89.
Subcontracting Assistance Program.........  Small Business Act, sec.
                                             8(d) and Pub. L. 95-507.
Technology Assistance Program.............  Small Business Act, sec. 9.
Small business development centers........  Small Business Act, sec. 21
                                             and Pub. L. 96-302.
International Trade Program...............  Small Business Act, sec. 22
                                             and Pub. L. 96-481.
Service Corps of Retired Executives and     Small Business Act, secs.
 Active Corps of Executives.                 101 and 8(b)(1) and Pub. L.
                                             95-510.
Veterans Affairs Programs.................  Pub. L. 93-237.
Private sector initiatives................  Small Business Act, sec.
                                             8(b)(1).
------------------------------------------------------------------------


[50 FR 1442, Jan. 11, 1985]



 Subpart B--Nondiscrimination on the Basis of Sex in Education Programs 
          or Activities Receiving Federal Financial Assistance

    Authority: 20 U.S.C. 1681, 1682, 1683, 1685, 1686, 1687, 1688.

    Source: 65 FR 52865, 52876, Aug. 30, 2000, unless otherwise noted.

                              Introduction



Sec. 113.100  Purpose and effective date.

    The purpose of these Title IX regulations is to effectuate Title IX 
of the Education Amendments of 1972, as amended (except sections 904 and 
906 of those Amendments) (20 U.S.C. 1681, 1682, 1683, 1685, 1686, 1687, 
1688), which is designed to eliminate (with certain exceptions) 
discrimination on the basis of sex in any education program or activity 
receiving Federal financial assistance, whether or not such program or 
activity is offered or sponsored by an educational institution as 
defined in these Title IX regulations. The effective date of these Title 
IX regulations shall be September 29, 2000.



Sec. 113.105  Definitions.

    As used in these Title IX regulations, the term:

[[Page 156]]

    Administratively separate unit means a school, department, or 
college of an educational institution (other than a local educational 
agency) admission to which is independent of admission to any other 
component of such institution.
    Admission means selection for part-time, full-time, special, 
associate, transfer, exchange, or any other enrollment, membership, or 
matriculation in or at an education program or activity operated by a 
recipient.
    Applicant means one who submits an application, request, or plan 
required to be approved by an official of the Federal agency that awards 
Federal financial assistance, or by a recipient, as a condition to 
becoming a recipient.
    Designated agency official means Assistant Administrator for Equal 
Employment and Civil Rights Compliance.
    Educational institution means a local educational agency (LEA) as 
defined by 20 U.S.C. 8801(18), a preschool, a private elementary or 
secondary school, or an applicant or recipient that is an institution of 
graduate higher education, an institution of undergraduate higher 
education, an institution of professional education, or an institution 
of vocational education, as defined in this section.
    Federal financial assistance means any of the following, when 
authorized or extended under a law administered by the Federal agency 
that awards such assistance:
    (1) A grant or loan of Federal financial assistance, including funds 
made available for:
    (i) The acquisition, construction, renovation, restoration, or 
repair of a building or facility or any portion thereof; and
    (ii) Scholarships, loans, grants, wages, or other funds extended to 
any entity for payment to or on behalf of students admitted to that 
entity, or extended directly to such students for payment to that 
entity.
    (2) A grant of Federal real or personal property or any interest 
therein, including surplus property, and the proceeds of the sale or 
transfer of such property, if the Federal share of the fair market value 
of the property is not, upon such sale or transfer, properly accounted 
for to the Federal Government.
    (3) Provision of the services of Federal personnel.
    (4) Sale or lease of Federal property or any interest therein at 
nominal consideration, or at consideration reduced for the purpose of 
assisting the recipient or in recognition of public interest to be 
served thereby, or permission to use Federal property or any interest 
therein without consideration.
    (5) Any other contract, agreement, or arrangement that has as one of 
its purposes the provision of assistance to any education program or 
activity, except a contract of insurance or guaranty.
    Institution of graduate higher education means an institution that:
    (1) Offers academic study beyond the bachelor of arts or bachelor of 
science degree, whether or not leading to a certificate of any higher 
degree in the liberal arts and sciences;
    (2) Awards any degree in a professional field beyond the first 
professional degree (regardless of whether the first professional degree 
in such field is awarded by an institution of undergraduate higher 
education or professional education); or
    (3) Awards no degree and offers no further academic study, but 
operates ordinarily for the purpose of facilitating research by persons 
who have received the highest graduate degree in any field of study.
    Institution of professional education means an institution (except 
any institution of undergraduate higher education) that offers a program 
of academic study that leads to a first professional degree in a field 
for which there is a national specialized accrediting agency recognized 
by the Secretary of Education.
    Institution of undergraduate higher education means:
    (1) An institution offering at least two but less than four years of 
college-level study beyond the high school level, leading to a diploma 
or an associate degree, or wholly or principally creditable toward a 
baccalaureate degree; or
    (2) An institution offering academic study leading to a 
baccalaureate degree; or

[[Page 157]]

    (3) An agency or body that certifies credentials or offers degrees, 
but that may or may not offer academic study.
    Institution of vocational education means a school or institution 
(except an institution of professional or graduate or undergraduate 
higher education) that has as its primary purpose preparation of 
students to pursue a technical, skilled, or semiskilled occupation or 
trade, or to pursue study in a technical field, whether or not the 
school or institution offers certificates, diplomas, or degrees and 
whether or not it offers full-time study.
    Recipient means any State or political subdivision thereof, or any 
instrumentality of a State or political subdivision thereof, any public 
or private agency, institution, or organization, or other entity, or any 
person, to whom Federal financial assistance is extended directly or 
through another recipient and that operates an education program or 
activity that receives such assistance, including any subunit, 
successor, assignee, or transferee thereof.
    Student means a person who has gained admission.
    Title IX means Title IX of the Education Amendments of 1972, Public 
Law 92-318, 86 Stat. 235, 373 (codified as amended at 20 U.S.C. 1681-
1688) (except sections 904 and 906 thereof), as amended by section 3 of 
Public Law 93-568, 88 Stat. 1855, by section 412 of the Education 
Amendments of 1976, Public Law 94-482, 90 Stat. 2234, and by Section 3 
of Public Law 100-259, 102 Stat. 28, 28-29 (20 U.S.C. 1681, 1682, 1683, 
1685, 1686, 1687, 1688).
    Title IX regulations means the provisions set forth at Secs. 113.100 
through 113.605.
    Transition plan means a plan subject to the approval of the 
Secretary of Education pursuant to section 901(a)(2) of the Education 
Amendments of 1972, 20 U.S.C. 1681(a)(2), under which an educational 
institution operates in making the transition from being an educational 
institution that admits only students of one sex to being one that 
admits students of both sexes without discrimination.



Sec. 113.110  Remedial and affirmative action and self-evaluation.

    (a) Remedial action. If the designated agency official finds that a 
recipient has discriminated against persons on the basis of sex in an 
education program or activity, such recipient shall take such remedial 
action as the designated agency official deems necessary to overcome the 
effects of such discrimination.
    (b) Affirmative action. In the absence of a finding of 
discrimination on the basis of sex in an education program or activity, 
a recipient may take affirmative action consistent with law to overcome 
the effects of conditions that resulted in limited participation therein 
by persons of a particular sex. Nothing in these Title IX regulations 
shall be interpreted to alter any affirmative action obligations that a 
recipient may have under Executive Order 11246, 3 CFR, 1964-1965 Comp., 
p. 339; as amended by Executive Order 11375, 3 CFR, 1966-1970 Comp., p. 
684; as amended by Executive Order 11478, 3 CFR, 1966-1970 Comp., p. 
803; as amended by Executive Order 12086, 3 CFR, 1978 Comp., p. 230; as 
amended by Executive Order 12107, 3 CFR, 1978 Comp., p. 264.
    (c) Self-evaluation. Each recipient education institution shall, 
within one year of September 29, 2000:
    (1) Evaluate, in terms of the requirements of these Title IX 
regulations, its current policies and practices and the effects thereof 
concerning admission of students, treatment of students, and employment 
of both academic and non-academic personnel working in connection with 
the recipient's education program or activity;
    (2) Modify any of these policies and practices that do not or may 
not meet the requirements of these Title IX regulations; and
    (3) Take appropriate remedial steps to eliminate the effects of any 
discrimination that resulted or may have resulted from adherence to 
these policies and practices.
    (d) Availability of self-evaluation and related materials. 
Recipients shall maintain on file for at least three years following 
completion of the evaluation required under paragraph (c) of this 
section, and shall provide to the designated agency official upon 
request, a

[[Page 158]]

description of any modifications made pursuant to paragraph (c)(2) of 
this section and of any remedial steps taken pursuant to paragraph 
(c)(3) of this section.



Sec. 113.115  Assurance required.

    (a) General. Either at the application stage or the award stage, 
Federal agencies must ensure that applications for Federal financial 
assistance or awards of Federal financial assistance contain, be 
accompanied by, or be covered by a specifically identified assurance 
from the applicant or recipient, satisfactory to the designated agency 
official, that each education program or activity operated by the 
applicant or recipient and to which these Title IX regulations apply 
will be operated in compliance with these Title IX regulations. An 
assurance of compliance with these Title IX regulations shall not be 
satisfactory to the designated agency official if the applicant or 
recipient to whom such assurance applies fails to commit itself to take 
whatever remedial action is necessary in accordance with Sec. 113.110(a) 
to eliminate existing discrimination on the basis of sex or to eliminate 
the effects of past discrimination whether occurring prior to or 
subsequent to the submission to the designated agency official of such 
assurance.
    (b) Duration of obligation. (1) In the case of Federal financial 
assistance extended to provide real property or structures thereon, such 
assurance shall obligate the recipient or, in the case of a subsequent 
transfer, the transferee, for the period during which the real property 
or structures are used to provide an education program or activity.
    (2) In the case of Federal financial assistance extended to provide 
personal property, such assurance shall obligate the recipient for the 
period during which it retains ownership or possession of the property.
    (3) In all other cases such assurance shall obligate the recipient 
for the period during which Federal financial assistance is extended.
    (c) Form. (1) The assurances required by paragraph (a) of this 
section, which may be included as part of a document that addresses 
other assurances or obligations, shall include that the applicant or 
recipient will comply with all applicable Federal statutes relating to 
nondiscrimination. These include but are not limited to: Title IX of the 
Education Amendments of 1972, as amended (20 U.S.C. 1681-1683, 1685-
1688).
    (2) The designated agency official will specify the extent to which 
such assurances will be required of the applicant's or recipient's 
subgrantees, contractors, subcontractors, transferees, or successors in 
interest.



Sec. 113.120  Transfers of property.

    If a recipient sells or otherwise transfers property financed in 
whole or in part with Federal financial assistance to a transferee that 
operates any education program or activity, and the Federal share of the 
fair market value of the property is not upon such sale or transfer 
properly accounted for to the Federal Government, both the transferor 
and the transferee shall be deemed to be recipients, subject to the 
provisions of Secs. 113.205 through 113.235(a).



Sec. 113.125  Effect of other requirements.

    (a) Effect of other Federal provisions. The obligations imposed by 
these Title IX regulations are independent of, and do not alter, 
obligations not to discriminate on the basis of sex imposed by Executive 
Order 11246, 3 CFR, 1964-1965 Comp., p. 339; as amended by Executive 
Order 11375, 3 CFR, 1966-1970 Comp., p. 684; as amended by Executive 
Order 11478, 3 CFR, 1966-1970 Comp., p. 803; as amended by Executive 
Order 12087, 3 CFR, 1978 Comp., p. 230; as amended by Executive Order 
12107, 3 CFR, 1978 Comp., p. 264; sections 704 and 855 of the Public 
Health Service Act (42 U.S.C. 295m, 298b-2); Title VII of the Civil 
Rights Act of 1964 (42 U.S.C. 2000e et seq.); the Equal Pay Act of 1963 
(29 U.S.C. 206); and any other Act of Congress or Federal regulation.
    (b) Effect of State or local law or other requirements. The 
obligation to comply with these Title IX regulations is not obviated or 
alleviated by any State or local law or other requirement that would 
render any applicant or student ineligible, or limit the eligibility of 
any applicant or student, on the basis

[[Page 159]]

of sex, to practice any occupation or profession.
    (c) Effect of rules or regulations of private organizations. The 
obligation to comply with these Title IX regulations is not obviated or 
alleviated by any rule or regulation of any organization, club, athletic 
or other league, or association that would render any applicant or 
student ineligible to participate or limit the eligibility or 
participation of any applicant or student, on the basis of sex, in any 
education program or activity operated by a recipient and that receives 
Federal financial assistance.



Sec. 113.130  Effect of employment opportunities.

    The obligation to comply with these Title IX regulations is not 
obviated or alleviated because employment opportunities in any 
occupation or profession are or may be more limited for members of one 
sex than for members of the other sex.



Sec. 113.135  Designation of responsible employee and adoption of grievance procedures.

    (a) Designation of responsible employee. Each recipient shall 
designate at least one employee to coordinate its efforts to comply with 
and carry out its responsibilities under these Title IX regulations, 
including any investigation of any complaint communicated to such 
recipient alleging its noncompliance with these Title IX regulations or 
alleging any actions that would be prohibited by these Title IX 
regulations. The recipient shall notify all its students and employees 
of the name, office address, and telephone number of the employee or 
employees appointed pursuant to this paragraph.
    (b) Complaint procedure of recipient. A recipient shall adopt and 
publish grievance procedures providing for prompt and equitable 
resolution of student and employee complaints alleging any action that 
would be prohibited by these Title IX regulations.



Sec. 113.140  Dissemination of policy.

    (a) Notification of policy. (1) Each recipient shall implement 
specific and continuing steps to notify applicants for admission and 
employment, students and parents of elementary and secondary school 
students, employees, sources of referral of applicants for admission and 
employment, and all unions or professional organizations holding 
collective bargaining or professional agreements with the recipient, 
that it does not discriminate on the basis of sex in the educational 
programs or activities that it operates, and that it is required by 
Title IX and these Title IX regulations not to discriminate in such a 
manner. Such notification shall contain such information, and be made in 
such manner, as the designated agency official finds necessary to 
apprise such persons of the protections against discrimination assured 
them by Title IX and these Title IX regulations, but shall state at 
least that the requirement not to discriminate in education programs or 
activities extends to employment therein, and to admission thereto 
unless Secs. 113.300 through 113.310 do not apply to the recipient, and 
that inquiries concerning the application of Title IX and these Title IX 
regulations to such recipient may be referred to the employee designated 
pursuant to Sec. 113.135, or to the designated agency official.
    (2) Each recipient shall make the initial notification required by 
paragraph (a)(1) of this section within 90 days of September 29, 2000 or 
of the date these Title IX regulations first apply to such recipient, 
whichever comes later, which notification shall include publication in:
    (i) Newspapers and magazines operated by such recipient or by 
student, alumnae, or alumni groups for or in connection with such 
recipient; and
    (ii) Memoranda or other written communications distributed to every 
student and employee of such recipient.
    (b) Publications. (1) Each recipient shall prominently include a 
statement of the policy described in paragraph (a) of this section in 
each announcement, bulletin, catalog, or application form that it makes 
available to any person of a type, described in paragraph (a) of this 
section, or which is otherwise used in connection with the recruitment 
of students or employees.

[[Page 160]]

    (2) A recipient shall not use or distribute a publication of the 
type described in paragraph (b)(1) of this section that suggests, by 
text or illustration, that such recipient treats applicants, students, 
or employees differently on the basis of sex except as such treatment is 
permitted by these Title IX regulations.
    (c) Distribution. Each recipient shall distribute without 
discrimination on the basis of sex each publication described in 
paragraph (b)(1) of this section, and shall apprise each of its 
admission and employment recruitment representatives of the policy of 
nondiscrimination described in paragraph (a) of this section, and shall 
require such representatives to adhere to such policy.

                                Coverage



Sec. 113.200  Application.

    Except as provided in Secs. 113.205 through 113.235(a), these Title 
IX regulations apply to every recipient and to each education program or 
activity operated by such recipient that receives Federal financial 
assistance.



Sec. 113.205  Educational institutions and other entities controlled by religious organizations.

    (a) Exemption. These Title IX regulations do not apply to any 
operation of an educational institution or other entity that is 
controlled by a religious organization to the extent that application of 
these Title IX regulations would not be consistent with the religious 
tenets of such organization.
    (b) Exemption claims. An educational institution or other entity 
that wishes to claim the exemption set forth in paragraph (a) of this 
section shall do so by submitting in writing to the designated agency 
official a statement by the highest-ranking official of the institution, 
identifying the provisions of these Title IX regulations that conflict 
with a specific tenet of the religious organization.



Sec. 113.210  Military and merchant marine educational institutions.

    These Title IX regulations do not apply to an educational 
institution whose primary purpose is the training of individuals for a 
military service of the United States or for the merchant marine.



Sec. 113.215  Membership practices of certain organizations.

    (a) Social fraternities and sororities. These Title IX regulations 
do not apply to the membership practices of social fraternities and 
sororities that are exempt from taxation under section 501(a) of the 
Internal Revenue Code of 1954, 26 U.S.C. 501(a), the active membership 
of which consists primarily of students in attendance at institutions of 
higher education.
    (b) YMCA, YWCA, Girl Scouts, Boy Scouts, and Camp Fire Girls. These 
Title IX regulations do not apply to the membership practices of the 
Young Men's Christian Association (YMCA), the Young Women's Christian 
Association (YWCA), the Girl Scouts, the Boy Scouts, and Camp Fire 
Girls.
    (c) Voluntary youth service organizations. These Title IX 
regulations do not apply to the membership practices of a voluntary 
youth service organization that is exempt from taxation under section 
501(a) of the Internal Revenue Code of 1954, 26 U.S.C. 501(a), and the 
membership of which has been traditionally limited to members of one sex 
and principally to persons of less than nineteen years of age.



Sec. 113.220  Admissions.

    (a) Admissions to educational institutions prior to June 24, 1973, 
are not covered by these Title IX regulations.
    (b) Administratively separate units. For the purposes only of this 
section, Secs. 113.225 and 113.230, and Secs. 113.300 through 113.310, 
each administratively separate unit shall be deemed to be an educational 
institution.
    (c) Application of Secs. 113.300 through 113.310. Except as provided 
in paragraphs (d) and (e) of this section, Secs. 113.300 through 113.310 
apply to each recipient. A recipient to which Secs. 113.300 through 
113.310 apply shall not discriminate on the basis of sex in admission or 
recruitment in violation of Secs. 113.300 through 113.310.
    (d) Educational institutions. Except as provided in paragraph (e) of 
this section as to recipients that are educational institutions, 
Secs. 113.300 through

[[Page 161]]

113.310 apply only to institutions of vocational education, professional 
education, graduate higher education, and public institutions of 
undergraduate higher education.
    (e) Public institutions of undergraduate higher education. 
Secs. 113.300 through 113.310 do not apply to any public institution of 
undergraduate higher education that traditionally and continually from 
its establishment has had a policy of admitting students of only one 
sex.



Sec. 113.225  Educational institutions eligible to submit transition plans.

    (a) Application. This section applies to each educational 
institution to which Secs. 113.300 through 113.310 apply that:
    (1) Admitted students of only one sex as regular students as of June 
23, 1972; or
    (2) Admitted students of only one sex as regular students as of June 
23, 1965, but thereafter admitted, as regular students, students of the 
sex not admitted prior to June 23, 1965.
    (b) Provision for transition plans. An educational institution to 
which this section applies shall not discriminate on the basis of sex in 
admission or recruitment in violation of Secs. 113.300 through 113.310.



Sec. 113.230  Transition plans.

    (a) Submission of plans. An institution to which Sec. 113.225 
applies and that is composed of more than one administratively separate 
unit may submit either a single transition plan applicable to all such 
units, or a separate transition plan applicable to each such unit.
    (b) Content of plans. In order to be approved by the Secretary of 
Education, a transition plan shall:
    (1) State the name, address, and Federal Interagency Committee on 
Education Code of the educational institution submitting such plan, the 
administratively separate units to which the plan is applicable, and the 
name, address, and telephone number of the person to whom questions 
concerning the plan may be addressed. The person who submits the plan 
shall be the chief administrator or president of the institution, or 
another individual legally authorized to bind the institution to all 
actions set forth in the plan.
    (2) State whether the educational institution or administratively 
separate unit admits students of both sexes as regular students and, if 
so, when it began to do so.
    (3) Identify and describe with respect to the educational 
institution or administratively separate unit any obstacles to admitting 
students without discrimination on the basis of sex.
    (4) Describe in detail the steps necessary to eliminate as soon as 
practicable each obstacle so identified and indicate the schedule for 
taking these steps and the individual directly responsible for their 
implementation.
    (5) Include estimates of the number of students, by sex, expected to 
apply for, be admitted to, and enter each class during the period 
covered by the plan.
    (c) Nondiscrimination. No policy or practice of a recipient to which 
Sec. 113.225 applies shall result in treatment of applicants to or 
students of such recipient in violation of Secs. 113.300 through 113.310 
unless such treatment is necessitated by an obstacle identified in 
paragraph (b)(3) of this section and a schedule for eliminating that 
obstacle has been provided as required by paragraph (b)(4) of this 
section.
    (d) Effects of past exclusion. To overcome the effects of past 
exclusion of students on the basis of sex, each educational institution 
to which Sec. 113.225 applies shall include in its transition plan, and 
shall implement, specific steps designed to encourage individuals of the 
previously excluded sex to apply for admission to such institution. Such 
steps shall include instituting recruitment programs that emphasize the 
institution's commitment to enrolling students of the sex previously 
excluded.



Sec. 113.235  Statutory amendments.

    (a) This section, which applies to all provisions of these Title IX 
regulations, addresses statutory amendments to Title IX.
    (b) These Title IX regulations shall not apply to or preclude:

[[Page 162]]

    (1) Any program or activity of the American Legion undertaken in 
connection with the organization or operation of any Boys State 
conference, Boys Nation conference, Girls State conference, or Girls 
Nation conference;
    (2) Any program or activity of a secondary school or educational 
institution specifically for:
    (i) The promotion of any Boys State conference, Boys Nation 
conference, Girls State conference, or Girls Nation conference; or
    (ii) The selection of students to attend any such conference;
    (3) Father-son or mother-daughter activities at an educational 
institution or in an education program or activity, but if such 
activities are provided for students of one sex, opportunities for 
reasonably comparable activities shall be provided to students of the 
other sex;
    (4) Any scholarship or other financial assistance awarded by an 
institution of higher education to an individual because such individual 
has received such award in a single-sex pageant based upon a combination 
of factors related to the individual's personal appearance, poise, and 
talent. The pageant, however, must comply with other nondiscrimination 
provisions of Federal law.
    (c) Program or activity or program means:
    (1) All of the operations of any entity described in paragraphs 
(c)(1)(i) through (iv) of this section, any part of which is extended 
Federal financial assistance:
    (i)(A) A department, agency, special purpose district, or other 
instrumentality of a State or of a local government; or
    (B) The entity of such State or local government that distributes 
such assistance and each such department or agency (and each other State 
or local government entity) to which the assistance is extended, in the 
case of assistance to a State or local government;
    (ii)(A) A college, university, or other postsecondary institution, 
or a public system of higher education; or
    (B) A local educational agency (as defined in section 8801 of title 
20), system of vocational education, or other school system;
    (iii)(A) An entire corporation, partnership, or other private 
organization, or an entire sole proprietorship--
    (1) If assistance is extended to such corporation, partnership, 
private organization, or sole proprietorship as a whole; or
    (2) Which is principally engaged in the business of providing 
education, health care, housing, social services, or parks and 
recreation; or
    (B) The entire plant or other comparable, geographically separate 
facility to which Federal financial assistance is extended, in the case 
of any other corporation, partnership, private organization, or sole 
proprietorship; or
    (iv) Any other entity that is established by two or more of the 
entities described in paragraphs (c)(1)(i), (ii), or (iii) of this 
section.
    (2)(i) Program or activity does not include any operation of an 
entity that is controlled by a religious organization if the application 
of 20 U.S.C. 1681 to such operation would not be consistent with the 
religious tenets of such organization.
    (ii) For example, all of the operations of a college, university, or 
other postsecondary institution, including but not limited to 
traditional educational operations, faculty and student housing, campus 
shuttle bus service, campus restaurants, the bookstore, and other 
commercial activities are part of a ``program or activity'' subject to 
these Title IX regulations if the college, university, or other 
institution receives Federal financial assistance.
    (d)(1) Nothing in these Title IX regulations shall be construed to 
require or prohibit any person, or public or private entity, to provide 
or pay for any benefit or service, including the use of facilities, 
related to an abortion. Medical procedures, benefits, services, and the 
use of facilities, necessary to save the life of a pregnant woman or to 
address complications related to an abortion are not subject to this 
section.

[[Page 163]]

    (2) Nothing in this section shall be construed to permit a penalty 
to be imposed on any person or individual because such person or 
individual is seeking or has received any benefit or service related to 
a legal abortion. Accordingly, subject to paragraph (d)(1) of this 
section, no person shall be excluded from participation in, be denied 
the benefits of, or be subjected to discrimination under any academic, 
extracurricular, research, occupational training, employment, or other 
educational program or activity operated by a recipient that receives 
Federal financial assistance because such individual has sought or 
received, or is seeking, a legal abortion, or any benefit or service 
related to a legal abortion.

    Discrimination on the Basis of Sex in Admission and Recruitment 
                               Prohibited



Sec. 113.300  Admission.

    (a) General. No person shall, on the basis of sex, be denied 
admission, or be subjected to discrimination in admission, by any 
recipient to which Secs. 113.300 through Secs. 113.310 apply, except as 
provided in Secs. 113.225 and Secs. 113.230.
    (b) Specific prohibitions. (1) In determining whether a person 
satisfies any policy or criterion for admission, or in making any offer 
of admission, a recipient to which Secs. 113.300 through 113.310 apply 
shall not:
    (i) Give preference to one person over another on the basis of sex, 
by ranking applicants separately on such basis, or otherwise;
    (ii) Apply numerical limitations upon the number or proportion of 
persons of either sex who may be admitted; or
    (iii) Otherwise treat one individual differently from another on the 
basis of sex.
    (2) A recipient shall not administer or operate any test or other 
criterion for admission that has a disproportionately adverse effect on 
persons on the basis of sex unless the use of such test or criterion is 
shown to predict validly success in the education program or activity in 
question and alternative tests or criteria that do not have such a 
disproportionately adverse effect are shown to be unavailable.
    (c) Prohibitions relating to marital or parental status. In 
determining whether a person satisfies any policy or criterion for 
admission, or in making any offer of admission, a recipient to which 
Secs. 113.300 through 113.310 apply:
    (1) Shall not apply any rule concerning the actual or potential 
parental, family, or marital status of a student or applicant that 
treats persons differently on the basis of sex;
    (2) Shall not discriminate against or exclude any person on the 
basis of pregnancy, childbirth, termination of pregnancy, or recovery 
therefrom, or establish or follow any rule or practice that so 
discriminates or excludes;
    (3) Subject to Sec. 113.235(d), shall treat disabilities related to 
pregnancy, childbirth, termination of pregnancy, or recovery therefrom 
in the same manner and under the same policies as any other temporary 
disability or physical condition; and
    (4) Shall not make pre-admission inquiry as to the marital status of 
an applicant for admission, including whether such applicant is ``Miss'' 
or ``Mrs.'' A recipient may make pre-admission inquiry as to the sex of 
an applicant for admission, but only if such inquiry is made equally of 
such applicants of both sexes and if the results of such inquiry are not 
used in connection with discrimination prohibited by these Title IX 
regulations.



Sec. 113.305  Preference in admission.

    A recipient to which Secs. 113.300 through 113.310 apply shall not 
give preference to applicants for admission, on the basis of attendance 
at any educational institution or other school or entity that admits as 
students only or predominantly members of one sex, if the giving of such 
preference has the effect of discriminating on the basis of sex in 
violation of Secs. 113.300 through 113.310.



Sec. 113.310  Recruitment.

    (a) Nondiscriminatory recruitment. A recipient to which 
Secs. 113.300 through 113.310 apply shall not discriminate on the basis 
of sex in the recruitment and admission of students. A recipient may be 
required to undertake additional recruitment efforts for one sex as 
remedial action pursuant to Sec. 113.110(a), and

[[Page 164]]

may choose to undertake such efforts as affirmative action pursuant to 
Sec. 113.110(b).
    (b) Recruitment at certain institutions. A recipient to which 
Secs. 113.300 through 113.310 apply shall not recruit primarily or 
exclusively at educational institutions, schools, or entities that admit 
as students only or predominantly members of one sex, if such actions 
have the effect of discriminating on the basis of sex in violation of 
Secs. 113.300 through 113.310.

 Discrimination on the Basis of Sex in Education Programs or Activities 
                               Prohibited



Sec. 113.400  Education programs or activities.

    (a) General. Except as provided elsewhere in these Title IX 
regulations, no person shall, on the basis of sex, be excluded from 
participation in, be denied the benefits of, or be subjected to 
discrimination under any academic, extracurricular, research, 
occupational training, or other education program or activity operated 
by a recipient that receives Federal financial assistance. Sections 
113.400 through 113.455 do not apply to actions of a recipient in 
connection with admission of its students to an education program or 
activity of a recipient to which Secs. 113.300 through 113.310 do not 
apply, or an entity, not a recipient, to which Secs. 113.300 through 
113.310 would not apply if the entity were a recipient.
    (b) Specific prohibitions. Except as provided in Secs. 113.400 
through 113.455, in providing any aid, benefit, or service to a student, 
a recipient shall not, on the basis of sex:
    (1) Treat one person differently from another in determining whether 
such person satisfies any requirement or condition for the provision of 
such aid, benefit, or service;
    (2) Provide different aid, benefits, or services or provide aid, 
benefits, or services in a different manner;
    (3) Deny any person any such aid, benefit, or service;
    (4) Subject any person to separate or different rules of behavior, 
sanctions, or other treatment;
    (5) Apply any rule concerning the domicile or residence of a student 
or applicant, including eligibility for in-state fees and tuition;
    (6) Aid or perpetuate discrimination against any person by providing 
significant assistance to any agency, organization, or person that 
discriminates on the basis of sex in providing any aid, benefit, or 
service to students or employees;
    (7) Otherwise limit any person in the enjoyment of any right, 
privilege, advantage, or opportunity.
    (c) Assistance administered by a recipient educational institution 
to study at a foreign institution. A recipient educational institution 
may administer or assist in the administration of scholarships, 
fellowships, or other awards established by foreign or domestic wills, 
trusts, or similar legal instruments, or by acts of foreign governments 
and restricted to members of one sex, that are designed to provide 
opportunities to study abroad, and that are awarded to students who are 
already matriculating at or who are graduates of the recipient 
institution; Provided, that a recipient educational institution that 
administers or assists in the administration of such scholarships, 
fellowships, or other awards that are restricted to members of one sex 
provides, or otherwise makes available, reasonable opportunities for 
similar studies for members of the other sex. Such opportunities may be 
derived from either domestic or foreign sources.
    (d) Aids, benefits or services not provided by recipient. (1) This 
paragraph (d) applies to any recipient that requires participation by 
any applicant, student, or employee in any education program or activity 
not operated wholly by such recipient, or that facilitates, permits, or 
considers such participation as part of or equivalent to an education 
program or activity operated by such recipient, including participation 
in educational consortia and cooperative employment and student-teaching 
assignments.
    (2) Such recipient:
    (i) Shall develop and implement a procedure designed to assure 
itself that the operator or sponsor of such other education program or 
activity takes no action affecting any applicant, student, or employee 
of such recipient that

[[Page 165]]

these Title IX regulations would prohibit such recipient from taking; 
and
    (ii) Shall not facilitate, require, permit, or consider such 
participation if such action occurs.



Sec. 113.405  Housing.

    (a) Generally. A recipient shall not, on the basis of sex, apply 
different rules or regulations, impose different fees or requirements, 
or offer different services or benefits related to housing, except as 
provided in this section (including housing provided only to married 
students).
    (b) Housing provided by recipient. (1) A recipient may provide 
separate housing on the basis of sex.
    (2) Housing provided by a recipient to students of one sex, when 
compared to that provided to students of the other sex, shall be as a 
whole:
    (i) Proportionate in quantity to the number of students of that sex 
applying for such housing; and
    (ii) Comparable in quality and cost to the student.
    (c) Other housing. (1) A recipient shall not, on the basis of sex, 
administer different policies or practices concerning occupancy by its 
students of housing other than that provided by such recipient.
    (2)(i) A recipient which, through solicitation, listing, approval of 
housing, or otherwise, assists any agency, organization, or person in 
making housing available to any of its students, shall take such 
reasonable action as may be necessary to assure itself that such housing 
as is provided to students of one sex, when compared to that provided to 
students of the other sex, is as a whole:
    (A) Proportionate in quantity; and
    (B) Comparable in quality and cost to the student.
    (ii) A recipient may render such assistance to any agency, 
organization, or person that provides all or part of such housing to 
students of only one sex.



Sec. 113.410  Comparable facilities.

    A recipient may provide separate toilet, locker room, and shower 
facilities on the basis of sex, but such facilities provided for 
students of one sex shall be comparable to such facilities provided for 
students of the other sex.



Sec. 113.415  Access to course offerings.

    (a) A recipient shall not provide any course or otherwise carry out 
any of its education program or activity separately on the basis of sex, 
or require or refuse participation therein by any of its students on 
such basis, including health, physical education, industrial, business, 
vocational, technical, home economics, music, and adult education 
courses.
    (b)(1) With respect to classes and activities in physical education 
at the elementary school level, the recipient shall comply fully with 
this section as expeditiously as possible but in no event later than one 
year from September 29, 2000. With respect to physical education classes 
and activities at the secondary and post-secondary levels, the recipient 
shall comply fully with this section as expeditiously as possible but in 
no event later than three years from September 29, 2000.
    (2) This section does not prohibit grouping of students in physical 
education classes and activities by ability as assessed by objective 
standards of individual performance developed and applied without regard 
to sex.
    (3) This section does not prohibit separation of students by sex 
within physical education classes or activities during participation in 
wrestling, boxing, rugby, ice hockey, football, basketball, and other 
sports the purpose or major activity of which involves bodily contact.
    (4) Where use of a single standard of measuring skill or progress in 
a physical education class has an adverse effect on members of one sex, 
the recipient shall use appropriate standards that do not have such 
effect.
    (5) Portions of classes in elementary and secondary schools, or 
portions of education programs or activities, that deal exclusively with 
human sexuality may be conducted in separate sessions for boys and 
girls.
    (6) Recipients may make requirements based on vocal range or quality 
that may result in a chorus or choruses of one or predominantly one sex.

[[Page 166]]



Sec. 113.420  Access to schools operated by LEAs.

    A recipient that is a local educational agency shall not, on the 
basis of sex, exclude any person from admission to:
    (a) Any institution of vocational education operated by such 
recipient; or
    (b) Any other school or educational unit operated by such recipient, 
unless such recipient otherwise makes available to such person, pursuant 
to the same policies and criteria of admission, courses, services, and 
facilities comparable to each course, service, and facility offered in 
or through such schools.



Sec. 113.425  Counseling and use of appraisal and counseling materials.

    (a) Counseling. A recipient shall not discriminate against any 
person on the basis of sex in the counseling or guidance of students or 
applicants for admission.
    (b) Use of appraisal and counseling materials. A recipient that uses 
testing or other materials for appraising or counseling students shall 
not use different materials for students on the basis of their sex or 
use materials that permit or require different treatment of students on 
such basis unless such different materials cover the same occupations 
and interest areas and the use of such different materials is shown to 
be essential to eliminate sex bias. Recipients shall develop and use 
internal procedures for ensuring that such materials do not discriminate 
on the basis of sex. Where the use of a counseling test or other 
instrument results in a substantially disproportionate number of members 
of one sex in any particular course of study or classification, the 
recipient shall take such action as is necessary to assure itself that 
such disproportion is not the result of discrimination in the instrument 
or its application.
    (c) Disproportion in classes. Where a recipient finds that a 
particular class contains a substantially disproportionate number of 
individuals of one sex, the recipient shall take such action as is 
necessary to assure itself that such disproportion is not the result of 
discrimination on the basis of sex in counseling or appraisal materials 
or by counselors.



Sec. 113.430  Financial assistance.

    (a) General. Except as provided in paragraphs (b) and (c) of this 
section, in providing financial assistance to any of its students, a 
recipient shall not:
    (1) On the basis of sex, provide different amounts or types of such 
assistance, limit eligibility for such assistance that is of any 
particular type or source, apply different criteria, or otherwise 
discriminate;
    (2) Through solicitation, listing, approval, provision of 
facilities, or other services, assist any foundation, trust, agency, 
organization, or person that provides assistance to any of such 
recipient's students in a manner that discriminates on the basis of sex; 
or
    (3) Apply any rule or assist in application of any rule concerning 
eligibility for such assistance that treats persons of one sex 
differently from persons of the other sex with regard to marital or 
parental status.
    (b) Financial aid established by certain legal instruments. (1) A 
recipient may administer or assist in the administration of 
scholarships, fellowships, or other forms of financial assistance 
established pursuant to domestic or foreign wills, trusts, bequests, or 
similar legal instruments or by acts of a foreign government that 
require that awards be made to members of a particular sex specified 
therein; Provided, that the overall effect of the award of such sex-
restricted scholarships, fellowships, and other forms of financial 
assistance does not discriminate on the basis of sex.
    (2) To ensure nondiscriminatory awards of assistance as required in 
paragraph (b)(1) of this section, recipients shall develop and use 
procedures under which:
    (i) Students are selected for award of financial assistance on the 
basis of nondiscriminatory criteria and not on the basis of availability 
of funds restricted to members of a particular sex;
    (ii) An appropriate sex-restricted scholarship, fellowship, or other 
form of financial assistance is allocated to each student selected under 
paragraph (b)(2)(i) of this section; and

[[Page 167]]

    (iii) No student is denied the award for which he or she was 
selected under paragraph (b)(2)(i) of this section because of the 
absence of a scholarship, fellowship, or other form of financial 
assistance designated for a member of that student's sex.
    (c) Athletic scholarships. (1) To the extent that a recipient awards 
athletic scholarships or grants-in-aid, it must provide reasonable 
opportunities for such awards for members of each sex in proportion to 
the number of students of each sex participating in interscholastic or 
intercollegiate athletics.
    (2) A recipient may provide separate athletic scholarships or 
grants-in-aid for members of each sex as part of separate athletic teams 
for members of each sex to the extent consistent with this paragraph (c) 
and Sec. 113.450.



Sec. 113.435  Employment assistance to students.

    (a) Assistance by recipient in making available outside employment. 
A recipient that assists any agency, organization, or person in making 
employment available to any of its students:
    (1) Shall assure itself that such employment is made available 
without discrimination on the basis of sex; and
    (2) Shall not render such services to any agency, organization, or 
person that discriminates on the basis of sex in its employment 
practices.
    (b) Employment of students by recipients. A recipient that employs 
any of its students shall not do so in a manner that violates 
Secs. 113.500 through 113.550.



Sec. 113.440  Health and insurance benefits and services.

    Subject to Sec. 113.235(d), in providing a medical, hospital, 
accident, or life insurance benefit, service, policy, or plan to any of 
its students, a recipient shall not discriminate on the basis of sex, or 
provide such benefit, service, policy, or plan in a manner that would 
violate Secs. 113.500 through 113.550 if it were provided to employees 
of the recipient. This section shall not prohibit a recipient from 
providing any benefit or service that may be used by a different 
proportion of students of one sex than of the other, including family 
planning services. However, any recipient that provides full coverage 
health service shall provide gynecological care.



Sec. 113.445  Marital or parental status.

    (a) Status generally. A recipient shall not apply any rule 
concerning a student's actual or potential parental, family, or marital 
status that treats students differently on the basis of sex.
    (b) Pregnancy and related conditions. (1) A recipient shall not 
discriminate against any student, or exclude any student from its 
education program or activity, including any class or extracurricular 
activity, on the basis of such student's pregnancy, childbirth, false 
pregnancy, termination of pregnancy, or recovery therefrom, unless the 
student requests voluntarily to participate in a separate portion of the 
program or activity of the recipient.
    (2) A recipient may require such a student to obtain the 
certification of a physician that the student is physically and 
emotionally able to continue participation as long as such a 
certification is required of all students for other physical or 
emotional conditions requiring the attention of a physician.
    (3) A recipient that operates a portion of its education program or 
activity separately for pregnant students, admittance to which is 
completely voluntary on the part of the student as provided in paragraph 
(b)(1) of this section, shall ensure that the separate portion is 
comparable to that offered to non-pregnant students.
    (4) Subject to Sec. 113.235(d), a recipient shall treat pregnancy, 
childbirth, false pregnancy, termination of pregnancy and recovery 
therefrom in the same manner and under the same policies as any other 
temporary disability with respect to any medical or hospital benefit, 
service, plan, or policy that such recipient administers, operates, 
offers, or participates in with respect to students admitted to the 
recipient's educational program or activity.
    (5) In the case of a recipient that does not maintain a leave policy 
for its students, or in the case of a student who does not otherwise 
qualify for leave under such a policy, a recipient shall treat 
pregnancy, childbirth, false pregnancy, termination of pregnancy, and 
recovery therefrom as a justification

[[Page 168]]

for a leave of absence for as long a period of time as is deemed 
medically necessary by the student's physician, at the conclusion of 
which the student shall be reinstated to the status that she held when 
the leave began.



Sec. 113.450  Athletics.

    (a) General. No person shall, on the basis of sex, be excluded from 
participation in, be denied the benefits of, be treated differently from 
another person, or otherwise be discriminated against in any 
interscholastic, intercollegiate, club, or intramural athletics offered 
by a recipient, and no recipient shall provide any such athletics 
separately on such basis.
    (b) Separate teams. Notwithstanding the requirements of paragraph 
(a) of this section, a recipient may operate or sponsor separate teams 
for members of each sex where selection for such teams is based upon 
competitive skill or the activity involved is a contact sport. However, 
where a recipient operates or sponsors a team in a particular sport for 
members of one sex but operates or sponsors no such team for members of 
the other sex, and athletic opportunities for members of that sex have 
previously been limited, members of the excluded sex must be allowed to 
try out for the team offered unless the sport involved is a contact 
sport. For the purposes of these Title IX regulations, contact sports 
include boxing, wrestling, rugby, ice hockey, football, basketball, and 
other sports the purpose or major activity of which involves bodily 
contact.
    (c) Equal opportunity. (1) A recipient that operates or sponsors 
interscholastic, intercollegiate, club, or intramural athletics shall 
provide equal athletic opportunity for members of both sexes. In 
determining whether equal opportunities are available, the designated 
agency official will consider, among other factors:
    (i) Whether the selection of sports and levels of competition 
effectively accommodate the interests and abilities of members of both 
sexes;
    (ii) The provision of equipment and supplies;
    (iii) Scheduling of games and practice time;
    (iv) Travel and per diem allowance;
    (v) Opportunity to receive coaching and academic tutoring;
    (vi) Assignment and compensation of coaches and tutors;
    (vii) Provision of locker rooms, practice, and competitive 
facilities;
    (viii) Provision of medical and training facilities and services;
    (ix) Provision of housing and dining facilities and services;
    (x) Publicity.
    (2) For purposes of paragraph (c)(1) of this section, unequal 
aggregate expenditures for members of each sex or unequal expenditures 
for male and female teams if a recipient operates or sponsors separate 
teams will not constitute noncompliance with this section, but the 
designated agency official may consider the failure to provide necessary 
funds for teams for one sex in assessing equality of opportunity for 
members of each sex.
    (d) Adjustment period. A recipient that operates or sponsors 
interscholastic, intercollegiate, club, or intramural athletics at the 
elementary school level shall comply fully with this section as 
expeditiously as possible but in no event later than one year from 
September 29, 2000. A recipient that operates or sponsors 
interscholastic, intercollegiate, club, or intramural athletics at the 
secondary or postsecondary school level shall comply fully with this 
section as expeditiously as possible but in no event later than three 
years from September 29, 2000.



Sec. 113.455  Textbooks and curricular material.

    Nothing in these Title IX regulations shall be interpreted as 
requiring or prohibiting or abridging in any way the use of particular 
textbooks or curricular materials.

 Discrimination on the Basis of Sex in Employment in Education Programs 
                        or Activities Prohibited



Sec. 113.500  Employment.

    (a) General. (1) No person shall, on the basis of sex, be excluded 
from participation in, be denied the benefits of, or be subjected to 
discrimination in employment, or recruitment, consideration, or 
selection therefor, whether

[[Page 169]]

full-time or part-time, under any education program or activity operated 
by a recipient that receives Federal financial assistance.
    (2) A recipient shall make all employment decisions in any education 
program or activity operated by such recipient in a nondiscriminatory 
manner and shall not limit, segregate, or classify applicants or 
employees in any way that could adversely affect any applicant's or 
employee's employment opportunities or status because of sex.
    (3) A recipient shall not enter into any contractual or other 
relationship which directly or indirectly has the effect of subjecting 
employees or students to discrimination prohibited by Secs. 113.500 
through 113.550, including relationships with employment and referral 
agencies, with labor unions, and with organizations providing or 
administering fringe benefits to employees of the recipient.
    (4) A recipient shall not grant preferences to applicants for 
employment on the basis of attendance at any educational institution or 
entity that admits as students only or predominantly members of one sex, 
if the giving of such preferences has the effect of discriminating on 
the basis of sex in violation of these Title IX regulations.
    (b) Application. The provisions of Secs. 113.500 through 113.550 
apply to:
    (1) Recruitment, advertising, and the process of application for 
employment;
    (2) Hiring, upgrading, promotion, consideration for and award of 
tenure, demotion, transfer, layoff, termination, application of nepotism 
policies, right of return from layoff, and rehiring;
    (3) Rates of pay or any other form of compensation, and changes in 
compensation;
    (4) Job assignments, classifications, and structure, including 
position descriptions, lines of progression, and seniority lists;
    (5) The terms of any collective bargaining agreement;
    (6) Granting and return from leaves of absence, leave for pregnancy, 
childbirth, false pregnancy, termination of pregnancy, leave for persons 
of either sex to care for children or dependents, or any other leave;
    (7) Fringe benefits available by virtue of employment, whether or 
not administered by the recipient;
    (8) Selection and financial support for training, including 
apprenticeship, professional meetings, conferences, and other related 
activities, selection for tuition assistance, selection for sabbaticals 
and leaves of absence to pursue training;
    (9) Employer-sponsored activities, including social or recreational 
programs; and
    (10) Any other term, condition, or privilege of employment.



Sec. 113.505  Employment criteria.

    A recipient shall not administer or operate any test or other 
criterion for any employment opportunity that has a disproportionately 
adverse effect on persons on the basis of sex unless:
    (a) Use of such test or other criterion is shown to predict validly 
successful performance in the position in question; and
    (b) Alternative tests or criteria for such purpose, which do not 
have such disproportionately adverse effect, are shown to be 
unavailable.



Sec. 113.510  Recruitment.

    (a) Nondiscriminatory recruitment and hiring. A recipient shall not 
discriminate on the basis of sex in the recruitment and hiring of 
employees. Where a recipient has been found to be presently 
discriminating on the basis of sex in the recruitment or hiring of 
employees, or has been found to have so discriminated in the past, the 
recipient shall recruit members of the sex so discriminated against so 
as to overcome the effects of such past or present discrimination.
    (b) Recruitment patterns. A recipient shall not recruit primarily or 
exclusively at entities that furnish as applicants only or predominantly 
members of one sex if such actions have the effect of discriminating on 
the basis of sex in violation of Secs. 113.500 through 113.550.



Sec. 113.515  Compensation.

    A recipient shall not make or enforce any policy or practice that, 
on the basis of sex:

[[Page 170]]

    (a) Makes distinctions in rates of pay or other compensation;
    (b) Results in the payment of wages to employees of one sex at a 
rate less than that paid to employees of the opposite sex for equal work 
on jobs the performance of which requires equal skill, effort, and 
responsibility, and that are performed under similar working conditions.



Sec. 113.520  Job classification and structure.

    A recipient shall not:
    (a) Classify a job as being for males or for females;
    (b) Maintain or establish separate lines of progression, seniority 
lists, career ladders, or tenure systems based on sex; or
    (c) Maintain or establish separate lines of progression, seniority 
systems, career ladders, or tenure systems for similar jobs, position 
descriptions, or job requirements that classify persons on the basis of 
sex, unless sex is a bona fide occupational qualification for the 
positions in question as set forth in Sec. 113.550.



Sec. 113.525  Fringe benefits.

    (a) ``Fringe benefits'' defined. For purposes of these Title IX 
regulations, fringe benefits means: Any medical, hospital, accident, 
life insurance, or retirement benefit, service, policy or plan, any 
profit-sharing or bonus plan, leave, and any other benefit or service of 
employment not subject to the provision of Sec. 113.515.
    (b) Prohibitions. A recipient shall not:
    (1) Discriminate on the basis of sex with regard to making fringe 
benefits available to employees or make fringe benefits available to 
spouses, families, or dependents of employees differently upon the basis 
of the employee's sex;
    (2) Administer, operate, offer, or participate in a fringe benefit 
plan that does not provide for equal periodic benefits for members of 
each sex and for equal contributions to the plan by such recipient for 
members of each sex; or
    (3) Administer, operate, offer, or participate in a pension or 
retirement plan that establishes different optional or compulsory 
retirement ages based on sex or that otherwise discriminates in benefits 
on the basis of sex.



Sec. 113.530  Marital or parental status.

    (a) General. A recipient shall not apply any policy or take any 
employment action:
    (1) Concerning the potential marital, parental, or family status of 
an employee or applicant for employment that treats persons differently 
on the basis of sex; or
    (2) Which is based upon whether an employee or applicant for 
employment is the head of household or principal wage earner in such 
employee's or applicant's family unit.
    (b) Pregnancy. A recipient shall not discriminate against or exclude 
from employment any employee or applicant for employment on the basis of 
pregnancy, childbirth, false pregnancy, termination of pregnancy, or 
recovery therefrom.
    (c) Pregnancy as a temporary disability. Subject to Sec. 113.235(d), 
a recipient shall treat pregnancy, childbirth, false pregnancy, 
termination of pregnancy, recovery therefrom, and any temporary 
disability resulting therefrom as any other temporary disability for all 
job-related purposes, including commencement, duration, and extensions 
of leave, payment of disability income, accrual of seniority and any 
other benefit or service, and reinstatement, and under any fringe 
benefit offered to employees by virtue of employment.
    (d) Pregnancy leave. In the case of a recipient that does not 
maintain a leave policy for its employees, or in the case of an employee 
with insufficient leave or accrued employment time to qualify for leave 
under such a policy, a recipient shall treat pregnancy, childbirth, 
false pregnancy, termination of pregnancy, and recovery therefrom as a 
justification for a leave of absence without pay for a reasonable period 
of time, at the conclusion of which the employee shall be reinstated to 
the status that she held when the leave began or to a comparable 
position, without decrease in rate of compensation or loss of 
promotional opportunities, or any other right or privilege of 
employment.



Sec. 113.535  Effect of state or local law or other requirements.

    (a) Prohibitory requirements. The obligation to comply with 
Secs. 113.500 through

[[Page 171]]

113.550 is not obviated or alleviated by the existence of any State or 
local law or other requirement that imposes prohibitions or limits upon 
employment of members of one sex that are not imposed upon members of 
the other sex.
    (b) Benefits. A recipient that provides any compensation, service, 
or benefit to members of one sex pursuant to a State or local law or 
other requirement shall provide the same compensation, service, or 
benefit to members of the other sex.



Sec. 113.540  Advertising.

    A recipient shall not in any advertising related to employment 
indicate preference, limitation, specification, or discrimination based 
on sex unless sex is a bona fide occupational qualification for the 
particular job in question.



Sec. 113.545  Pre-employment inquiries.

    (a) Marital status. A recipient shall not make pre-employment 
inquiry as to the marital status of an applicant for employment, 
including whether such applicant is ``Miss'' or ``Mrs.''
    (b) Sex. A recipient may make pre-employment inquiry as to the sex 
of an applicant for employment, but only if such inquiry is made equally 
of such applicants of both sexes and if the results of such inquiry are 
not used in connection with discrimination prohibited by these Title IX 
regulations.



Sec. 113.550  Sex as a bona fide occupational qualification.

    A recipient may take action otherwise prohibited by Secs. 113.500 
through 113.550 provided it is shown that sex is a bona fide 
occupational qualification for that action, such that consideration of 
sex with regard to such action is essential to successful operation of 
the employment function concerned. A recipient shall not take action 
pursuant to this section that is based upon alleged comparative 
employment characteristics or stereotyped characterizations of one or 
the other sex, or upon preference based on sex of the recipient, 
employees, students, or other persons, but nothing contained in this 
section shall prevent a recipient from considering an employee's sex in 
relation to employment in a locker room or toilet facility used only by 
members of one sex.

                               Procedures



Sec. 113.600  Notice of covered programs.

    Within 60 days of September 29, 2000, each Federal agency that 
awards Federal financial assistance shall publish in the Federal 
Register a notice of the programs covered by these Title IX regulations. 
Each such Federal agency shall periodically republish the notice of 
covered programs to reflect changes in covered programs. Copies of this 
notice also shall be made available upon request to the Federal agency's 
office that enforces Title IX.



Sec. 113.605  Enforcement procedures.

    The investigative, compliance, and enforcement procedural provisions 
of Title VI of the Civil Rights Act of 1964 (42 U.S.C. 2000d) (``Title 
VI'') are hereby adopted and applied to these Title IX regulations. 
These procedures may be found at 13 CFR part 112.

[65 FR 52876, Aug. 30, 2000]



PART 114--ADMINISTRATIVE CLAIMS UNDER THE FEDERAL TORT CLAIMS ACT AND REPRESENTATION AND INDEMNIFICATION OF SBA EMPLOYEES--Table of Contents


                  Subpart A--Administrative Tort Claims

Sec.
114.100  Definitions.
114.101  What do these regulations cover?
114.102  When, where and how do I present a claim?
114.103  Who may file a claim?
114.104  What evidence and information may SBA require relating to my 
          claim?
114.105  Who investigates and considers my claim?
114.106  What if my claim exceeds $5,000?
114.107  What if my claim exceeds $25,000 or has other special features?
114.108  What if my claim is approved?
114.109  What if my claim is denied?

     Subpart B--Representation and Indemnification of SBA Employees

114.110  What is SBA's policy with respect to indemnifying and providing 
          legal representation to SBA employees?

[[Page 172]]

114.111  Does the attorney-client privilege apply when SBA employees are 
          represented by the Government?

    Authority: 15 U.S.C. 634 (b)(1), (b)(6); 28 U.S.C. 2672; 28 CFR 
14.11.

    Source: 61 FR 2401, Jan. 26, 1996, unless otherwise noted.



                  Subpart A--Administrative Tort Claims



Sec. 114.100  Definitions.

    As used throughout this part 114, date of accrual means the date you 
know or reasonably should have known of your injury. The date of accrual 
will depend on the facts of each case. Site means the geographic 
location where the incident giving rise to your claim occurred.



Sec. 114.101  What do these regulations cover?

    This part applies only to monetary claims you assert under the 
Federal Tort Claims Act, 28 U.S.C. 2671 et seq., for injury to or loss 
of property, personal injury, or death arising from the negligent or 
wrongful act or omission of any SBA employee acting within the scope of 
his or her employment.



Sec. 114.102  When, where and how do I present a claim?

    (a) When. You must present your claim within 2 years of the date of 
accrual.
    (b) Where. You may present your claim at the SBA District Office 
nearest to the site of the action giving rise to the claim and within 
the same state as the site. If your claim is based on the acts or 
omissions of an employee of SBA's Disaster Assistance Program, you may 
present your claim either to the appropriate SBA District Office or to 
the Disaster Assistance Office nearest to the site of the action giving 
rise to the claim.
    (c) How. You must use an official form which can be obtained from 
the SBA office where you file the claim or give other written notice of 
your claim, stating the specific amount of your alleged damages and 
providing enough information to enable SBA to investigate your claim. 
You may present your claim in person or by mail, but your claim will not 
be considered presented until SBA receives the written information.

[64 FR 40283, July 26, 1999]



Sec. 114.103  Who may file a claim?

    (a) If a claim is based on factors listed in the first column, then 
it may be presented by persons listed in the second column.

------------------------------------------------------------------------
               Claim factors                      Claim presenters
------------------------------------------------------------------------
Injury to or loss of property.............  The owner of the property,
                                             his or her duly authorized
                                             agent, or legal
                                             representative.
Personal injury...........................  The injured person, his or
                                             her duly authorized agent,
                                             or legal representative.
Death.....................................  The executor, administrator,
                                             or legal representative of
                                             the decedent's estate, or
                                             any other person entitled
                                             to assert the claim under
                                             applicable state law.
Loss wholly compensated by an insurer with  The parties individually, as
 rights as a subrogee.                       their interests appear, or
                                             jointly.
------------------------------------------------------------------------

    (b) An agent or legal representative may present your claim in your 
name, but must sign the claim, state his or her title or legal capacity, 
and include documentation of authority to present the claim on your 
behalf.



Sec. 114.104  What evidence and information may SBA require relating to my claim?

    (a) For a claim based on injury to or loss of property:
    (1) Proof you own the property.
    (2) A specific statement of the damage you claim with respect to 
each item of property.
    (3) Itemized receipts for payment for necessary repairs or itemized 
written estimates of the cost of such repairs.
    (4) A statement listing date of purchase, purchase price and salvage 
value, where repair is not economical.
    (5) Full information about potential insurance coverage and any 
insurance claims or payments relating to your claim.
    (6) Any other information that may be relevant to the government's 
alleged liability or the damages you claim.
    (b) For a claim based on personal injury, including pain and 
suffering:
    (1) A written report from your health care provider stating the 
nature and extent of your injury and treatment,

[[Page 173]]

the degree of your temporary or permanent disability, your prognosis, 
period of hospitalization, and any diminished earning capacity.
    (2) A written report following a physical, dental or mental 
examination of you by a physician employed by SBA or another Federal 
Agency. If you want a copy of this report, you must request it in 
writing, furnish SBA with the written report of your health care 
provider, if SBA requests it, and make or agree to make available to SBA 
any other medical reports relevant to your claim.
    (3) Itemized bills for medical, dental and hospital expenses you 
have incurred, or itemized receipts of payment for these expenses.
    (4) Your health care provider's written statement of the expected 
expenses related to any necessary future treatment.
    (5) A statement from your employer showing actual time lost from 
employment, whether you are a full or part-time employee, and the wages 
or salary you actually lost.
    (6) Documentary evidence showing the amount of earnings you actually 
lost if you are self-employed.
    (7) Information about the existence of insurance coverage and any 
insurance claims or payments relating to the claim in question.
    (8) Any other information that may be relevant to the government's 
alleged liability or the damages you claim.
    (c) For a claim based on death:
    (1) An authenticated death certificate or other competent evidence 
showing cause of death, date of death, and age of the decedent.
    (2) Evidence of decedent's employment or occupation at the time of 
death, including monthly or yearly salary or earnings, and the duration 
of such employment or occupation.
    (3) Full names, addresses, birth dates, kinship, and marital status 
of the decedent's survivors, including identification of those survivors 
who were dependent upon the decedent for support at the time of his or 
her death.
    (4) Evidence of the support provided by the decedent to each 
dependent survivor at the time of his or her death.
    (5) A summary of the decedent's general physical and mental 
condition before death.
    (6) Itemized bills or receipts for payments for medical and burial 
expenses.
    (7) For pain and suffering damage claims, a physician's detailed 
statement specifying the injuries suffered, the duration of pain and 
suffering, any drugs administered for pain, and the decedent's physical 
condition in the interval between injury and death.
    (8) Any other information that may be relevant to the government's 
alleged liability or the damages claimed.



Sec. 114.105  Who investigates and considers my claim?

    (a) SBA may investigate, or ask another Federal agency to 
investigate, your claim. SBA also may request any Federal agency to 
conduct a physical examination of you and provide a report to SBA. SBA 
will reimburse the Federal agency for the costs of that examination when 
authorized or required by statute or regulation.
    (b) In those cases in which SBA investigates your claim, and which 
arise out of the acts or omissions of employees other than employees of 
the Disaster Assistance Program, the SBA District Counsel in the office 
with jurisdiction over the site where the action giving rise to the 
claim occurred will investigate and make recommendations or 
determination with respect to your claim. In those cases in which SBA 
investigates your claim, and which arise out of acts or omissions of 
Disaster Assistance Program employees, the SBA Disaster Area Counsel in 
the office with jurisdiction over the site where the action giving rise 
to the claim occurred will investigate and make recommendations or a 
determination with respect to your claim. The District Counsel, or 
Disaster Area Counsel, where appropriate, may negotiate with you, and is 
authorized to use alternative dispute resolution mechanisms, which are 
nonbinding on SBA, when they may promote the prompt, fair and efficient 
resolution of your claim.
    (c) If your claim is for $5,000 or less, the District Counsel or 
Disaster Area Counsel who investigates your claim

[[Page 174]]

may deny the claim, or may recommend approval, compromise, or settlement 
of the claim to the Associate General Counsel for Litigation, who will 
in such a case take final action.

[61 FR 2401, Jan. 26, 1996, as amended at 64 FR 40283, July 26, 1999]



Sec. 114.106  What if my claim exceeds $5,000?

    The District Counsel or Disaster Area Counsel, as appropriate, must 
review and investigate your claim and forward it with a report and 
recommendation to the Associate General Counsel for Litigation, who may 
approve or deny an award, compromise, or settlement of claims in excess 
of $5,000, but not exceeding $25,000.

[64 FR 40283, July 26, 1999]



Sec. 114.107  What if my claim exceeds $25,000 or has other special features?

    (a) The U.S. Attorney General or designee must approve in writing 
any award, compromise, or settlement of a claim in excess of $25,000. 
For this purpose, a principal claim and any derivative or subrogated 
claim are considered a single claim.
    (b) SBA must consult with the Department of Justice before 
adjusting, determining, compromising, or settling a claim whenever the 
General Counsel or designee determines:
    (1) The claim involves a new precedent or a new point of law; or
    (2) The claim involves or may involve a question of policy; or
    (3) The United States is or may be entitled to indemnity or 
contribution from a third party and SBA is unable to adjust the third 
party claim; or
    (4) Approval of a claim, as a practical matter, will or may control 
the disposition of a related claim in which the amount to be paid may 
exceed $25,000.
    (c) SBA must consult with the Department of Justice before 
adjusting, determining, compromising, or settling a claim whenever SBA 
learns that the United States, or any of its employees, agents, or cost-
plus contractors, is involved in litigation based on a claim arising out 
of the same incident or transaction.
    (d) SBA, acting through its General Counsel or designee, must make 
any referrals to the Department of Justice for approval or consultation 
by transmitting them in writing to the Assistant Attorney General, Civil 
Division.
    (1) The referral must contain a short and concise statement of the 
facts and the reason for the request or referral, copies of the relevant 
portions of the claim file, and SBA's views and recommendations.
    (2) SBA may make this referral at any time after a claim is 
presented.



Sec. 114.108  What if my claim is approved?

    SBA will notify you in writing if it approves your claim. The 
District Counsel or Disaster Area Counsel investigating your claim will 
forward to you, your agent or legal representative the forms necessary 
to indicate satisfaction of your claim and your acceptance of the 
payment. Acceptance by you, your agent or your legal representative of 
any award, compromise or settlement releases all your claims against the 
United States under the Federal Tort Claims Act. This means that it 
binds you, your agent or your legal representative, and any other person 
on whose behalf or for whose benefit the claim was presented. It also 
constitutes a complete release of your claim against the United States 
and its employees. If you are represented by counsel, SBA will designate 
you and your counsel as joint payees and will deliver the check to 
counsel. Payment is contingent upon the waiver of your claim and is 
subject to the availability of appropriated funds.

[64 FR 40283, July 26, 1999]



Sec. 114.109  What if my claim is denied?

    SBA will notify you or your agent or legal representative in writing 
by certified or registered mail if it denies your claim. You have a 
right to file suit in an appropriate U.S. District Court not later than 
six months after the date the notification was mailed.

[[Page 175]]



     Subpart B--Representation and Indemnification of SBA Employees



Sec. 114.110  What is SBA's policy with respect to indemnifying and providing legal representation to SBA employees?

    (a) If an SBA employee engages in conduct, within the scope of his 
or her employment, which gives rise to a claim, and the SBA 
Administrator or designee determines that any of the following actions 
relating to the claim are in SBA's interest, SBA may:
    (1) Indemnify the employee after a verdict, judgment, or other 
monetary award is rendered personally against the employee in any civil 
suit in state or federal court or any arbitration proceeding;
    (2) Settle or compromise the claim; and/or
    (3) Pay for, or request that the Department of Justice provide, 
legal representation to the employee once personally named in such a 
suit.
    (b) If you are an SBA employee, you may ask SBA to settle or 
compromise your claim, provide you with legal representation, or provide 
you with indemnification for a verdict, judgment or award entered 
against you in a suit. To do so, you must submit a timely, written 
request to the General Counsel, with appropriate documentation, 
including copies of any pleadings, verdict, judgment, award, or 
settlement proposal. The General Counsel will decide all requests for 
representation or settlement, and will forward to the Administrator, 
with the accompanying documentation and a recommendation, any requests 
for indemnification.
    (c) Any payments by SBA under this section will be contingent upon 
the availability of appropriated funds.



Sec. 114.111  Does the attorney-client privilege apply when SBA employees 
are represented by the Government?

    When attorneys employed by SBA participate in any process in which 
SBA seeks to determine whether SBA should request the Department of 
Justice to provide representation to an SBA employee sued, subpoenaed, 
or charged in his or her individual capacity, or whether attorneys 
employed by SBA should provide representational assistance for such an 
employee, those attorneys undertake a full and traditional attorney-
client relationship with the employee with respect to the attorney-
client privilege. If representation is authorized, SBA attorneys who 
assist in the representation of an SBA employee also undertake a full 
and traditional attorney-client relationship with the employee with 
respect to the attorney-client privilege. Unless authorized by the 
employee, the attorney must not disclose to anyone other than attorneys 
also responsible for the employee's representation information 
communicated to the attorney by the client-employee during the course of 
the attorney-client relationship. The attorney-client privilege will 
continue with respect to that information whether or not representation 
is provided, and even if the employee's representation is denied or 
discontinued.



PART 115--SURETY BOND GUARANTEE--Table of Contents


Sec.
115.1  Overview of regulations.
115.2  Savings clause.

          Subpart A--Provisions for All Surety Bond Guarantees

115.10  Definitions.
115.11  Applying to participate in the Surety Bond Guarantee Program.
115.12  General program policies and provisions.
115.13  Eligibility of Principal.
115.14  Loss of Principal's eligibility for future assistance.
115.15  Underwriting and servicing standards.
115.16  Determination of Surety's Loss.
115.17  Minimization of Surety's Loss.
115.18  Refusal to issue further guarantees; suspension and termination 
          of PSB status.
115.19  Denial of liability.
115.20  Insolvency of Surety.
115.21  Audits and investigations.

             Subpart B--Guarantees Subject to Prior Approval

115.30  Submission of Surety's guarantee application.
115.31  Guarantee percentage.
115.32  Fees and Premiums.
115.33  Surety bonding line.
115.34  Minimization of Surety's Loss.

[[Page 176]]

115.35  Claims for reimbursement of Losses.
115.36  Indemnity settlements and reinstatement of Principal.

            Subpart C--Preferred Surety Bond (PSB) Guarantees

115.60  Selection and admission of PSB Sureties.
115.61  Duration of PSB program.
115.62  Prohibition on participation in Prior Approval program.
115.63  Allotment of guarantee authority.
115.64  Timeliness requirement.
115.65  General PSB procedures.
115.66  Fees.
115.67  Changes in Contract or bond amount.
115.68  Guarantee percentage.
115.69  Imminent Breach.
115.70  Claims for reimbursement of Losses.
115.71  Denial of liability.

    Authority: 5 U.S.C. app 3; 15 U.S.C. 687b, 687c, 694a, 694b; 694b 
note, Pub. L. 106-554, 114 Stat. 2763A-653.

    Source: 61 FR 3271, Jan. 31, 1996, unless otherwise noted.



Sec. 115.1  Overview of regulations.

    The regulations in this part cover the SBA's Surety Bond Guarantee 
Programs under Part B of Title IV of the Small Business Investment Act 
of 1958, as amended. Subpart A of this part contains regulations common 
to both the program requiring prior SBA approval of each bond guarantee 
(the Prior Approval Program) and the program not requiring prior 
approval (the PSB Program). Subpart B of this part contains the 
regulations applicable only to the Prior Approval Program. Subpart C of 
this part contains the regulations applicable only to the PSB Program.



Sec. 115.2  Savings clause.

    Transactions affected by this part 115 are governed by the 
regulations in effect at the time they occur.



          Subpart A--Provisions for All Surety Bond Guarantees



Sec. 115.10  Definitions.

    AA/SG means SBA's Associate Administrator for Surety Guarantees.
    Affiliate is defined in part 121 of this chapter.
    Ancillary Bond means a bond incidental and essential to the 
performance of a Contract for which there is a guaranteed Final Bond.
    Bid Bond means a bond conditioned upon the bidder on a Contract 
entering into the Contract, and furnishing the required Payment and 
Performance Bonds. The term does not include a forfeiture bond unless it 
is issued for a jurisdiction where statute or settled decisional law 
requires forfeiture bonds for public works.
    Contract means a written obligation of the Principal requiring the 
furnishing of services, supplies, labor, materials, machinery, 
equipment, or construction. A Contract must not prohibit a Surety from 
performing the Contract upon default of the Principal. A Contract does 
not include a permit, subdivision contract, lease, land contract, 
evidence of debt, financial guarantee (e.g., a contract requiring any 
payment by the Principal to the Obligee), warranty of performance or 
efficiency, warranty of fidelity, or release of lien (other than for 
claims under a guaranteed bond). It includes a maintenance agreement of 
2 years or less which covers defective workmanship or materials only. 
With SBA's written approval, it can also include a longer maintenance 
agreement covering defective workmanship or materials, or a maintenance 
agreement covering something other than defective workmanship or 
materials. To qualify for such approval, the agreement must be ancillary 
to the Contract for which SBA is guaranteeing a bond, must be required 
to be performed by the same Principal, and must be customarily required 
in the relevant trade or industry.
    Execution means signing by a representative or agent of the Surety 
with the authority and power to bind the Surety.
    Final Bond means a Performance Bond and/or a Payment Bond.
    Imminent Breach means a threat to the successful completion of a 
bonded Contract which, unless remedied by the Surety, makes a default 
under the bond appear to be inevitable.
    Investment Act means the Small Business Investment Act of 1958 (15 
U.S.C. 661 et seq.), as amended.
    Loss has the meaning set forth in Sec. 115.16.

[[Page 177]]

    Obligee means:
    (1)(i) In the case of a Bid Bond, the Person requesting bids for the 
performance of a Contract; or
    (ii) In the case of a Final Bond, the Person who has contracted with 
a Principal for the completion of the Contract and to whom the primary 
obligation of the Surety runs in the event of a breach by the Principal.
    (2) In either case, no Person (other than a Federal department or 
agency) may be named co-Obligee or Obligee on a bond or on a rider to 
the bond unless that Person is bound by the Contract to the Principal 
(or to the Surety, if the Surety has arranged completion of the 
Contract) to the same extent as the original Obligee. In no event may 
the addition of one or more co-Obligees increase the aggregate liability 
of the Surety under the bond.
    OSG means SBA's Office of Surety Guarantees.
    Payment Bond means a bond which is conditioned upon the payment by 
the Principal of money to persons who have a right of action against 
such bond, including those who have furnished labor, materials, 
equipment and supplies for use in the performance of the Contract. A 
Payment Bond can not require the Surety to pay an amount which exceeds 
the claimant's actual loss or damage.
    Performance Bond means a bond conditioned upon the completion by the 
Principal of a Contract in accordance with its terms.
    Person means a natural person or a legal entity.
    Premium means the amount charged by a Surety to issue bonds. The 
Premium is determined by applying an approved rate (see Secs. 115.32(a) 
and 115.60(a)(2)) to the bond or contract amount. The Premium does not 
include surcharges for extra services, whether or not considered part of 
the ``premium'' under local law.
    Principal means, in the case of a Bid Bond, the Person bidding for 
the award of a Contract. In the case of Final Bonds and Ancillary Bonds, 
Principal means the Person primarily liable to complete the Contract, or 
to make Contract-related payments to other persons, and is the Person 
whose performance or payment is bonded by the Surety. A Principal may be 
a prime contractor or a subcontractor.
    Prior Approval Agreement means the Surety Bond Guarantee Agreement 
(SBA Form 990) entered into between a Prior Approval Surety and SBA 
under which SBA agrees to guarantee a specific bond.
    Prior Approval Surety means a Surety which must obtain SBA's prior 
approval on each guarantee and which has entered into one or more Prior 
Approval Agreements with SBA.
    PSB Agreement means the Preferred Surety Bond Guarantee Agreement 
entered into between a PSB Surety and SBA.
    PSB Surety means a Surety that has been admitted to the Preferred 
Surety Bond (PSB) Program.
    Surety means a company which:
    (1)(i) Under the terms of a Bid Bond, agrees to pay a sum of money 
to the Obligee if the Principal breaches the conditions of the bond;
    (ii) Under the terms of a Performance Bond, agrees to pay a sum of 
money or to incur the cost of fulfilling the terms of a Contract if the 
Principal breaches the conditions of the Contract; and
    (iii) Under the terms of a Payment or an Ancillary Bond, agrees to 
make payment to all who have a right of action against such bond, 
including those who have furnished labor, materials, equipment and 
supplies in the performance of the Contract.
    (2) The term Surety includes an agent, independent agent, 
underwriter, or any other company or individual empowered to act on 
behalf of the Surety.

[61 FR 3271, Jan. 31, 1996; 61 FR 7985, Mar. 1, 1996]



Sec. 115.11  Applying to participate in the Surety Bond Guarantee Program.

    Sureties interested in participating as Prior Approval Sureties or 
PSB Sureties should apply in writing to the AA/SG at 409 3rd Street, 
SW., Washington, DC 20416. OSG will determine the eligibility of the 
applicant considering its standards and procedures for underwriting, 
administration, claims and recovery. Each applicant must be a 
corporation listed by the U.S. Treasury as eligible to issue bonds in 
connection with Federal procurement contracts.

[[Page 178]]



Sec. 115.12  General program policies and provisions.

    (a) Description of Surety Bond Guarantee Programs. SBA guarantees 
Sureties participating in the Surety Bond Guarantee Programs against a 
portion of their Losses incurred and paid as a result of a Principal's 
breach of the terms of a Bid Bond, Final Bond or Ancillary Bond, on any 
eligible Contract. In the Prior Approval Program, the Surety must obtain 
SBA's approval before a guaranteed bond can be issued. In the PSB 
Program, selected Sureties may issue, monitor, and service SBA 
guaranteed bonds without further SBA approval.
    (b) Eligibility of bonds. Bid Bonds and Final Bonds are eligible for 
an SBA guarantee if they are executed in connection with an eligible 
Contract and are of a type listed in the ``Contract Bonds'' section of 
the current Manual of Rules, Procedures and Classifications of the 
Surety Association of America (100 Wood Avenue South, Iselin, New Jersey 
08830). Ancillary Bonds may also be eligible for SBA's guarantee. A 
Performance Bond must not prohibit a Surety from performing the Contract 
upon default of the Principal.
    (c) Expiration of Bid Bond Guarantee. A Bid Bond guarantee expires 
120 days after Execution of the Bid Bond, unless the Surety notifies SBA 
in writing before the 120th day that a later expiration date is 
required. The notification must include the new expiration date.
    (d) Guarantee agreement. The terms and conditions of SBA's bond 
guarantee agreements, including the guarantee percentage, may vary from 
Surety to Surety, depending on past experience with SBA. If the 
guarantee percentage is not fixed by the Investment Act, it is 
determined by OSG after considering, among other things, the rating or 
ranking assigned to the Surety by recognized authority, and the Surety's 
Loss rate, average Contract amount, average bond penalty per guaranteed 
bond, and ratio of Bid Bonds to Final Bonds, all in comparison with 
other Sureties participating in the same SBA Surety Bond Guarantee 
Program (Prior Approval or PSB) to a comparable degree. Any guarantee 
agreement under this part is made exclusively for the benefit of SBA and 
the Surety, and does not confer any rights (such as a right of action 
against SBA) or benefits on any other party.
    (e) Amount of Contract--(1) Statutory ceiling. The amount of the 
Contract to be bonded must not exceed $2,000,000 in face value at the 
time of the bond's Execution.
    (2) Aggregation of Contract amounts. The amounts of two or more 
Contracts for a ``single project'' are aggregated to determine the 
Contract amount unless the Contracts are to be performed in phases and 
the prior bond is released before the beginning of each succeeding 
phase. A bond may be considered released even if the warranty period it 
is covering has not yet expired. For purposes of this paragraph, a 
``single project'' means one represented by two or more Contracts of one 
Principal or its Affiliates with one Obligee or its Affiliates for 
performance at the same location, regardless of job title or nature of 
the work to be performed.
    (3) Service and supply contracts. A service or supply Contract 
covering more than a 1 year period is eligible for an SBA guaranteed 
bond if neither the annual Contract amount nor the penal sum of the bond 
exceeds $2,000,000 at any time.
    (f) Transfers or sales by Surety. Sureties must not sell or 
otherwise transfer their files or accounts, whether before or after a 
default by the Principal has occurred, without the prior written 
approval of SBA. A violation of this provision is grounds for 
termination from participation in the program. This provision does not 
apply to the sale of an entire business division, subsidiary or 
operation of the Surety.

[61 FR 3271, Jan. 31, 1996, as amended at 66 FR 30804, June 8, 2001]



Sec. 115.13  Eligibility of Principal.

    (a) General eligibility. In order to be eligible for a bond 
guaranteed by SBA, the Principal must comply with the following 
requirements:
    (1) Size. Together with its Affiliates, it must qualify as a small 
business under part 121 of this title.
    (2) Character. It must possess good character and reputation. A 
Principal meets this standard if each owner of 20% or more of its 
equity, and each of

[[Page 179]]

its officers, directors, or general partners, possesses good character 
and reputation. A Person's good character and reputation is presumed 
absent when:
    (i) The Person is under indictment for, or has been convicted of a 
felony, or a final civil judgment has been entered stating that such 
Person has committed a breach of trust or has violated a law or 
regulation protecting the integrity of business transactions or business 
relationships; or
    (ii) A regulatory authority has revoked, canceled, or suspended a 
license of the Person which is necessary to perform the Contract; or
    (iii) The Person has obtained a bond guarantee by fraud or material 
misrepresentation (as described in Sec. 115.19(b)), or has failed to 
keep the Surety informed of unbonded contracts or of a contract bonded 
by another Surety, as required by a bonding line commitment under 
Sec. 115.33.
    (3) Need for bond. It must certify that a bond is expressly required 
by the bid solicitation or the original Contract in order to bid on the 
Contract or to serve as a prime contractor or subcontractor.
    (4) Availability of bond. It must certify that a bond is not 
obtainable on reasonable terms and conditions without SBA's guarantee.
    (5) Partial subcontract. It must certify the percentage of work 
under the Contract to be subcontracted. SBA will not guarantee bonds for 
Principals who are primarily brokers or who have effectively transferred 
control over the project to one or more subcontractors.
    (6) Debarment. It must certify that the Principal is not presently 
debarred, suspended, proposed for debarment, declared ineligible, or 
voluntarily excluded from transactions with any Federal department or 
agency, under governmentwide debarment and suspension rules.
    (b) Conflict of interest. A Principal is not eligible for an SBA-
guaranteed bond issued by a particular Surety if that Surety, or an 
Affiliate of that Surety, or a close relative or member of the household 
of that Surety or Affiliate owns, directly or indirectly, 10% or more of 
the Principal. This prohibition also applies to ownership interests in 
any of the Principal's Affiliates.



Sec. 115.14  Loss of Principal's eligibility for future assistance.

    (a) Ineligibility. A Principal and its Affiliates lose eligibility 
for further SBA bond guarantees if any of the following occurs under an 
SBA-guaranteed bond issued on behalf of the Principal:
    (1) Legal action under the guaranteed bond has been initiated.
    (2) The Obligee has declared the Principal to be in default under 
the Contract.
    (3) The Surety has established a claim reserve for the bond of at 
least $1000.
    (4) The Surety has requested reimbursement for Losses incurred under 
the bond.
    (5) The guarantee fee has not been paid by the Principal.
    (6) The Principal committed fraud or material misrepresentation in 
obtaining the guaranteed bond.
    (b) Reinstatement of Principal's eligibility. Prior Approval 
Sureties should refer to Sec. 115.36(b) for provisions on reinstatement 
of the Principal's eligibility. A PSB Surety may reinstate a Principal's 
eligibility upon the Surety's determination that reinstatement is 
appropriate.



Sec. 115.15  Underwriting and servicing standards.

    (a) Underwriting. (1) Sureties must evaluate the credit, capacity, 
and character of a Principal using standards generally accepted by the 
surety industry and in accordance with SBA's Standard Operating 
Procedures on underwriting and the Surety's principles and practices on 
unguaranteed bonds. The Principal must satisfy the eligibility 
requirements set forth in Sec. 115.13. The Surety must reasonably expect 
that the Principal will successfully perform the Contract to be bonded.
    (2) The terms and conditions of the bond and the Contract must be 
reasonable in light of the risks involved and the extent of the Surety's 
participation. The bond must satisfy the eligibility requirements set 
forth in Sec. 115.12(b). The Surety must be satisfied as to the 
reasonableness of cost and the feasibility of successful completion of 
the Contract.

[[Page 180]]

    (b) Servicing. The Surety must ensure that the Principal remains 
viable and eligible for SBA's Surety Bond Guarantee Program, must 
monitor the Principal's progress on bonded Contracts guaranteed by SBA, 
and must request job status reports from Obligees of Final Bonds 
guaranteed by SBA. Documentation of the job status requests must be 
maintained by the Surety.



Sec. 115.16  Determination of Surety's Loss.

    Loss is determined as follows:
    (a) Loss under a Bid Bond is the lesser of the penal sum or the 
amount which is the difference between the bonded bid and the next 
higher responsive bid. In either case, the Loss is reduced by any 
amounts the Surety recovers by reason of the Principal's defenses 
against the Obligee's demand for performance by the Principal and any 
sums the Surety recovers from indemnitors and other salvage.
    (b) Loss under a Payment Bond is, at the Surety's option, the sum 
necessary to pay all just and timely claims against the Principal for 
the value of labor, materials, equipment and supplies furnished for use 
in the performance of the bonded Contract and other covered debts, or 
the penal sum of the Payment Bond. In either case, the Loss includes 
interest (if any), but Loss is reduced by any amounts recovered (through 
offset or otherwise) by reason of the Principal's claims against 
laborers, materialmen, subcontractors, suppliers, or other rightful 
claimants, and by any amounts recovered from indemnitors and other 
salvage.
    (c) Loss under a Performance Bond is, at the Surety's option, the 
sum necessary to meet the cost of fulfilling the terms of a bonded 
Contract or the penal sum of the bond. In either case, the Loss includes 
interest (if any), but Loss is reduced by any amounts recovered (through 
offset or otherwise) by reason of the Principal's defenses or causes of 
action against the Obligee, and by any amounts recovered from 
indemnitors and other salvage.
    (d) Loss under an Ancillary Bond is the amount covered by such bond 
which is attributable to the Contract for which guaranteed Final Bonds 
were Executed.
    (e) Loss includes the following expenses if they are itemized, 
documented and attributable solely to the Loss under the guaranteed 
bond:
    (1) Amounts actually paid by the Surety which are specifically 
allocable to the investigation, adjustment, negotiation, compromise, 
settlement of, or resistance to a claim for Loss resulting from the 
breach of the terms of the bonded Contract. Any cost allocation method 
must be reasonable and must comply with generally accepted accounting 
principles; and
    (2) Amounts actually paid by the Surety for court costs and 
reasonable attorney's fees incurred to mitigate any Loss under 
paragraphs (a) through (e)(1) of this section including suits to obtain 
sums due from Obligees, indemnitors, Principals and others.
    (f) Loss does not include the following expenses:
    (1) Any unallocated expenses, or any clear mark-up on expenses or 
any overhead, of the Surety, its attorney, or any other party hired by 
the Surety or the attorney;
    (2) Expenses paid for any suits, cross-claims, or counterclaims 
filed against the United States of America or any of its agencies, 
officers, or employees unless the Surety has received, prior to filing 
such suit or claim, written concurrence from SBA that the suit may be 
filed;
    (3) Attorney's fees and court costs incurred by the Surety in a suit 
by or against SBA or its Administrator; and
    (4) Fees, costs, or other payments, including tort damages, arising 
from a successful tort suit or claim by a Principal or any other Person 
against the Surety.



Sec. 115.17  Minimization of Surety's Loss.

    (a) Indemnity agreements and collateral--(1) Requirements. The 
Surety must take all reasonable action to minimize risk of Loss 
including, but not limited to, obtaining from each Principal a written 
indemnity agreement which covers actual Losses under the Contract and 
Imminent Breach payments under Sec. 115.34(a) or Sec. 115.69. The 
indemnity agreement must be secured by such collateral as the Surety or 
SBA finds appropriate. Indemnity agreements from other Persons, secured 
or

[[Page 181]]

unsecured, may also be required by the Surety or SBA.
    (2) Prohibitions. No indemnity agreement may be obtained from the 
Surety, its agent or any other representative of the Surety. The Surety 
must not separately collateralize the portion of its bond which is not 
guaranteed by SBA.
    (b) Salvage and recovery--(1) General. The Surety must pursue all 
possible sources of salvage and recovery. Salvage and recovery includes 
all payments made in settlement of the Surety's claim, even though the 
Surety has incurred other losses as a result of that Principal which are 
not reimbursable by SBA.
    (2) SBA's share. SBA is entitled to its guaranteed percentage of all 
salvage and recovery from a defaulted Principal, its guarantors and 
indemnitors, and any other party, received by the Surety in connection 
with the guaranteed bond or any other bond issued by the Surety on 
behalf of the Principal unless such recovery is unquestionably 
identifiable as related solely to the non-guaranteed bond. The Surety 
must reimburse or credit SBA (in the same proportion as SBA's share of 
Loss) within 90 days of receipt of any recovery by the Surety.
    (3) Multiple Sureties. In any dispute between two or more Sureties 
concerning recovery under SBA guaranteed bonds, the dispute must first 
be brought to the attention of OSG for an attempt at mediation and 
settlement.



Sec. 115.18  Refusal to issue further guarantees; suspension and termination of PSB status.

    (a) Improper surety bond guarantee practices--(1) Imprudent 
practices. SBA may refuse to issue further guarantees to a Prior 
Approval Surety or may suspend the preferred status of a PSB Surety, by 
written notice stating all reasons for such decision and the effective 
date. Reasons for such a decision include, but are not limited to, a 
determination that the Surety (in its underwriting, its efforts to 
minimize Loss, its claims or recovery practices, or its documentation 
related to SBA guaranteed bonds) has failed to adhere to prudent 
standards or practices, including any standards or practices required by 
SBA, as compared to those of other Sureties participating in the same 
SBA Surety Bond Guarantee Program to a comparable degree.
    (2) Regulatory violations, fraud. Acts of wrongdoing such as fraud, 
material misrepresentation, breach of the Prior Approval or PSB 
Agreement, or regulatory violations (as defined in Secs. 115.19(d) and 
115.19(h)) also constitute sufficient grounds for refusal to issue 
further guarantees, or in the case of a PSB Surety, termination of 
preferred status.
    (3) Audit; records. The failure of a Surety to consent to SBA's 
audit or to maintain and produce records constitutes grounds for SBA to 
refuse to issue further guarantees for a Prior Approval Surety, to 
suspend a PSB Surety from participation, and to refuse to honor claims 
submitted by a Prior Approval or PSB Surety until the Surety consents to 
the audit.
    (4) Excessive Losses. If a Surety experiences excessive Losses on 
SBA guaranteed bonds relative to those of other Sureties participating 
in the same SBA Surety Bond Guarantee Program to a comparable degree, 
SBA may also require the renegotiation of the guarantee percentage and/
or SBA's charge to the Surety for bonds executed thereafter.
    (b) Lack of business integrity. A Surety's participation in the 
Surety Bond Guarantee Programs may be denied, suspended, or terminated 
upon the occurrence of any event in paragraphs (b) (1) through (5) of 
this section involving any of the following Persons: The Surety or any 
of its officers, directors, partners, or other individuals holding at 
least 20% of the Surety's voting securities, and any agents, 
underwriters, or any individual empowered to act on behalf of any of the 
preceding Persons.
    (1) If a State or other authority has revoked, canceled, or 
suspended the license required of such Person to engage in the surety 
business, the right of such Person to participate in the SBA Surety Bond 
Guarantee Program may be denied, terminated, or suspended, as 
applicable, in that jurisdiction or in other jurisdictions. 
Ineligibility or suspension from the Surety Bond Guarantee Programs is 
for at least the duration of the license suspension.

[[Page 182]]

    (2) If such Person has been indicted or otherwise formally charged 
with a misdemeanor or felony bearing on such Person's fitness to 
participate in the Surety Bond Guarantee Programs, the participation of 
such Person may be suspended pending disposition of the charge. Upon 
conviction, participation may be denied or terminated.
    (3) If a final civil judgment is entered holding that such Person 
has committed a breach of trust or violation of a law or regulation 
protecting the integrity of business transactions or relationships, 
participation may be denied or terminated.
    (4) If such Person has made a material misrepresentation or 
willfully false statement in the presentation of oral or written 
information to SBA in connection with an application for a surety bond 
guarantee or the presentation of a claim, or committed a material breach 
of the Prior Approval or PSB Agreement or a material violation of the 
regulations (all as described in Sec. 115.19), participation may be 
denied or terminated.
    (5) If such Person is debarred, suspended, voluntarily excluded 
from, or declared ineligible for participation in Federal programs, 
participation may be denied or terminated.
    (c) Notification requirement. The Prior Approval or PSB Surety must 
promptly notify SBA of the occurrence of any event in paragraphs (b) (1) 
through (5) of this section, or if any of the Persons described in 
paragraph (b) of this section does not, or ceases to, qualify as a 
Surety. SBA may require submission of a Statement of Personal History 
(SBA Form 912) from any of these Persons.
    (d) SBA proceedings. Decisions to suspend, terminate, deny 
participation in, or deny reinstatement in the Surety Bond Guarantee 
program are made by the AA/SG. A Surety may file a petition for review 
of suspensions and terminations with the SBA Office of Hearings and 
Appeals (OHA) under part 134 of this chapter. SBA's Administrator may, 
pending a decision pursuant to part 134 of this chapter, suspend the 
participation of any Surety for any of the causes listed in paragraphs 
(b) (1) through (5) of this section.
    (e) Effect on guarantee. A guarantee issued by SBA before a 
suspension or termination under this section remains in effect, subject 
to SBA's right to deny liability under the guarantee.



Sec. 115.19  Denial of liability.

    In addition to equitable and legal defenses and remedies under 
contract law, the Act and the regulations in this part, SBA is not 
liable under a Prior Approval or PSB Agreement if any of the 
circumstances in paragraphs (a) through (h) of this section exist.
    (a) Excess Contract or bond amount. The total Contract amount at the 
time of Execution of the bond exceeds $2,000,000 in face value (see 
Sec. 115.12(e)), or the bond amount at any time exceeds the total 
Contract amount.
    (b) Misrepresentation or fraud. The Surety obtained the Prior 
Approval or PSB Agreement, or applied for reimbursement for losses, by 
fraud or material misrepresentation. Material misrepresentation includes 
(but is not limited to) both the making of an untrue statement of 
material fact and the omission of a statement of material fact necessary 
to make a statement not misleading in light of the circumstances in 
which it was made. Material misrepresentation also includes the adoption 
by the Surety of a material misstatement made by others which the Surety 
knew or under generally accepted underwriting standards should have 
known to be false or misleading. The Surety's failure to disclose its 
ownership (or the ownership by any owner of at least 20% of the Surety's 
equity) of an interest in a Principal or an Obligee is considered the 
omission of a statement of material fact.
    (c) Material breach. The Surety has committed a material breach of 
one or more terms or conditions of its Prior Approval or PSB Agreement. 
A material breach is considered to have occurred if:
    (1) Such breach (or such breaches in the aggregate) causes an 
increase in the Contract amount or in the bond amount of at least 25% or 
$50,000; or
    (2) One of the conditions under Part B of Title IV of the Investment 
Act is not met.
    (d) Substantial regulatory violation. The Surety has committed a 
``substantial violation'' of SBA regulations. For

[[Page 183]]

purposes of this paragraph, a ``substantial violation'' is a violation 
which causes an increase in the bond amount of at least 25% or $50,000 
in the aggregate, or is contrary to the purposes of the Surety Bond 
Guarantee Programs.
    (e) Alteration. Without obtaining prior written approval from SBA 
(which may be conditioned upon payment of additional fees), the Surety 
agrees to or acquiesces in any material alteration in the terms, 
conditions, or provisions of the bond, including but not limited to the 
following acts:
    (1) Naming as an Obligee or co-Obligee any Person that does not 
qualify as an Obligee under Sec. 115.10; or
    (2) In the case of a Prior Approval Surety, acquiescing in any 
alteration to the bond which would increase the bond amount by at least 
25% or $50,000.
    (f) Timeliness. (1) Either:
    (i) The bond was Executed prior to the date of SBA's guarantee; or
    (ii) The bond was Executed (or approved, if the Surety is legally 
bound by such approval) after the work under the Contract had begun, 
unless SBA executes a ``Surety Bond Guarantee Agreement Addendum'' (SBA 
Form 991) after receiving all of the following from the Surety:
    (A) Satisfactory evidence, including a certified copy of the 
Contract (or a sworn affidavit from the Principal), showing that the 
bond requirement was contained in the original Contract, or other 
documentation satisfactory to SBA, showing why a bond was not previously 
obtained and is now being required;
    (B) Certification by the Principal that all taxes and labor costs 
are current, and listing all suppliers and subcontractors, indicating 
that they are all paid to date, and attaching a waiver of lien from 
each; or an explanation satisfactory to SBA why such documentation 
cannot be produced; and
    (C) Certification by the Obligee that all payments due under the 
Contract to date have been made and that the job has been satisfactorily 
completed to date.
    (2)(i) For purposes of paragraph (f)(1)(ii) of this section, work 
under a Contract is considered to have begun when a Principal takes any 
action at the job site which would have exposed its Surety to liability 
under applicable law had a bond been Executed (or approved, if the 
Surety is legally bound by such approval) at the time.
    (ii) For purposes of this paragraph (f), the Surety must maintain a 
contemporaneous record of the Execution and approval of each bond.
    (g) Principal fee. The Surety has not remitted to SBA the 
Principal's payment for the full amount of the guarantee fee within the 
time period required under Sec. 115.30(d) for Prior Approval Sureties or 
Sec. 115.66 for PSB Sureties. SBA may reinstate the guarantee upon a 
showing that the Contract is not in default and that a valid reason 
exists why a timely submission was not made.
    (h) Other regulatory violations. The occurrence of any of the 
following:
    (1) The Principal on the bonded Contract is not a small business;
    (2) The bond was not required under the bid solicitation or the 
original Contract;
    (3) The bond was not eligible for guarantee by SBA because the 
bonded contract was not a Contract as defined in Sec. 115.10;
    (4) The loss occurred under a bond that was not guaranteed by SBA;
    (5) The loss incurred by the Surety was not a Loss as determined 
under Sec. 115.16; or
    (6) The Surety's loss under a Performance Bond did not result from 
the Principal's breach or Imminent Breach of the Contract.

[61 FR 3271, Jan. 31, 1996, as amended at 66 FR 30804, June 8, 2001]



Sec. 115.20  Insolvency of Surety.

    (a) Successor in interest. If a Surety becomes insolvent, all rights 
or benefits conferred on the Surety under a valid and binding Prior 
Approval or PSB Agreement will accrue only to the trustee or receiver of 
the Surety. SBA will not be liable to the trustee or receiver of the 
insolvent Surety except for the guaranteed portion of any Loss incurred 
and actually paid by such Surety or its trustee or receiver under the 
guaranteed bonds.
    (b) Filing requirement. The trustee or receiver must submit to SBA 
quarterly status reports accounting for all funds

[[Page 184]]

received and all settlements being considered.



Sec. 115.21  Audits and investigations.

    (a) Audits--(1) Scope of audit. SBA may audit in the office of a 
Prior Approval or PSB Surety, the Surety's attorneys or consultants, or 
the Principal or its subcontractors, all documents, files, books, 
records, tapes, disks and other material relevant to SBA's guarantee, 
commitments to guarantee a surety bond, or agreements to indemnify the 
Prior Approval or PSB Surety. See Sec. 115.18(a)(3) for consequences of 
failure to comply with this section.
    (2) Frequency of PSB audits. Each PSB Surety is subject to audit at 
least once each year by examiners selected and approved by SBA.
    (b) Records. The Surety must maintain the records listed in this 
paragraph (b) for the term of each bond, plus any additional time 
required to settle any claims of the Surety for reimbursement from SBA 
and to attempt salvage or other recovery, plus an additional 3 years. If 
there are any unresolved audit findings in relation to a particular 
bond, the Surety must maintain the related records until the findings 
are resolved. The records to be maintained include the following:
    (1) A copy of the bond;
    (2) A copy of the bonded Contract;
    (3) All documentation submitted by the Principal in applying for the 
bond;
    (4) All information gathered by the Surety in reviewing the 
Principal's application;
    (5) All documentation of any of the events set forth in 
Sec. 115.35(a) or Sec. 115.65(c)(2);
    (6) All records of any transaction for which the Surety makes 
payment under or in connection with the bond, including but not limited 
to claims, bills (including lawyers' and consultants' bills), judgments, 
settlement agreements and court or arbitration decisions, consultants' 
reports, Contracts and receipts;
    (7) All documentation relating to efforts to mitigate Losses, 
including documentation required by Sec. 115.34(a) or Sec. 115.69 
concerning Imminent Breach;
    (8) All records of any accounts into which fees and funds obtained 
in mitigation of Losses were paid and from which payments were made 
under the bond, and any other trust accounts, and any reconciliations of 
such accounts;
    (9) Job status reports received from Obligees and documentation of 
each unanswered request for a job status report; and
    (10) All documentation relating to any collateral held by or 
available to the Surety.
    (c) Purpose of audit. SBA's audit will determine, but not be limited 
to:
    (1) The adequacy and sufficiency of the Surety's underwriting and 
credit analysis, its documentation of claims and claims settlement 
procedures and activities, and its recovery procedures and practices;
    (2) The Surety's minimization of Loss, including the exercise of 
bond options upon Contract default; and
    (3) The Surety's loss ratio in comparison with other Sureties 
participating in the same SBA Surety Bond Guarantee Program to a 
comparable degree.
    (d) Investigations. SBA may conduct investigations to inquire into 
the possible violation by any Person of the Small Business Act or the 
Investment Act, or of any rule or regulation under those Acts, or of any 
order issued under those Acts, or of any Federal law relating to 
programs and operations of SBA.



             Subpart B--Guarantees Subject to Prior Approval



Sec. 115.30  Submission of Surety's guarantee application.

    (a) Legal effect of application. By submitting an application to SBA 
for a bond guarantee, the Prior Approval Surety certifies that the 
Principal meets the eligibility requirements set forth in Sec. 115.13 
and that the underwriting standards set forth in Sec. 115.15 have been 
met.
    (b) SBA's determination. SBA's approval or decline of a guarantee 
application is made in writing by an authorized SBA officer. The officer 
may provide telephone notice before the Prior Approval Surety receives 
SBA's guarantee approval form if the officer has already signed the 
form. In the event of a conflict between the telephone notice

[[Page 185]]

and the written form, the written form controls.
    (c) Reconsideration-appeal of SBA determination. A Prior Approval 
Surety may request reconsideration of a decline from the SBA officer who 
made the decision. If the decision on reconsideration is negative, the 
Surety may appeal to an individual designated by the AA/SG. If the 
decision is again adverse, the Surety may appeal to the AA/SG, who will 
make the final decision.
    (d) Notice and payment to SBA. When the Surety has Executed a Final 
Bond, including a Final Bond under a bonding line, the Surety must 
complete the Prior Approval Agreement, and submit the form, together 
with the Principal's payment for its guarantee fee (see Sec. 115.32(b)) 
to SBA within 45 days, or in the case of a bonding line, within 15 
business days (see Sec. 115.33(d)(2)) after Execution of the bond.



Sec. 115.31  Guarantee percentage.

    (a) Ninety percent. SBA reimburses a Prior Approval Surety for 90% 
of the Loss incurred and paid if:
    (1) The total amount of the Contract at the time of Execution of the 
bond is $100,000 or less; or
    (2) The bond was issued on behalf of a small business owned and 
controlled by socially and economically disadvantaged individuals or on 
behalf of a qualified HUBZone small business concern.
    (b) Eighty percent. SBA reimburses a Prior Approval Surety in an 
amount not to exceed 80% of the Loss incurred and paid on bonds for 
Contracts in excess of $100,000 which are executed on behalf of non-
disadvantaged concerns.
    (c) Contract increase to over $100,000. If the Contract amount 
increases to more than $100,000 after Execution of the bond, the 
guarantee percentage decreases by one percentage point for each $5,000 
of increase or part thereof, but it does not decrease below 80%. This 
provision applies only to guarantees which qualify under paragraph 
(a)(1) of this section.
    (d) Contract increase to over $2,000,000. If the Contract amount 
increases above the statutory limit of $2,000,000 after Execution of the 
bond, SBA's share of the Loss is limited to that percentage of the 
increased Contract amount which the statutory limit represents, 
multiplied by the guarantee percentage approved by SBA. For example if a 
Contract amount increases to $2,100,000, SBA's share of the Loss under 
an 80% guarantee is limited to 76.1% [2,000,000 / 2,100,000 = 95.2% x 
80% = 76.1%].
    (e) Contract decrease to $100,000 or less. If the Contract amount 
decreases to $100,000 or less after Execution of the bond, SBA's 
guarantee percentage increases to 90% if the Surety provides SBA with 
evidence supporting the decrease and any other information or documents 
requested.

[61 FR 3271, Jan. 31, 1996, as amended at 64 FR 18324, Apr. 14, 1999; 66 
FR 30804, June 8, 2001]



Sec. 115.32  Fees and Premiums.

    (a) Surety's Premium. A Prior Approval Surety must not charge a 
Principal an amount greater than that authorized by the appropriate 
insurance department. The Surety must not require the Principal to 
purchase casualty or other insurance or any other services from the 
Surety or any Affiliate or agent of the Surety. The Surety must not 
charge non-Premium fees to a Principal unless the Surety performs other 
services for the Principal, the additional fee is permitted by State 
law, and the Principal agrees to the fee.
    (b) SBA charge to Principal. SBA does not charge Principals 
application or Bid Bond guarantee fees. If SBA guarantees a Final Bond, 
the Principal must pay a guarantee fee equal to a certain percentage of 
the Contract amount. The percentage is determined by SBA and is 
published in Notices in the Federal Register from time to time. The 
Principal's fee is rounded to the nearest dollar and is to be remitted 
to SBA by the Surety together with the form required under 
Sec. 115.30(d). See paragraph (d) of this section for additional 
requirements when the Contract amount changes.
    (c) SBA charge to Surety. SBA does not charge Sureties application 
or Bid Bond guarantee fees. Subject to Sec. 115.18(a)(4), the Surety 
must pay SBA a guarantee fee on each guaranteed bond (other than a Bid 
Bond) in the ordinary course of business. The fee is a

[[Page 186]]

certain percentage of the bond Premium, determined by SBA and published 
in Notices in the Federal Register from time to time. The fee is rounded 
to the nearest dollar. SBA does not receive any portion of a Surety's 
non-Premium charges. See paragraph (d) of this section for additional 
requirements when the bond amount or the Contract amount changes.
    (d) Contract or bond increases/decreases--(1) Notification and 
approval. The Prior Approval Surety must notify SBA of any increases or 
decreases in the Contract or bond amount that aggregate 25% or $50,000, 
as soon as the Surety acquires knowledge of the change. Whenever the 
original bond amount increases as a result of a single change order of 
at least 25% or $50,000, the prior written approval of such increase by 
SBA is required on a supplemental Prior Approval Agreement (Supplemental 
Form 990) and is conditioned upon payment by the Surety of the increase 
in the Principal's guarantee fee as set forth in paragraph (d)(2) of 
this section.
    (2) Increases; fees. Notification of increases in the Contract or 
bond amount under this paragraph (d) must be accompanied by payment of 
the increase in the Principal's guarantee fee computed on the increase 
in the Contract amount. If the increase in the Principal's fee is less 
than $40, such increase is not due until all unpaid increases in the 
Principal's fee aggregate at least $40. The Surety's check for payment 
of the increase in the Surety's guarantee fee, computed on the increase 
in the bond Premium, may be submitted in the ordinary course of 
business. Increases in the Surety's fee are not due until they aggregate 
at least $40.
    (3) Decreases; refunds. Whenever SBA is notified of a decrease in 
the Contract or bond amount, SBA will refund to the Principal a 
proportionate amount of the Principal's guarantee fee and rebate to the 
Surety a proportionate amount of SBA's Premium share in the ordinary 
course of business. If the amount to be refunded or rebated is less than 
$40, such refund or rebate will not be made until the amounts to be 
refunded or rebated, respectively, aggregate at least $40. Upon receipt 
of the refund, the Surety must promptly pay a proportionate amount of 
its Premium to the Principal.



Sec. 115.33  Surety bonding line.

    A surety bonding line is a written commitment by SBA to a Prior 
Approval Surety which provides for the Surety's Execution of multiple 
bonds for a specified small business strictly within pre-approved terms, 
conditions and limitations. In applying for a bonding line, the Surety 
must provide SBA with information on the applicant as requested. In 
addition to the other limitations and provisions set forth in this part 
115, the following conditions apply to each surety bonding line:
    (a) Underwriting. A bonding line may be issued by SBA for a 
Principal only if the underwriting evaluation is satisfactory. The Prior 
Approval Surety must require the Principal to keep it informed of all 
its contracts, whether bonded by the same or another surety or unbonded, 
during the term of the bonding line.
    (b) Bonding line conditions. The bonding line contains limitations 
on the following:
    (1) The term of the bonding line, not to exceed 1 year subject to 
renewal in writing;
    (2) The total dollar amount of the Principal's bonded and unbonded 
work on hand at any time, including outstanding bids, during the term of 
the bonding line;
    (3) The number of such bonded and unbonded contracts outstanding at 
any time during the term of the bonding line;
    (4) The maximum dollar amount of any single guaranteed bonded 
Contract;
    (5) The timing of Execution of bonds under the bonding line--bonds 
must be dated and Executed before the work on the underlying Contract 
has begun, or the Surety must submit to SBA the documentation required 
under Sec. 115.19(f)(1)(ii); and
    (6) Any other limitation related to type, specialty of work, 
geographical area, or credit.
    (c) Excess bonding. If, after a bonding line is issued, the 
Principal desires a bond and the Surety desires a guarantee exceeding a 
limitation of the

[[Page 187]]

bonding line, the Surety must submit an application to SBA under regular 
procedures.
    (d) Submission of forms to SBA--(1) Bid Bonds. Within 15 business 
days after the Execution of any Bid Bonds under a bonding line, the 
Surety must submit a ``Surety Bond Guarantee Underwriting Review'' (SBA 
Form 994B) to SBA for approval. If that form is already on file with SBA 
and no new financial statements are required or have been received from 
the Principal, a ``Surety Bond Guarantee Review Update'' (SBA Form 994C) 
may be submitted instead. If the Surety fails to submit either form 
within this time period, SBA's guarantee of the bond will be void from 
its inception unless SBA determines otherwise upon a showing that a 
valid reason exists why the timely submission was not made.
    (2) Final Bonds. Within 15 business days after the Execution of any 
Final Bonds under a bonding line, the Surety must submit a signed Prior 
Approval Agreement and a ``Surety Bond Guarantee Underwriting Review'' 
(SBA Form 994B) to SBA for approval. If that form is already on file 
with SBA and no new financial statements are required or have been 
received from the Principal, a ``Surety Bond Guarantee Review Update'' 
(SBA Form 994C) may be submitted instead. If the Surety fails to submit 
these forms together with the Principal's payment for its guarantee fee 
within this time period, SBA's guarantee of the bond will be void from 
its inception unless SBA determines otherwise upon a showing that the 
Contract is not in default and a valid reason exists why the timely 
submission was not made.
    (3) Additional information. The Surety must submit any other data 
SBA requests.
    (e) Cancellation of bonding line--(1) Optional cancellation. Either 
SBA or the Surety may cancel a bonding line at any time, with or without 
cause, upon written notice to the other party. Upon the receipt of any 
adverse information concerning the Principal, the Surety must promptly 
notify SBA, and SBA may cancel the bonding line.
    (2) Mandatory cancellation. Upon the occurrence of a default by the 
Principal, whether under a contract bonded by the same or another surety 
or an unbonded contract, the Surety must immediately cancel the bonding 
line.
    (3) Effect of cancellation. Cancellation of a bonding line by SBA is 
effective upon receipt of written notice by the Surety. Bonds issued 
before the effective date of cancellation remain guaranteed by SBA. Upon 
cancellation by SBA or the Surety, the Surety must promptly notify the 
Principal in writing.



Sec. 115.34  Minimization of Surety's Loss.

    (a) Imminent Breach--(1) Prior approval requirement. SBA will 
reimburse its guaranteed share of payments made by a Surety to avoid or 
attempt to avoid an Imminent Breach of the terms of a Contract covered 
by an SBA guaranteed bond only if the payments were made with the prior 
approval of OSG. OSG's prior approval will be given only if the Surety 
demonstrates to SBA's satisfaction that a breach is imminent and that 
there is no other recourse to prevent such breach.
    (2) Amount of reimbursement. The aggregate of the payments by SBA to 
avoid Imminent Breach cannot exceed 10% of the Contract amount, unless 
the Administrator finds that a greater payment (not to exceed the 
guaranteed share of the bond penalty) is necessary and reasonable. In no 
event will SBA make any duplicate payment pursuant to this or any other 
provision of this part 115.
    (3) Recordkeeping requirement. The Surety must keep records of 
payments made to avoid Imminent Breach.
    (b) Salvage and recovery. A Prior Approval Surety must pursue all 
possible sources of salvage and recovery until SBA concurs with the 
Surety's recommendation for a discontinuance or for a settlement. The 
Surety must certify that continued pursuit of salvage and recovery would 
be neither economically feasible nor a viable strategy in maximizing 
recovery. See also Sec. 115.17(b).



Sec. 115.35  Claims for reimbursement of Losses.

    (a) Notification requirements--(1) Events requiring notification. A 
Prior Approval Surety must notify OSG of the occurrence of any of the 
following:

[[Page 188]]

    (i) Legal action under the bond has been initiated.
    (ii) The Obligee has declared the Principal to be in default under 
the Contract.
    (iii) The Surety has established a claim reserve for the bond.
    (iv) The Surety has received any adverse information concerning the 
Principal's financial condition or possible inability to complete the 
project or to pay laborers or suppliers.
    (2) Timing of notification. Notification must be made in writing at 
the earlier of the time the Surety applies for a guarantee on behalf of 
an affected Principal, or within 30 days of the date the Surety acquires 
knowledge, or should have acquired knowledge, of any of the listed 
events.
    (b) Surety action. The Surety must take all necessary steps to 
mitigate Losses resulting from any of the events in paragraph (a) of 
this section, including the disposal at fair market value of any 
collateral held by or available to the Surety. Unless SBA notifies the 
Surety otherwise, the Surety must take charge of all claims or suits 
arising from a defaulted bond, and compromise, settle and defend such 
suits. The Surety must handle and process all claims under the bond and 
all settlements and recoveries as it does on non-guaranteed bonds.
    (c) Claim reimbursement requests. (1) Claims for reimbursement for 
Losses which the Surety has paid must be submitted (together with a copy 
of the bond, the bonded Contract, and any indemnity agreements) with the 
initial claim to OSG on a ``Default Report, Claim for Reimbursement and 
Record of Administrative Action'' (SBA Form 994H), within 1 year from 
the time of each disbursement. Claims submitted after 1 year must be 
accompanied by substantiation satisfactory to SBA. The date of the claim 
for reimbursement is the date of receipt of the claim by SBA, or such 
later date as additional information requested by SBA is received.
    (2) The Surety must also submit evidence of the disposal of all 
collateral at fair market value.
    (3) SBA may request additional information prior to reimbursing the 
Surety for its Loss.
    (4) Subject to the offset provisions of part 140, SBA pays its share 
of the Loss incurred and paid by the Surety within 90 days of receipt of 
the requisite information.
    (5) Claims for reimbursement and any additional information 
submitted are subject to review and audit by SBA, including but not 
limited to the Surety's compliance with SBA's regulations and forms.
    (d) Status updates. The Surety must submit semiannual status reports 
on each claim 6 months after the initial default notice, and then every 
6 months. The Surety must notify SBA immediately of any substantial 
changes in the status of the claim or the amounts of Loss reserves.
    (e) Reservation of SBA rights. The payment by SBA of a Surety's 
claim does not waive or invalidate any of the terms of the Prior 
Approval Agreement, the regulations set forth in this part 115, or any 
defense SBA may have against the Surety. Within 30 days of receipt of 
notification that a claim or any portion of a claim should not have been 
paid by SBA, the Surety must repay the specified amounts to SBA.



Sec. 115.36  Indemnity settlements and reinstatement of Principal.

    (a) Indemnity settlements. (1) An indemnity settlement occurs when a 
defaulted Principal and its Surety agree upon an amount, less than the 
actual loss under the bond, which will satisfy the Principal's 
indebtedness to the Surety. Sureties must not agree to any indemnity 
settlement proposal or enter into any such agreement without SBA's 
concurrence.
    (2) Any settlement proposal submitted for SBA's consideration must 
include current financial information, including financial statements, 
tax returns, and credit reports, together with the Surety's written 
recommendations. It should also indicate whether the Principal is 
interested in further bonding.
    (3) The Surety must pay SBA its pro rata share of the settlement 
amount within 90 days of receipt. Prior to closing the file on a 
Principal, the Surety must certify that SBA has received its pro rata 
share of all indemnity recovery.

[[Page 189]]

    (b) Conditions for reinstatement. At any time after a Principal 
becomes ineligible for further bond guarantees under Sec. 115.14(a), the 
Surety may recommend that such Principal's eligibility be reinstated. 
OSG may agree to reinstate the Principal and its Affiliates if:
    (1) The Principal's guarantee fee has been paid to SBA and SBA 
receives evidence that the Principal has paid all delinquent amounts due 
to the Surety (including amounts for Imminent Breach); or
    (2) The Surety has settled its claim with the Principal for an 
amount and on terms accepted by OSG; or
    (3) The Principal contests a claim and provides collateral, 
acceptable to the Surety and OSG, which has a liquidation value of at 
least the amount of the claim including related expenses; or
    (4) The Principal's indebtedness to the Surety is discharged by 
operation of law (e.g., bankruptcy discharge); or
    (5) OSG and the Surety determine that further bond guarantees are 
appropriate.
    (c) Underwriting after reinstatement. A guarantee application 
submitted after reinstatement of the Principal's eligibility is subject 
to a very stringent underwriting review.



            Subpart C--Preferred Surety Bond (PSB) Guarantees



Sec. 115.60  Selection and admission of PSB Sureties.

    (a) Selection of PSB Sureties. SBA's selection of PSB Sureties will 
be guided by, but not limited to, these factors:
    (1) An underwriting limitation of at least $2,000,000 on the U.S. 
Treasury Department list of acceptable sureties;
    (2) An agreement to charge Principals no more than the Surety 
Association of America's advisory premium rates in effect on August 1, 
1987;
    (3) Premium income from contract bonds guaranteed by any government 
agency (Federal, State or local) of no more than one- quarter of the 
total contract bond premium income of the Surety;
    (4) The vesting of underwriting authority for SBA guaranteed bonds 
only in employees of the Surety;
    (5) The vesting of final settlement authority for claims and 
recovery under the PSB program only in employees of the Surety's 
permanent claims department; and
    (6) The rating or ranking designations assigned to the Surety by 
recognized authority.
    (b) Admission of PSB Sureties. A Surety admitted to the PSB program 
must execute a PSB Agreement before approving SBA guaranteed bonds. No 
SBA guarantee attaches to bonds approved before the AA/SG or designee 
has countersigned the Agreement.

[61 FR 3271, Jan. 31, 1996, as amended at 66 FR 30804, June 8, 2001]



Sec. 115.61  Duration of PSB program.

    The PSB program terminates on September 30, 2003, unless extended by 
legislation. SBA guarantees effective under this program on or before 
September 30, 2003, will remain in effect after such date.

[61 FR 3271, Jan. 31, 1996, as amended at 63 FR 12605, Mar. 16, 1998; 66 
FR 30804, June 8, 2001]



Sec. 115.62  Prohibition on participation in Prior Approval program.

    Neither a PSB Surety nor any of its Affiliates is eligible to submit 
applications under subpart B of this part.



Sec. 115.63  Allotment of guarantee authority.

    (a) General. SBA allots to each PSB Surety a periodic maximum 
guarantee authority. No SBA guarantee attaches to bonds approved by a 
PSB Surety if the bonds exceed the allotted authority for the period in 
which the bonds are approved. No reliance on future authority is 
permitted. An allotment can be increased only by prior written 
permission of SBA.
    (b) Execution of Bid Bonds. When the PSB Surety Executes a Bid Bond, 
SBA debits the Surety's allotment for an amount equal to the guarantee 
percentage of the estimated penal sum of the Final Bond SBA would 
guarantee if the Contract were awarded. If the Contract is then awarded 
for an amount other than the bid amount, or if the bid is withdrawn or 
the Bid Bond guarantee has expired (see Sec. 115.12(c)), SBA

[[Page 190]]

debits or credits the Surety's allotment accordingly.
    (c) Execution of Final Bonds. If the PSB Surety Executes a 
guaranteed Final Bond, but not the related Bid Bond, SBA debits the 
Surety's allotment for an amount equal to the guarantee percentage of 
the penal sum of the Final Bond. SBA will debit the allotment for 
increases, and credit the allotment for decreases, in the bond amount.
    (d) Release and non-issuance of Final Bonds. The release of Final 
Bonds upon completion of the Contract does not restore the corresponding 
allotment. If, however, a PSB Surety approves a Final Bond but never 
issues the bond, SBA will credit the Surety's allotment for an amount 
equal to the guarantee percentage of the penal sum of the bond. In that 
event, the Surety must notify SBA as soon as possible, but in no event 
later than 5 business days after the non-issuance has been determined. 
Until the Surety has so notified SBA, it cannot rely on such credit.



Sec. 115.64  Timeliness requirement.

    There must be no Execution or approval of a bond by a PSB Surety 
after commencement of work under a Contract unless the Surety obtains 
written approval from the AA/SG. To apply for such approval, the Surety 
must submit a completed ``Surety Bond Guarantee Agreement Addendum'' 
(SBA Form 991), together with the evidence and certifications described 
in Sec. 115.19(f)(1)(ii).



Sec. 115.65  General PSB procedures.

    (a) Retention of information. A PSB Surety must comply with all 
applicable SBA regulations and obtain from its applicants all the 
information and certifications required by SBA. The PSB Surety must 
document compliance with SBA regulations and retain such certifications 
in its files, including a contemporaneous record of the date of approval 
and Execution of each bond. See also Sec. 115.19(f). The certifications 
and other information must be made available for inspection by SBA or 
its agents and must be available for submission to SBA in connection 
with the Surety's claims for reimbursement. The PSB Surety must retain 
the certifications and other information for the term of the bond, plus 
such additional time as may be required to settle any claims of the 
Surety for reimbursement from SBA and to attempt salvage or other 
recovery, plus an additional 3 years. If there are any unresolved audit 
findings in relation to a particular bond, the Surety must maintain the 
related certifications and other information until the findings are 
resolved.
    (b) Usual staff and procedures. The approval, Execution and 
administration by a PSB Surety of SBA guaranteed bonds must be handled 
in the same manner and with the same staff as the Surety's activity 
outside the PSB program. The Surety must request job status reports from 
Obligees in accordance with its own procedures.
    (c) Notification to SBA. (1) Approvals. A PSB Surety must notify SBA 
by electronic transmission or monthly bordereau, as agreed between the 
Surety and SBA, of all approved Bid and Final Bonds, and of the Surety's 
approval of increases and decreases in the Contract or bond amount. The 
notice must contain the information specified from time to time in 
agreements between the Surety and SBA. SBA may deny liability with 
respect to Final Bonds for which SBA has not received timely notice.
    (2) Other events requiring notification. The PSB Surety must notify 
SBA within 30 calendar days of the name and address of any Principal 
against whom legal action on the bond has been instituted; whenever an 
Obligee has declared a default; whenever the Surety has established or 
added to a claim reserve; of the recovery of any amounts on the 
guaranteed bond; and of any decision by the Surety to bond any such 
Principal again.



Sec. 115.66  Fees.

    The PSB Surety must pay SBA a certain percentage of the Premium it 
charges on Final Bonds. The PSB Surety must also remit to SBA the 
Principal's payment for its guarantee fee, equal to a certain percentage 
of the Contract amount. The fee percentages are determined by SBA and 
are published in Notices in the Federal Register from time to time. Each 
fee is

[[Page 191]]

rounded to the nearest dollar. The Surety must remit SBA's Premium share 
and the Principal's guarantee fee with the bordereau listing the related 
Final Bond, as required in the PSB Agreement.



Sec. 115.67  Changes in Contract or bond amount.

    (a) Increases. The PSB Surety must process Contract or bond amount 
increases within its allotment in the same manner as initial guaranteed 
bond issuances (see Sec. 115.65(c)(1)). The Surety must present checks 
for additional fees due from the Principal and the Surety on increases 
aggregating 25% of the contract or bond amount or $50,000, and attach 
such payments to the respective monthly bordereau. If the additional 
Principal's fee or Surety's fee is less than $40, such fee is not due 
until all unpaid increases in such fee aggregate at least $40.
    (b) Decreases. If the Contract or bond amount is decreased, SBA will 
refund to the Principal a proportionate amount of the guarantee fee, and 
adjust SBA's Premium share accordingly in the ordinary course of 
business. No refund or adjustment will be made until the amounts to be 
refunded or rebated, respectively, aggregate at least $40.



Sec. 115.68  Guarantee percentage.

    SBA reimburses a PSB Surety in an amount not to exceed 70% of the 
Loss incurred and paid. Where the Contract amount, after the Execution 
of the bond, increases beyond the statutory limit of $2,000,000, SBA's 
share of the Loss is limited to that percentage of the increased 
Contract amount which the statutory limit represents, multiplied by the 
guarantee percentage approved by SBA. For an example, see 
Sec. 115.31(d).

[61 FR 3271, Jan. 31, 1996, as amended at 66 FR 30804, June 8, 2001]



Sec. 115.69  Imminent Breach.

    (a) No prior approval requirement. SBA will reimburse a PSB Surety 
for the guaranteed portion of payments the Surety makes to avoid or 
attempt to avoid an Imminent Breach of the terms of a Contract covered 
by an SBA guaranteed bond. The PSB Surety does not need SBA approval to 
make Imminent Breach payments.
    (b) Amount of reimbursement. The aggregate of the payments by SBA 
under this section cannot exceed 10% of the Contract amount, unless the 
Administrator finds that a greater payment (not to exceed the guaranteed 
portion of the bond penalty) is necessary and reasonable. In no event 
will SBA make any duplicate payment under any provision of these 
regulations in this part.
    (c) Recordkeeping requirement. The PSB Surety must keep records of 
payments made to avoid Imminent Breach.



Sec. 115.70  Claims for reimbursement of Losses.

    (a) How claims are submitted. A PSB Surety must submit claims for 
reimbursement on a form approved by SBA no later than 1 year from the 
date the Surety paid the amount. Loss is determined as of the date of 
receipt by SBA of the claim for reimbursement, or as of such later date 
as additional information requested by SBA is received. Subject to the 
offset provisions of part 140, SBA pays its share of Loss within 90 days 
of receipt of the requisite information. Claims for reimbursement and 
any additional information submitted are subject to review and audit by 
SBA.
    (b) Surety responsibilities. The PSB Surety must take all necessary 
steps to mitigate Losses when legal action against a bond has been 
instituted, when the Obligee has declared a default, and when the Surety 
has established a claim reserve. The Surety may dispose of collateral at 
fair market value only. Unless SBA notifies the Surety otherwise, the 
Surety must take charge of all claims or suits arising from a defaulted 
bond, and compromise, settle or defend the suits. The Surety must handle 
and process all claims under the bond and all settlements and recoveries 
in the same manner as it does on non-guaranteed bonds.
    (c) Reservation of SBA's rights. The payment by SBA of a PSB 
Surety's claim does not waive or invalidate any of the terms of the PSB 
Agreement, the regulations in this part 115, or any defense SBA may have 
against the Surety. Within 30 days of receipt of notification that a 
claim or any portion of a

[[Page 192]]

claim should not have been paid by SBA, the Surety must repay the 
specified amounts to SBA.



Sec. 115.71  Denial of liability.

    In addition to the grounds set forth in Sec. 115.19, SBA may deny 
liability to a PSB Surety if:
    (a) The PSB Surety's guaranteed bond was in an amount which, 
together with all other guaranteed bonds, exceeded the allotment for the 
period during which the bond was approved, and no prior SBA approval had 
been obtained;
    (b) The PSB Surety's loss was incurred under a bond which was not 
listed on the bordereau for the period when it was approved; or
    (c) The loss incurred by the PSB Surety is not attributable to the 
particular Contract for which an SBA guaranteed bond was approved.



PART 117--NONDISCRIMINATION IN FEDERALLY ASSISTED PROGRAMS OR ACTIVITIES OF SBA--EFFECTUATION OF THE AGE DISCRIMINATION ACT OF 1975, AS AMENDED--Table of Contents

Sec.
117.1  Purpose.
117.2  Application of this part.
117.3  Definitions.
117.4  Discrimination prohibited and exceptions.
117.5  Illustrative applications.
117.6  Remedial and affirmative action by recipients.
117.7  Assurances required.
117.8  Responsibilities of SBA recipients.
117.9  Compliance information.
117.10  Review procedures.
117.11  Complaint procedures.
117.12  Mediation.
117.13  Investigation and resolution of matters.
117.14  Intimidating or retaliatory acts prohibited.
117.15  Procedure for effecting compliance.
117.16  Hearings.
117.17  Decisions and notices.
117.18  Judicial review.
117.19  Effect on other regulations.
117.20  Supervision and coordination.

Appendix A to Part 117

    Authority: Age Discrimination Act of 1975, 42 U.S.C. 6101 et seq.

    Source: 50 FR 41648, Oct. 11, 1985, unless otherwise noted.

    Editorial Note: Nomenclature changes to part 117 appear at 68 FR 
51349, Aug. 26, 2003.



Sec. 117.1  Purpose.

    The purpose of this part is to effectuate the provisions of The Age 
Discrimination Act of 1975, as amended (hereinafter referred to as the 
Act), to the end that no person in the United States shall, on the basis 
of age, be excluded from participation in, be denied the benefits of, or 
be subjected to discrimination under programs or activities receiving 
financial assistance or any financial activities of the Small Business 
Administration to which this Act applies. The Act also permits 
recipients of Federal funds to continue to use certain age distinctions 
and other factors other than age which meet the requirements of the Act 
and these regulations in the conduct of programs and the provision of 
services to the public.



Sec. 117.2  Application of this part.

    (a) This part applies to all recipients of Federal financial 
assistance administered by the Small Business Administration, whether or 
not the specific type of Federal financial assistance administered is 
listed in appendix A.
    (b) For the purposes of this part, the prohibition against age 
discrimination applies to natural persons of all ages.
    (c) This part does not apply to the employment practices of any 
recipients.

[50 FR 41648, Oct. 11, 1985, as amended at 68 FR 51349, Aug. 26, 2003]



Sec. 117.3  Definitions.

    As used in this part:
    (a) The term act means the Age Discrimination Act of 1975, as 
amended (Title III of Pub. L. 94-135).
    (b) The term action means any act, activity, policy, rule, standard, 
or method of administration; or the use of any policy, rule, standard, 
or method of administration.
    (c) The term age means how old a person is, or the number of years 
from the date of a person's birth.
    (d) The term age distinction means any action using age or an age-
related term.
    (e) The term age-related means a word or words which necessarily 
imply a

[[Page 193]]

particular age or range of ages (for example, children, adult, older 
persons, but not student).
    (f) The term agency means a Federal department or agency that is 
empowered to extend financial assistance.
    (g) The term applicant means one who applies for Federal financial 
assistance.
    (h) The term Federal financial assistance includes: (1) Grants and 
loans of Federal funds; (2) the grant or donation of Federal property 
and interests in property; (3) the detail of Federal personnel; (4) the 
sale and lease of, and the permission to use (on other than a casual or 
transient basis), Federal property or any interest in such property 
without consideration, or at a nominal consideration, or at a 
consideration which is reduced for the purpose of assisting the 
recipient, or in recognition of the public interest to be served by such 
sale or lease to the recipient; and (5) any Federal agreement, 
arrangement, or other contract which has as one of its purposes the 
provision of assistance.
    (i) The term normal operation means the operation of a business or 
activity without significant changes that would impair its ability to 
meet its objectives.
    (j) The term program or activity means all of the operations of any 
entity described in paragraphs (j)(1) through (4) of this section, any 
part of which is extended Federal financial assistance:
    (1)(i) A department, agency, special purpose district, or other 
instrumentality of a State or of a local government; or
    (ii) The entity of such State or local government that distributes 
such assistance and each such department or agency (and each other State 
or local government entity) to which the assistance is extended, in the 
case of assistance to a State or local government;
    (2)(i) A college, university, or other postsecondary institution, or 
a public system of higher education; or
    (ii) A local educational agency (as defined in 20 U.S.C. 7801), 
system of vocational education, or other school system;
    (3)(i) An entire corporation, partnership, or other private 
organization, or an entire sole proprietorship--
    (A) If assistance is extended to such corporation, partnership, 
private organization, or sole proprietorship as a whole; or
    (B) Which is principally engaged in the business of providing 
education, health care, housing, social services, or parks and 
recreation; or
    (ii) The entire plant or other comparable, geographically separate 
facility to which Federal financial assistance is extended, in the case 
of any other corporation, partnership, private organization, or sole 
proprietorship; or
    (4) Any other entity which is established by two or more of the 
entities described in paragraph (j)(1), (2), or (3) of this section.
    (k) The term recipient means one who receives any Federal financial 
assistance administered by the Small Business Administration. (See 
Appendix A.) The term recipient also shall be deemed to include 
subrecipients of SBA financial assistance.
    (l) The term SBA means the Small Business Administration.
    (m) The term subrecipient means any business concern that receives 
Federal financial assistance from the primary recipient of such 
financial assistance. A subrecipient is generally regarded as a 
recipient of Federal financial assistance and has all the duties of a 
recipient in these regulations.
    (n) The term statutory objective means the purposes of the 
legislation as stated in an act, statute or ordinance or can be shown in 
the legislative history of any Federal statute, State statute, or local 
statute or ordinance adopted by an elected, general purpose legislative 
body.

[50 FR 41648, Oct. 11, 1985, as amended at 68 FR 51349, Aug. 26, 2003]



Sec. 117.4  Discrimination prohibited and exceptions.

    (a) General. To the extent that this part applies, no person in the 
United States shall, on the basis of age, be excluded from participation 
in, be denied the benefits of, or be subjected to discrimination under 
any business or activity receiving Federal financial assistance.

[[Page 194]]

    (b) Specific discriminatory actions prohibited. To the extent that 
this part applies, a recipient business or other activity may not, 
directly or through contractual arrangements, on the ground of age:
    (1) Deny an individual any services, financial aid or other benefit 
provided by the business or other activity, except where sanctioned by 
one of the exceptions stated in Sec. 117.4 (d), (e) or (f) of this 
section.
    (2) Provide any service, financial aid or other benefit, except as 
sanctioned by one of the exceptions stated below, in such a way as to 
deny or limit persons in their efforts to participate in federally-
assisted programs or activities;
    (3) Treat an individual differently from others, except as 
sanctioned by an exception stated below, in determining whether the 
person satisfied any admission, enrollment, eligibility, membership, or 
other requirement or condition which individuals must meet in order to 
be provided any service, financial aid or other benefit provided by the 
business or activity.
    (c) The specific forms of prohibited discrimination in paragraph (b) 
of this section does not limit the generality of the prohibition in 
paragraph (a) of this section.
    (d) Exception 1. A recipient is permitted to take an action 
otherwise prohibited by paragraphs (a) and (b) of this section, if the 
action reasonably takes into account age as a factor necessary to the 
normal operation or the achievement of any statutory objective of a 
business or activity. An action reasonably takes into account age as a 
factor necessary to the normal operation or the achievement of any 
statutory objective of a business or activity, if:
    (1) Age is used as a measure or approximation of one or more other 
characteristics; and
    (2) The other characteristic(s) must be measured or approximated in 
order for the normal operation of the business or activity to continue, 
or to achieve any statutory objective of the business or activity; and
    (3) The other characteristic(s) can be reasonably measured or 
approximated by the use of age; and
    (4) The other characteristic(s) are impractical to measure directly 
on an individual basis.

    Note: All of the above factors must be met in order to exclude a 
business activity from the provisions of this part.

    (e) Exception 2. A recipient is permitted to take an action 
otherwise prohibited by paragraphs (a) and (b) of this section which is 
based on a factor other than age, even though that action may have a 
disproportionate effect on persons of different ages. An action may be 
based on a factor other than age if the factor bears a direct and 
substantial relationship to the normal operation of the business or 
activity or to the achievement of a statutory objective.
    (f) Exception 3. A recipient is permitted to take an action 
otherwise prohibited by paragraphs (a) and (b) of this section if an age 
distinction is contained in that part of a Federal, State or local 
statute or ordinance adopted by an elected general purpose legislative 
body which provides any benefits or assistance to, establishes criteria 
for participation in, or describes intended beneficiaries or target 
groups in age-related terms.
    (g) The burden of proving that an age distinction or other action 
falls within the exceptions outlined in paragraphs (d), (e), and (f) of 
this section on the recipient of Federal financial assistance.



Sec. 117.5  Illustrative applications.

    (a) Discrimination in providing financial assistance. Development 
companies and small business investment companies, which apply for or 
receive any financial assistance may not discriminate on the ground of 
age in providing financial assistance to small business concerns. Such 
discrimination prohibited by Sec. 117.4 includes but is not limited to 
the failure or refusal, because of the age of the applicant, or the age 
of the applicant's principal owner or operating official to extend a 
loan or equity financing to any business concern; or, in the case of 
financing which has actually been extended, the failure or refusal 
because of the age of the recipient, or the age of recipient's principal 
owner or operating official to accord the recipient fair treatment and 
the

[[Page 195]]

customary courtesies regarding such matters as default, grace periods 
and the like.
    (b) Discrimination in accommodations or services. Small Business 
Concerns and others who or which apply for or receive any financial 
assistance administered by the Small Business Administration, such as 
but not limited to physicians, dentists, hospitals, schools, libraries, 
and other individuals or organizations may not discriminate in the 
treatment, accommodations or services they provide to their patients, 
students, members, passengers, or members of the public, except when the 
normal operation or statutory objective of the business or activity of 
the intended beneficiary is designated in age-related terms, whether or 
not operated for profit. Action by such business or activity to be 
excluded from compliance with this regulation must fall within the 
exceptions enumerated in Sec. 117.4 (d), (e), and (f) of this part.
    (c) The discrimination prohibited by Sec. 117.5(b) includes, but is 
not limited to the failure or refusal, because of age, to accept a 
patient, student, member, customer, client, or passenger, except when 
the imposition of this prohibition would interfere with the normal 
operation of the business, e.g., pediatricians, nursery schools, 
geriatric clinics.



Sec. 117.6  Remedial and affirmative action by recipients.

    (a) Where a recipient is found to have discriminated on the basis of 
age, the recipient shall take any remedial action which the Agency may 
require to overcome the effects of the discrimination. If another 
recipient exercises control over the recipient that has discriminated, 
both recipients may be required to take remedial action.
    (b) Even in the absence of a finding of discrimination, a recipient 
may take affirmative action to overcome the effects of conditions that 
resulted in limited participation in the recipient's program or activity 
on the basis of age.
    (c) If a recipient operating a program or activity which serves the 
elderly or children in addition to persons of other ages, provides 
special benefits to the elderly or to children, the provision of those 
benefits shall be presumed to be voluntary affirmative action provided 
that it does not have the effect of excluding otherwise eligible persons 
from participation in the program or activity.



Sec. 117.7  Assurances required.

    An application for financial assistance administered by the Small 
Business Administration shall, as a condition of its approval and the 
extension of such assistance, contain or be accompanied by an assurance 
that the recipient will comply with this part. SBA shall specify the 
form of the foregoing assurance, and the extent to which like assurances 
will be required of contractors and subcontractors, transferees, 
successors, and other participants.



Sec. 117.8  Responsibilities of SBA recipients.

    (a) Each SBA recipient has the primary responsibility to ensure that 
its programs or activities are in compliance with the Act and these 
regulations, and shall take steps to eliminate violations of the Act. A 
recipient also has responsibility to maintain records, provide 
information, and to afford SBA access to its records to the extent SBA 
finds necessary to determine whether the recipient is in compliance with 
the Act and these regulations. (OMB No. 3245 0076)
    (b) Where a recipient passes on Federal financial assistance from 
SBA to subrecipients, the recipient shall provide the subrecipients 
written notice of their obligations under the Act and these regulations.
    (c) Each recipient shall make necessary information about the Act 
and these regulations available to the beneficiaries of its programs or 
activities in order to inform them about the protections against 
discrimination provided by the Act and these regulations.
    (d) Whenever an assessment indicates a violation of the Act and the 
SBA regulations, the recipient shall take corrective action.



Sec. 117.9  Compliance information.

    (a) Cooperation and assistance. SBA shall, to the fullest extent 
practicable, seek the cooperation of recipients in obtaining compliance 
with this part

[[Page 196]]

and shall provide assistance and guidance to recipients to help them 
comply voluntarily with this part.
    (b) Record Keeping. Each recipient shall keep records in such form, 
and containing such information which SBA determines may be necessary to 
ascertain whether the recipient has complied or is complying with this 
part (OMB No. 3245 0076). In the case of a small business concern which 
receives financial assistance from a development company or from a small 
business investment company, the small business concern shall also keep 
such records and information as may be necessary to enable SBA to 
determine if the small business concern is complying with this part.
    (c) Each recipient shall provide to SBA, upon request, information 
and reports which SBA determines are necessary to ascertain whether the 
recipient is complying with the Act and these regulations.
    (d) Access to sources of information. Each recipient shall permit 
reasonable access by SBA during normal business hours to such of its 
books, records, accounts, and other sources of information, and its 
facilities as may be pertinent to ascertain compliance with this part. 
Where any information required of an applicant or recipient is in the 
exclusive possession of any other agency, institution or person and that 
agency, institution or person shall fail or refuse to furnish the 
information, the recipient shall so certify and shall set forth what 
efforts it has made to obtain the required information. The recipient 
will be held responsible for submitting the information. Failure to 
submit information or permit access to sources of information required 
by SBA will subject the recipient to enforcement procedure as provided 
in Sec. 117.15 of this part.

(Information collection requirements in paragraph (c) were approved by 
the Office of Management and Budget under control number 3245-0076)



Sec. 117.10  Review procedures.

    (a) SBA shall from time to time review the practices of recipients 
to determine whether they are complying with this part. As part of a 
compliance review or complaint investigation, SBA may require a 
recipient employing 15 or more full-time employees to complete a written 
self-evaluation, in a manner specified by the Agency, of any age 
distinction imposed in its program or activity receiving Federal 
financial assistance.
    (b) If a compliance review or pre-award review indicates a violation 
of the Act or these regulations, SBA will attempt to achieve voluntary 
compliance with the Act. If voluntary compliance with the recipient 
cannot be achieved, such recipient will be subject to the enforcement 
procedure contained in Sec. 117.15 of these regulations. A refusal to 
permit an on-site compliance review during normal working hours may 
constitute noncompliance with this part.



Sec. 117.11  Complaint procedures.

    (a) Any person who believes that he/she or any specific class of 
individuals is being or has been subjected to discrimination by SBA, a 
recipient, or an applicant for assistance, prohibited by this part may, 
by himself/herself or by a representative, file with SBA a written 
complaint. The complainant has the right to have a representative at all 
stages of the complaint procedure.
    (b) A complaint must be filed not later than 180 days from the date 
of the alleged discrimination, unless the time filing is extended by 
SBA. The Adminstrator, the Director, Office of Equal Employment 
Opportunity and Compliance, and the Chief, Office of Civil Rights 
Compliance, are the only officials who may waive the 180-day time limit 
for filing complaints under this part. SBA will consider the date a 
complaint is filed to be the date upon which the complaint is sufficient 
to be processed.
    (c) Each complaint will be reviewed to ensure that it falls within 
the coverage of the Act and contains all information necessary for 
further processing.
    (d) SBA will attempt to facilitate the filing of complaints wherever 
possible, including taking the following actions:
    (1) Accepting as a sufficient complaint, any written statement which 
identifies the parties involved and the date the complainant first had 
knowledge of the alleged violation, describes

[[Page 197]]

generally the action or practice complained of, and is signed by the 
complainant.
    (2) Freely permitting a complainant to add information to the 
complaint to meet the requirements of a sufficient complaint.
    (3) Notifying the complainant and the recipient of their rights and 
obligations under the complaint procedure, including the right to have a 
representative at all stages of the complaint procedure.
    (4) Notifying the complainant and the recipient (or their 
representatives) of their right to contact the Chief, Office of Civil 
Rights Compliance, for information and assistance regarding the 
complaint resolution process.
    (e) SBA will return to the complainant any complaint filed under the 
jurisdiction of this regulation, but found to be outside the 
jurisdiction of this regulation, and will state the reason(s) why it is 
outside the jurisdiction of this regulation.



Sec. 117.12  Mediation.

    (a) SBA shall, after ensuring that the complaint falls within the 
coverage of this Act and all information necessary for further 
processing is contained therein, unless the age distinction complained 
of is clearly within an exception, promptly refer the complaint to the 
Federal Mediation and Conciliation Service (FMCS).
    (b) SBA shall, to the extent possible, require the participation of 
the recipient and the complainant in the mediation process in an effort 
to reach a mutually satisfactory settlement of the complaint or make an 
informed judgment that an agreement is not possible. Both parties need 
not meet with the mediator at the same time.
    (c) If the complainant and the recipient reach a mutually 
satisfactory resolution of the complaint during the mediation period, 
the mediator shall prepare a written statement of the agreement and have 
the complainant and recipient sign it.
    (d) A copy of the written mediation agreement will be referred to 
SBA, and no further action will be taken unless it appears that either 
the complainant or the recipient (or other alleged discriminator subject 
to this part) fails to comply with the agreement.
    (e) If at the end of 60 days after the receipt of a complaint by 
SBA, or at any time prior thereto, an agreement is reached or the 
mediator determines an agreement cannot be reached through mediation, 
the agreement or complaint will be returned to SBA.
    (f) This 60-day period may be extended by the mediator, with the 
concurrence of SBA for not more than 30 days if the mediator determines 
that an agreement will likely be reached during the extended period.
    (g) The mediator shall protect the confidentiality of all 
information obtained in the course of the mediation process. No mediator 
shall testify in any adjudicative proceeding, produce any document, or 
otherwise disclose any information obtained during the course of the 
mediation process without prior approval of the head of the agency 
appointing the mediator.



Sec. 117.13  Investigation and resolution of matters.

    (a) SBA will make a prompt investigation whenever a compliance 
review indicates a possible failure to comply with this part by the 
recipient and additional information is needed by SBA to assure 
compliance with this part, or when an unresolved complaint has been 
returned by the FMCS, or when it appears that the complainant or the 
recipient is failing to comply with a mediation agreement. The 
investigation shall include a review of the pertinent practices and 
policies of the recipient, the circumstances under which the possible 
noncompliance with this part occurred, and other factors relevant to a 
determination as to whether the recipient is complying, is not 
complying, or has failed to comply with this part.
    (b) Resolution of matters. If an investigation indicates a failure 
to comply with this part, SBA will so inform the complainant, if 
applicable, and the recipient that the matter will be resolved by 
informal means that are mutually agreeable to the parties, whenever 
possible.
    (1) If, during the course of an investigation, the matter is 
resolved by informal means, SBA will put any agreement in writing and 
have it signed by

[[Page 198]]

the parties and an authorized official of SBA.
    (2) If investigation indicates a violation of the Act or these 
regulations, SBA will attempt to achieve voluntary compliance. If SBA 
cannot achieve voluntary compliance, it will begin enforcement as 
described in Sec. 117.15.
    (3) If an investigation does not warrant action, SBA will so inform 
the complainant, if applicable, and the recipient in writing.



Sec. 117.14  Intimidating or retaliatory acts prohibited.

    No complainant, recipient or other person shall intimidate, 
threaten, coerce, or discriminate against any individual for the purpose 
of interfering with any right or privilege secured by this part or 
because an individual or group has made a complaint, testified, 
assisted, or participated in any manner in an investigation, review, 
enforcement process, or hearing under this part. The identity of 
complainants shall be kept confidential except to the extent necessary 
to carry out the purposes of this part, including the conduct of any 
investigation, hearing, mediation, or judicial proceeding.



Sec. 117.15  Procedure for effecting compliance.

    (a) General. (1) If there appears to be a failure or threatened 
failure to comply with this part by an applicant or recipient and if the 
noncompliance or threatened noncompliance cannot be resolved by informal 
means, compliance with this part may be effected by suspending, 
terminating, or refusing any financial assistance approved but not yet 
disbursed to an applicant. In the case of loans partially or fully 
disbursed, compliance with this part may be effected by calling, 
canceling, terminating, accelerating repayment, or suspending in whole 
or in part the Federal financial assistance provided. The determination 
of the recipient's violation may be made only after a recipient has had 
an opportunity for a hearing on the record before an administrative law 
judge.
    (2) In addition, compliance may be effected by any other means 
authorized by law. Such other means may include, but are not limited to:
    (i) Action by SBA to accelerate the maturity of the recipient's 
obligation;
    (ii) Referral to the Department of Justice with a recommendation 
that appropriate proceedings be brought to enforce any rights of the 
United States under any law of the United States or obligations of the 
recipient created by the Act or this part; and
    (iii) Use of any requirement of or referral to any Federal, State or 
local government agency that will have the effect of correcting a 
violation of the Act or these regulations.
    (3) If there appears to be a failure or threatened failure to comply 
with this part by an SBA office or official, the Chief, Office of Civil 
Rights Compliance, through the Director, Office of Equal Employment 
Opportunity and Compliance, will recommend appropriate corrective action 
to the Administrator. Any resulting adverse action against an SBA 
employee shall follow Office of Personnel Management and SBA procedures 
for such action.
    (b) Noncompliance with Secs. 117.7 and 117.9. If an applicant fails 
or refuses to furnish an assurance required under Sec. 117.7, or fails 
to provide information or allow SBA access to information under 
Sec. 117.9 or otherwise fails or refuses to comply with a requirement 
imposed by or pursuant to those sections, Federal financial assistance 
may be deferred for a period not to exceed 60 days after the applicant 
has received a notice for an opportunity for hearing under Sec. 117.16, 
or unless a hearing has begun within that time, or the time for 
beginning the hearing has been extended by mutual consent of the 
recipient and the Agency, for purposes of determining what constitutes 
mutual consent, the Agency shall be deemed to have consented to any 
extension requested by the recipient and granted by the administrative 
law judge (hearing officer), whether or not the Agency initially 
approved the extension. A deferral may not continue for more than 30 
days after the close of the hearing, unless the hearing results in a 
finding against the applicant or recipient.
    (c) SBA will not take action toward accelerating repayment, 
suspending, terminating, or refusing financial assistance until:

[[Page 199]]

    (1) SBA has advised the applicant or recipient of the failure to 
comply and has determined that compliance cannot be secured by voluntary 
means;
    (2) There has been an express finding on the record, after an 
opportunity for hearing, of a failure by the applicant or recipient to 
comply with a requirement imposed by or pursuant to this part;
    (3) The action has been approved by the Administrator of SBA 
pursuant to Sec. 117.17; and
    (4) The expiration of 30 days after SBA has filed with the committee 
of the House and the committee of the Senate having legislative 
jurisdiction over the form of financial assistance involved, a full 
written report of the circumstances and the grounds for such action.
    (d) Other means authorized by law. No action to effect compliance by 
any other means authorized by law shall be taken until:
    (1) SBA has determined that compliance cannot be secured by 
voluntary means;
    (2) The action has been approved by the Administrator or designee;
    (3) The expiration of 30 days after SBA has filed with the committee 
of the House and the committee of the Senate having legislative 
jurisdiction over the form of financial assistance involved, a full 
written report of the circumstances and the grounds for such action;
    (4) The applicant or recipient has been notified of the failure to 
comply, and of the action to be taken to effect compliance; and
    (5) The expiration of at least 10 days from the mailing of such 
notice to the applicant or recipient or other person. During this period 
of at least 10 days from the mailing of such notice to the applicant or 
recipient or other person, additional efforts shall be made to persuade 
the applicant or recipient to comply with this part and to take such 
corrective action as may be appropriate.



Sec. 117.16  Hearings.

    (a) Opportunity for hearing. Whenever an opportunity for a hearing 
is required by Sec. 117.15, reasonable notice shall be given by 
registered or certified mail, return receipt requested, to the affected 
applicant or recipient. This notice shall advise the applicant or 
recipient of the action proposed to be taken, the specific provision 
under which the proposed action against it is to be taken, and the 
matters of fact or law asserted as the basis for this action, and 
either.
    (1) Fix a date not less than 20 days after the date of such notice 
within which the applicant or recipient may request the Office of 
Hearings and Appeals (OHA) that the matter be scheduled for hearing; or
    (2) Advise the applicant or recipient that the matter in question 
has been set down for hearing at a stated place and time. The time and 
place so fixed shall be reasonable and shall be subject to change for 
cause. The complainant shall be advised of the time and place of the 
hearing. An applicant or recipient may waive a hearing and submit 
written information and argument for the record. The failure of an 
applicant or recipient to appear at a hearing for which a date has been 
set shall be deemed to be a waiver of the right to a hearing and as 
consent to the making of a decision on the basis of such information as 
is available.
    (b) Time and place of hearing. Hearings shall be held at OHA in 
Washington, DC, at a time fixed by OHA unless that office determines 
that the convenience of the complainant, applicant, recipient or SBA 
requires that another place be selected. Hearings shall be held before 
an administrative law judge designated in accordance with the 
Administrative Procedure Act.
    (c) Right to counsel. In all proceedings under this section, the 
applicant or recipient and SBA shall have the right to be represented by 
counsel.
    (d) Procedures, evidence, and record. (1) The hearings, decisions, 
and any administrative review shall be conducted in conformity with the 
Administrative Procedure Act and 13 CFR part 134. Such rules of 
procedure should be consistent with this section, relate to the conduct 
of the hearing, provide for giving of notices to those referred to in 
paragraph (a) of this section, taking of testimony, exhibits, arguments, 
and briefs, request for findings and other related matters. SBA, the 
complainant,

[[Page 200]]

if any, and the applicant or recipient shall be entitled to introduce 
all relevant evidence on the issues as stated in the notice for hearing, 
or as determined by the administrative law judge conducting the hearing 
at the outset of or during the hearing.
    (2) Technical rules of evidence may be waived by the administrative 
law judge conducting a hearing pursuant to this part, but rules or 
principles designed to assure production of the most credible evidence 
available, and subject testimony to test by cross-examination shall be 
applied where reasonably necessary. The administrative law judge may 
exclude irrelevant, immaterial, or unduly repetitious evidence. All 
documents and other evidence offered or taken for the record shall be 
open to examination by the parties and opportunity shall be given to 
refute facts and arguments advanced on either side of the issues. A 
transcript shall be made of the oral evidence except to the extent the 
substance thereof is stipulated for the record. All decisions shall be 
based upon the hearing record and written findings shall be made.
    (e) Consolidated or joint hearings. In cases in which the same or 
related facts are asserted to constitute noncompliance or threatened 
noncompliance with this part, with respect to two or more forms of 
financial assistance to which this part applies, or noncompliance with 
this part and the regulations of one or more other Federal agencies 
issued under the Act, the Administrator may, by agreement with such 
other agencies, provide for the conduct of consolidated or joint 
hearings, and for the application to such hearings of rules and 
procedures not inconsistent with this part. Final decisions in such 
cases, insofar as this part is concerned, shall be made in accordance 
with Sec. 117.17.



Sec. 117.17  Decisions and notices.

    (a) Decision by an administrative law judge. If the hearing is held 
by an administrative law judge, such administrative law judge shall 
either make an initial decision, if so authorized, or certify the entire 
record, including recommended findings and proposed decision, to the 
Administrator for a final decision and a copy of such initial decision 
or certification shall be mailed to the applicant or recipient and the 
complainant. Where the initial decision is made by the administrative 
law judge, the applicant or recipient may, within 30 days of the mailing 
of such notice of initial decision, file with the Administrator 
exceptions to the initial decision, with the reasons therefor. In the 
absence of exceptions, the Administrator may, by motion within 45 days 
after the initial decision, serve on the applicant or recipient a notice 
that he/she will review the decision. Upon the filing of such exceptions 
or of such notice of review, the Administrator shall review the initial 
decision and issue his/her decision thereon, including the reasons 
therefor. The decision of the Administrator shall be mailed promptly to 
the applicant or recipient, and the complainant, if any. In the absence 
of either exceptions or a notice of review, the initial decision shall 
constitute the final decision of the Administrator.
    (b) Decisions on record or review by the Administrator. Whenever a 
record is certified to the Administrator for decision or the 
Administrator reviews the decision of an administrative law judge 
pursuant to paragraph (a) of this section, or whenever the Secretary of 
the Department of Health and Human Services or the Department of Justice 
conducts the hearing, the applicant or recipient shall be given 
reasonable opportunity to file briefs or other written statements of its 
contentions and a copy of the final decision of the Administrator shall 
be given in writing to the applicant or recipient and the complainant, 
if any.
    (c) Decisions on record where a hearing is waived. Whenever a 
hearing is waived pursuant to Sec. 117.16, a decision shall be made by 
the Administrator on the record and a copy of such decision shall be 
given in writing to the applicant or recipient, and to the complainant, 
if any.
    (d) Rulings required. Each decision of an administrative law judge 
or the Administrator shall set forth the ruling on each finding, 
conclusion, or exception presented, and shall identify the requirement 
or requirements imposed by or pursuant to this part with which

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it is found that the applicant or recipient has failed to comply.
    (e) Decision by the Administrator. The Administrator shall make any 
final decision which provides for the suspension or termination of, or 
the refusal to grant or continue Federal financial assistance, 
acceleration repayment or the imposition of any other sanction available 
under the regulations or taken under other means authorized by law.
    (f) Content of orders. The final decision may provide for 
accelerating of repayment, suspension or termination of, or refusal to 
approve, disburse, or continue Federal financial assistance, in whole or 
in part, to which this regulation applies, and may contain such terms, 
conditions, and other provisions as are consistent with and will 
effectuate the purposes of the Act and this part, including provisions 
designed to assure that no Federal financial assistance to which this 
regulation applies will, thereafter, be extended to the applicant or 
recipient determined by such decision to have failed to comply with this 
part, unless and until it corrects its noncompliance and satisfies the 
Administrator that it will fully comply with this part.
    (g) Post termination proceedings. (1) An applicant or recipient 
adversely affected by an order issued under paragraph (e) of this 
section shall be restored to full eligibility to receive Federal 
financial assistance only if it satisfies the terms and conditions of 
that order for such eligibility and it brings itself into compliance 
with this regulation and provides reasonable assurance that it will 
fully comply with this regulation.
    (2) Any applicant or recipient adversely affected by an order 
entered pursuant to paragraph (f) of this section may at any time 
request the Administrator to restore fully its eligibility to receive 
Federal financial assistance. Any such request shall be supported by 
information showing that the applicant or recipient has met the 
requirements of paragraph (g)(1) of this section. If the Administrator 
determines that those requirements have been satisfied, he/she shall 
restore such eligibility.
    (3) If the Administrator denies any such request, the applicant or 
recipient may submit a request for a hearing in writing, specifying why 
it believes the denial to have been in error. It shall there upon be 
given an expeditious hearing, with a decision on the record, in 
accordance with rules and procedures issued by the Administrator. The 
applicant or recipient shall be restored to such eligibility if it 
proves at such hearing that it satisfied the requirements of paragraph 
(g)(1) of this section. While proceedings under this paragraph are 
pending, the sanctions imposed by the order issued under paragraph (f) 
of this section shall remain in effect.



Sec. 117.18  Judicial review.

    (a) The complainant may file a civil action following the exhaustion 
of administrative remedies under the Act. Administrative remedies are 
exhausted if:
    (1) 180 days have elapsed since the complainant filed the complaint 
and the Agency has made no finding with regard to the complaint; or
    (2) The Agency has issued a finding in favor of the recipient.
    (b) If the Agency fails to make a finding within 180 days or issues 
a finding in favor of the recipient, the Agency shall:
    (1) Advise the complainant of this fact;
    (2) Advise the complainant of the right to file a civil action for 
injunctive relief; and
    (3) Inform the complainant:
    (i) That the complainant may bring a civil action only in a United 
States district court for the district in which the recipient is found 
or transacts business;
    (ii) That a complainant prevailing in a civil action has the right 
to be awarded the costs of the action, including reasonable attorney's 
fees, but that the complainant must demand these costs in the complaint;
    (iii) That before commencing the action the complainant shall give 
30 days notice by registered mail to the Secretary of the Department of 
Health and Human Services, the Attorney General of the United States and 
the recipient;

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    (iv) That the notice must state: The alleged violation of the Act; 
the relief requested; the court in which the complainant is bringing the 
action; and whether or not attorney's fees are demanded in the event the 
complainant prevails; and
    (v) That the complainant may not bring an action if the same alleged 
violation of the Act by the same recipient is the subject of a pending 
action in any court of the United States.



Sec. 117.19  Effect on other regulations.

    (a) All regulations, orders or like directions heretofore issued by 
SBA which impose requirements designed to prohibit any discrimination 
against individuals on the grounds of age and which authorize the 
suspension or termination of or refusal to grant or to continue 
financial assistance to any applicant for or recipient of such 
assistance for failure to comply with such requirements, are hereby 
superseded to the extent that such discrimination is prohibited by this 
part, except that nothing in this part shall be deemed to relieve any 
person of any obligation assumed or imposed under any such superseded 
regulation, order, instruction, or like direction prior to the effective 
date of this part. Nothing in this part, however, shall be deemed to 
supersede any of the following (including future amendments thereof):
    (1) Executive Order 11246, as amended, and regulations issued 
thereunder;
    (2) Title VI of the Civil Rights Act of 1964, as amended;
    (3) The Equal Credit Opportunity Act, as amended and Regulation B of 
the Board of Governors of the Federal Reserve System, (12 CFR part 202);
    (4) Section 504 of the Rehabilitation Act of 1973, as amended;
    (5) Title VIII of the Civil Rights Act of 1968;
    (6) Title IX of the Educational Amendments of 1972;
    (7) Section 633(b) of the Small Business Act;
    (8) Part 113 of title 13 of the Code of Federal Regulations (13 CFR 
part 113); or
    (9) Any other statute, order, regulation or instruction, insofar as 
such order, regulations, or instruction prohibits discrimination on the 
grounds of age in any program or activity or situation to which this 
part is inapplicable on any other ground.



Sec. 117.20  Supervision and coordination.

    The Administrator may from time to time assign to officials of SBA 
or to officials of other agencies of the Government with the consent of 
such agencies, responsibilities in connection with the effectuation of 
the purpose of the Act and this part (other than responsibility for 
final decision as provided in Sec. 117.17), including the achievement of 
effective coordination and maximum uniformity within SBA and within the 
Executive Branch of the Government in the application of the Act and 
this part to similar programs or activities and in similar situations. 
Responsibility for administering and enforcing this part is assigned by 
the Administrator, to the Office of Civil Rights Compliance, Office of 
Equal Employment Opportunity and Compliance of the Small Business 
Administration.

                        Appendix A to Part 117\1\

------------------------------------------------------------------------
   Type of Federal financial assistance               Authority
------------------------------------------------------------------------
Business Loans............................  Small Business Act, section
                                             7(a).
Debtor State Development companies (501)    Small Business Investment
 and their small business concerns.          Act, Title V.
Debtor State Development companies (502)    Small Business Investment
 and their small business concerns.          Act, Title V.
Debtor certified development companies      Small Business Investment
 (503) and their small business concerns.    Act, Title V.
Debtor small business investment companies  Small Business Investment
 and their small business concerns.          Act, Title III.
Pollution Control.........................  Small Business Investment
                                             Act, Title IV, Part A.
Disaster Loans:
  Physical, including riot................  Small Business Act, section
                                             7(b)(1).
  Economic Injury (EIDL)..................  Small Business Act, section
                                             7(b)(2).
  Federal Action Loan Program.............  Small Business Act, section
                                             7(b)(3).
  Small Business Institute................  Small Business Act, section
                                             8(b)(1).
  Small Business Development Centers......  Small Business Act, section
                                             21.
  International Trade Program.............  Small Business Act, section
                                             22.
  Technical and Management Assistance.....  Small Business Act, section
                                             7(j).
------------------------------------------------------------------------
\1\ None of the programs administered have any age distinctions except
  as statutorily required.


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PART 119--PROGRAM FOR INVESTMENT IN MICROENTREPRENEURS (``PRIME'' OR ``THE ACT'')--Table of Contents


Sec.
119.1  What is the Program for Investment in Microentreprenuers 
          (``PRIME'' or ``the Act'')?
119.2  Definitions.
119.3  What types of organizations are eligible for PRIME grants?
119.4  What services or activities must PRIME grant funds be used for?
119.5  How are PRIME grant awards allocated?
119.6  What are the minimum and maximum amounts for an award?
119.7  How long and for what amounts will grant funding be available to 
          a single grantee?
119.8  Are there matching requirements for grantees?
119.9  How will a qualified organization apply for PRIME grant awards?
119.10  Will SBA give preferential consideration to other SBA program 
          participants?
119.11  What information will be requested in an application under the 
          PRIME program?
119.12  What criteria will SBA use to evaluate applications for funding 
          under the PRIME program?
119.13  How will an applicant make a subgrant?
119.14  Are there limitations regarding the use of program income?
119.15  If a grantee is unable to spend the entire amount allotted for a 
          single fiscal year, can the funds be carried over to the next 
          year?
119.16  What are the reporting, record keeping, and related requirements 
          for grantees?
119.17  What types of oversight will SBA provide to grantees?
119.18  What are the restrictions against lobbying?
119.19  Is fundraising an allowable expense under the PRIME program?
119.20  Should grantees and subgrantees raise conflict of interest 
          matters with SBA?

    Authority: 15 U.S.C. 634(b)(6) and Pub. L. 106-102.

    Source: 66 FR 29013, May 29, 2001, unless otherwise noted.



Sec. 119.1  What is the Program for Investment in Microentrepreneurs (``PRIME'' or ``the Act'')?

    PRIME authorizes SBA to make grants to ``qualified organizations'' 
to fund training and technical assistance for disadvantaged 
entrepreneurs, build these organizations' own capacity to give training 
and technical assistance, fund research and development of ``best 
practices'' in microenterprise development and technical assistance 
programs for disadvantaged microentrepreneurs, and to fund other 
undertakings the Administrator or designee deems consistent with these 
purposes.



Sec. 119.2  Definitions.

    For the purposes of this part, the following definitions apply:
    Capacity Building Grant means a grant made under the Act identified 
under Sec. 119.4(b).
    Capacity building services means services provided to an 
organization or program that is currently, or is developing as, a 
microenterprise development organization or program, for the purpose of 
enhancing its ability to provide training and technical assistance to 
disadvantaged microentrepreneurs.
    Collaborative means two or more nonprofit entities that agree to act 
jointly as a qualified organization under this part.
    Developer means a person interested in starting or acquiring a 
microenterprise.
    Disadvantaged entrepreneur, or disadvantaged microentrepreneur, 
means the owner, majority owner, or developer, of a microenterprise who 
is also--
    (1) A low-income person;
    (2) A very low-income person; or
    (3) An entrepreneur who lacks adequate access to capital or other 
resources essential for business success, or is economically 
disadvantaged, as defined in this part.
    Discretionary Grant means a grant made under the Act identified 
under Sec. 119.4(d).
    Economically disadvantaged entrepreneur, or economically 
disadvantaged microentrepreneur, means an owner, majority owner, or 
developer of a microenterprise whose ability to compete in the free 
enterprise system has been impaired due to diminished capital and credit 
opportunities as compared to others in the industry such that his or her 
ownership of a small business would help to qualify the

[[Page 204]]

small business for assistance under section 7(j) or section 8(a) 
programs of the Small Business Act.
    Grantee means a recipient of a grant under the Act.
    Group has the same meaning as ``collaborative'' as defined in this 
section.
    Indian tribe means any Indian tribe, band, pueblo, nation, or other 
organized group or community, including any Alaska Native village or 
regional or village corporation, as defined in or established pursuant 
to the Alaska Native Claims Settlement Act, which is recognized as 
eligible for the special programs and services the United States 
provides to Indians because of their status as Indians.
    Indian tribe jurisdiction means Indian country, as defined in 18 
U.S.C. 1151, and any other lands, title to which is either held by the 
United States in trust for the benefit of any Indian tribe or individual 
or held by any tribe or individual subject to a restriction by the 
United States against alienation, and any land held by Alaska Native 
groups, regional corporations, and village corporations, as defined in 
or established under the Alaska Native Claims Settlement Act, public 
domain Indian allotments, and former Indian reservations in the State of 
Oklahoma.
    Intermediary means a private, nonprofit entity serving or seeking to 
serve microenterprise development organizations or programs identified 
under Sec. 119.3.
    Large microenterprise development organization or program means a 
microenterprise development organization or program with 10 or more full 
time employees or equivalents, including its executive director, as of 
the date it files its application with SBA for a PRIME grant.
    Local community means an identifiable area and population 
constituting a political subdivision of a state.
    Low-income person means a person having an income, adjusted for 
family size, of not more than--
    (1) For metropolitan areas, 80 percent of the median income; and
    (2) For non-metropolitan areas, the greater of--
    (i) 80 percent of the area median income; or
    (ii) 80 percent of the statewide non-metropolitan area median 
income.
    Microenterprise means a sole proprietorship, partnership or 
corporation that--
    (1) Has fewer than 5 employees, including the owner; and
    (2) Generally lacks access to conventional loans, equity, or other 
banking services.
    Microenterprise development organization or program means a 
nonprofit entity, or a program administered by such an entity, including 
community development corporations or other nonprofit development 
organizations and social service organizations, that provides services 
to disadvantaged microentrepreneurs.
    Qualified organization means an organization eligible for a PRIME 
grant identified under Sec. 119.3.
    Research and Development Grant means a grant made under the Act 
identified under Sec. 119.4(c).
    Severe constraints on available sources of matching funds means the 
documented inability of a qualified organization applying for a PRIME 
grant to raise matching funds or in-kind resources from non-Federal 
sources during the 2 years immediately prior to the date of its 
application because of a lack of or increased scarcity of monetary or 
in-kind resources from potential non-Federal sources.
    Small microenterprise development organization or program means a 
microenterprise development organization or program with less than 10 
full time employees or equivalents, including its executive director, as 
of the date it files its application with SBA for a PRIME grant.
    Technical Assistance Grant means a grant made under the Act 
identified under Sec. 119.4(a).
    Training and technical assistance means services and support 
provided to disadvantaged entrepreneurs, such as, but not limited to, 
assistance intended to enhance business planning, marketing, management, 
financial management skills, business operations, or assistance for the 
purpose of increasing access to loans and other financial services.
    Very low-income person means having an income adjusted for family 
size of

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not more than 150 percent of the poverty line, as defined in section 
673(2) of the Community Services Block Grant Act, 42 U.S.C. 9902(2), 
including any revision required by that section.



Sec. 119.3  What types of organizations are eligible for PRIME grants?

    An organization eligible for a PRIME grant (``qualified 
organization'') is one that is:
    (a) A microenterprise development organization or program as defined 
in Sec. 119.2(q) (or a group or collaborative thereof) that has a 
demonstrated record of delivering microenterprise services to 
disadvantaged microentrepreneurs;
    (b) An intermediary, as defined in Sec. 119.2(l);
    (c) A microenterprise development organization or program as defined 
in Sec. 119.2(q) that is accountable to a local community, working with 
a State or local government or Indian tribe; or
    (d) An Indian tribe acting on its own, if the Indian tribe can 
certify that no private organization or program referred to in 
paragraphs (a), (b) and (c) of this section exists within its 
jurisdiction.



Sec. 119.4  What services or activities must PRIME grant funds be used for?

    A recipient of a PRIME grant (``grantee'') must use PRIME grants to-
-
    (a) Provide training and technical assistance to disadvantaged 
microentrepreneurs (``Technical Assistance Grant'');
    (b) Provide training and capacity building services to 
microenterprise development organizations and programs to assist them to 
develop microenterprise training and services (``Capacity Building 
Grant'');
    (c) Aid in researching and developing the best practices in the 
field of microenterprise development and technical assistance programs 
for disadvantaged microentrepreneurs (``Research and Development 
Grant''); or
    (d) Conduct such other activities as the Administrator or designee 
determines to be consistent with the purposes of the Act 
(``Discretionary Grant'').



Sec. 119.5  How are PRIME grant awards allocated?

    (a) At least 50 percent of the number of grant awards made under 
this part will be awarded to qualified organizations that benefit very 
low-income persons, including those residing on Indian reservations. In 
general, SBA will make grant award decisions to serve diverse 
populations by including as recipients both large and small 
microenterprise development organizations, and organizations serving 
urban, rural, and Indian tribal communities.
    (b) SBA will allocate the funding available for awards as follows:
    (1) A minimum of 75 percent for Technical Assistance Grants;
    (2) A minimum of 15 percent for Capacity Building Grants; and
    (3) The remaining 10 percent or less may be allocated by SBA, in its 
sole discretion to be used for:
    (i) Research and Development Grants; or
    (ii) Discretionary Grants.



Sec. 119.6  What are the minimum and maximum amounts for an award?

    (a) The minimum grant award for Technical Assistance and Capacity 
Building Grants will be $50,000 during the first year of the award, 
subject to the availability of funds.
    (b) There is no minimum grant award for Research and Development or 
Discretionary Grants.
    (c) The maximum amount that an individual grant recipient may 
receive in any fiscal year from a single award or multiple awards, under 
any of the purposes of the program, may not exceed $250,000 or 10 
percent of the total grant funds available for award in that fiscal 
year, whichever is less.



Sec. 119.7  How long and in what amounts will grant funding be available to a single grantee?

    (a) Generally, the funding period for a PRIME grant will be one 
year. Subject to availability of funds and continuing authorization, 
funding may be available on an annual basis allowing for the initial 
grant plus up to four option years, for a project period of up to five 
years. Decisions regarding option year awards and the funding levels of

[[Page 206]]

these awards will depend upon availability of funding and the grantee's 
performance as measured against project objectives and milestones. A 
grantee that enters into a cooperative agreement must submit a separate 
application to have the support continued for each subsequent year. In 
all cases, continuation awards require a determination by SBA that 
continued funding is in the best interest of the Federal government. 
Neither the approval of any application nor the entering into of any 
cooperative agreement commits or obligates the Federal Government in any 
way to make any additional, supplemental, continuation or other award 
with respect to any grantee.
    (b) For Technical Assistance and Capacity Building Grants, after a 
grantee receives an initial grant, funding for any option year(s) must 
be no more than 67 percent of the initial grant amount.
    (c) For Research and Development and Discretionary Grants, after a 
grantee receives an initial grant, funding for any option year(s) will 
be approved at the discretion of the SBA.
    (d) In the final year of a project, grantees may apply to extend the 
expiration date of a grant if additional time beyond the established 
expiration date is required to assure adequate completion of the 
original scope of work within the funds already made available. For this 
purpose, the grantee may make an extension request for a one-time, no-
cost extension, not to exceed 12 months, prior to the established 
expiration date. Written notification of such an extension, with the 
supporting reasons, must be received by the SBA Grant Officer at least 
60 days prior to the expiration of the award. SBA reserves the right to 
disapprove the extension if the requirements set forth in OMB Circular 
A-110, paragraph .25(e)(2) are not met or if the extension is not in the 
best interests of SBA.



Sec. 119.8  Are there matching requirements for grantees?

    Applicants and grantees must match SBA funding as follows:
    (a) Except as provided in paragraph (c) of this section, applicants 
and grantees must match Federal assistance with funds from sources other 
than the Federal Government in an amount not less than 50 percent of the 
grant amount awarded each year. Sources such as fees, grants, gifts, 
income from loan sources, and in-kind resources of a grant recipient 
from non-Federal public or private sources may be used to comply with 
the matching funds requirement;
    (b) Grantees receiving funds in option years as described in 
Sec. 119.7(b) through (c) are subject to the matching requirements of 
this section.
    (c) Applicants or grantees with severe constraints on available 
sources of matching funds may request that the Administrator or designee 
reduce or eliminate the matching requirements. Any reductions or 
eliminations must not exceed 10 percent of the aggregate of all PRIME 
grant funds made available by SBA in any fiscal year. By requesting a 
waiver, the applicant is implying that, but for the waiver, the proposed 
programming will not be possible at the levels requested.
    (d) An applicant may request a waiver of the matching fund 
requirement by submitting a written request with its application for 
funding. The request must justify, and evidence, the need for a waiver. 
As evidence, the request must include, but is not limited to:
    (1) The cause and extent of the constraints on the historical and 
projected ability to raise matching funds as demonstrated by financial 
statements and letters of rejection from previous funders and potential 
new funding sources;
    (2) Evidence of efforts to raise match specific to the subject 
application, including negative responses, and
    (3) Based on those efforts, a list of any matching funds expected 
for the PRIME grant.
    (e) Subject to Sec. 119.12 (a) through (d), applications will be 
evaluated on merit before being matched with cost proposals. Any 
organization requesting a waiver of matching funds, therefore, will not 
be rejected solely on the basis of such a request.
    (f) Applications will be ranked, within their respective categories, 
from the most to least qualified. The best qualified applicants in each 
category will be

[[Page 207]]

selected whether or not a waiver is requested until the availability of 
waivers is exhausted.



Sec. 119.9  How will a qualified organization apply for PRIME grant awards?

    (a) SBA will issue Program Announcements specifying the terms, 
conditions, and evaluation criteria for each potential set of awards. 
Program Announcements will summarize the purpose of the available funds; 
will advise potential applicants regarding how to obtain an application 
packet; and will provide summary information regarding deadlines and 
other requirements. Program Announcements may specify any limitations, 
special rules, procedures, and restrictions for available funding.
    (b) Applicants may submit applications in response to the Program 
Announcements. Each applicant shall submit an application for a grant in 
accordance with this part and the applicable Program Announcement.
    (c) SBA reserves the right to consider at the same time multiple 
applications from a single applicant when appropriate.



Sec. 119.10  Will SBA give preferential consideration to other SBA program participants?

    In making grants under this part, SBA will not give preferential 
consideration to an applicant that is a participant in programs 
established under section 7(m) of the Small Business Act.



Sec. 119.11  What information will be requested in an application under the PRIME program?

    Each application must contain the information and documentation 
specified in the applicable Program Announcement including, but not 
limited to, the following items.
    (a) For applications seeking Technical Assistance Grants:
    (1) Identifying information and core documentation for the applicant 
including such items as the applicant's articles of incorporation, by-
laws, proof of IRS tax-exempt status, financial statements, and 
reference contacts.
    (2) A description of past and present activities and technical 
qualifications of the applicant, including workshops, programs and other 
technical assistance services, with specific descriptions of the extent 
to which such services have reached low and very low-income individuals, 
and the success rates of clients.
    (3) A list of applicant's community partnerships and collaborations 
with state and local entities, and a description of how such 
partnerships and collaborations are serving microentrepreneurs.
    (4) A description of the proposed activity for which the applicant 
will use PRIME grant funds, including training programming plans; a plan 
for outreach and delivery; applicant's capacity to provide thorough and 
detailed reports; and a description of the applicant's current data 
collection and management system, such as computer hardware, software 
and internet capabilities.
    (5) In the event the applicant is a collaborative, a plan for 
maintaining internal controls, accountability, and program quality 
control among the participants of the collaborative.
    (6) Resumes of the personnel that will be administering and managing 
the proposed activities under the PRIME grant, showing knowledge in such 
areas as business development, business structures, financial 
management, and business training and counseling.
    (7) A list of grants received, and/or contracts entered into, that 
are similar in scope to the subject grant, including name of Federal or 
other agency providing funding, grant or contract number, and a summary 
of services provided.
    (b) For applicants seeking Capacity Building Grants:
    (1) See paragraphs (a)(1), (5), (6) and (7) of this section.
    (2) A description of past and present activities and technical 
qualifications of the applicant, including workshops, programs, 
operational services, and other technical assistance services, or 
program development services with specific descriptions of the extent to 
which such services have improved the operations of client MDOs, 
assisted client MDOs with operational issues, and

[[Page 208]]

assisted client MDOs in reaching low and very low-income individuals.
    (3) A description of the proposed activity for which the applicant 
will use PRIME grant funds, including training programming plans, a plan 
for outreach and delivery, applicant's capacity to provide thorough and 
detailed reports; a description of the applicant's current data 
collection and management system, such as computer hardware, software, 
and internet capabilities and a description of how these capabilities 
will or will not be integrated into the training of MDOs.
    (c) For applicants seeking Research and Development Grants:
    (1) See paragraphs (a)(1), (6), and (7) of this section.
    (2) A research proposal indicating the thesis, method(s), scope, 
duration, and implementation plans (if any).
    (3) A description of the expected effect of the research on services 
to disadvantaged microentrepreneurs.
    (d) For applicants seeking Discretionary Grants:
    (1) See paragraph (a)(1) of this section.
    (2) A description of the proposed activity for which the applicant 
will use PRIME grant funds, including applicant's capacity to provide 
thorough and detailed reports, and a description of the applicant's 
current data collection and management system, such as computer 
hardware, software and internet capabilities.



Sec. 119.12  What criteria will SBA use to evaluate applications for funding under the PRIME program?

    During the first year for which funding is available for the PRIME 
program, SBA will give special consideration to organizations located in 
and serving areas of, or with a history of successful outreach to, low-
income and very low-income persons, to enable the PRIME program to 
assist those with the greatest need first. SBA will evaluate 
applications for funding in accordance with the specific goals of the 
Act, and as more fully described in the Program Announcements. 
Evaluation criteria include, but are not limited to, the following:
    (a) Applications for Technical Assistance Grants:
    (1) Applicants will compete based on expertise and ability to 
fulfill the purposes of the Act.
    (2) SBA will evaluate organizational structure, financial stability, 
financial management systems, personnel capacity, and electronic 
communication capabilities (or potential for same). SBA will also 
evaluate data collection capabilities, reporting capacities, and ability 
to account for performance and outcome.
    (3) SBA will evaluate the applicant's history of providing technical 
assistance to low-income and very low-income microentrepreneurs. This 
factor includes patterns of program growth, client success, outcomes of 
training, success in establishing new businesses, and success in 
arranging micro-level financing when the client indicates financing as a 
goal.
    (4) SBA will evaluate the applicant's ability to use community 
partnerships and collaborations with state and local entities to better 
serve low-income and very low-income microentrepreneurs.
    (b) Applications for Capacity Building Grants:
    (1) SBA will evaluate the criteria set forth in paragraph (a)(2) of 
this section.
    (2) SBA will evaluate the applicant's history of providing capacity 
building services to MDOs, as an indication of the organization's 
understanding of the goals and purposes of capacity building, its 
historical effectiveness with the microenterprise development industry, 
and its ability to provide quality programming to the targeted market. 
SBA will evaluate patterns of program growth, outcomes of training, 
types of services provided, delivery systems used, the number and types 
of clients served, and the successes realized within the client's 
organizational goals.
    (3) SBA will evaluate expected impact on client MDOs; expected 
impact on services to low-and very-low income microentrepreneurs; and a 
plan for service and delivery.
    (c) Applications for Research and Development Grants:
    (1) SBA will evaluate the criteria set forth in paragraph (a)(2) of 
this section.

[[Page 209]]

    (2) SBA will evaluate how the research potentially will enhance 
microenterprise-oriented technical assistance services to disadvantaged 
entrepreneurs. Applicants must show the method(s), scope, duration, and 
implementation plans of the proposed research.
    (3) SBA will evaluate applicant's plan of action incorporating 
original and secondary research. Applicants must show impact on improved 
access to microenterprise development services for disadvantaged 
microentrepreneurs, and the expected replicability/transferability of 
the finished product to the field.
    (d) Applications for Discretionary Grants will be evaluated based on 
the goals and the viability of the project.



Sec. 119.13  How will an applicant make a subgrant?

    (a) An applicant that wants to make subgrants using PRIME grant 
funds must receive written approval from SBA prior to making subgrants. 
The applicant must identify the subgrantee(s) and describe in detail 
what the subgrantee(s) will do to help the grantee implement its 
proposal. An applicant must submit information to SBA demonstrating 
that, through the subgrantee(s), the grantee's program will:
    (1) Provide expanded services to the community,
    (2) Provide a method by which one or more previously unserved 
communities will gain access to the program, or
    (3) Provide other specific benefits to the clients, such as 
specialized training, expanded schedules of operation, or other 
benefits.
    (b) If an applicant has identified potential subgrantee(s) at the 
time it submits an application for a PRIME grant, the applicant must 
include the information requested in paragraph (a) of this section in 
the application. Otherwise, the applicant or grantee may submit the 
requested information at such time that approvals for subgrantee(s) are 
requested.
    (c) A grantee may not use more than 7.5 percent of the assistance 
received under its PRIME grant for administrative expenses in connection 
with the making of subgrants.



Sec. 119.14  Are there limitations regarding the use of program income?

    Program income, as defined in OMB Circular A-110, may only be used 
to further PRIME program objectives. As such, fees collected from 
clients, and other program income as defined, may be used to help fund 
the matching requirement. All program income, as defined, shall be 
reported on financial reports submitted to SBA and added to funds 
committed to the project by SBA and the recipient organization. However, 
any interest earned in excess of the maximum allowable amount as 
specified in the OMB circular incorporated into the grant must be 
returned to the Federal Government by the grantee.



Sec. 119.15  If a grantee is unable to spend the entire amount allotted for a single fiscal year, can the funds be carried over to the next year?

    (a) The grantee may request approval to use unexpended funds in the 
next budget period. This is permissible if funds are to be used for a 
non-severable, non-recurring project or activity within the scope of the 
PRIME program. Non-severable means a project in its entirety that cannot 
be subdivided. The request for using unexpended funds in the next budget 
period must include the following:
    (1) SF 424, budget pages, and justification;
    (2) Explanation of why the funds were not expended during the period 
in which they were awarded; and
    (3) Evidence of match. The match requirement for funds carried over 
to the next budget period can be met by using any excess of matching 
funds from the current budget period, new matching funds, or a 
combination of both.
    (b) The request must be made no later than 60 days before the end of 
the budget/project period or the de-obligation process will begin. 
Approved requests will require the issuance of a revised Notice of 
Award. Expenditures for funds carried over to the next budget period 
must be tracked separately.

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Sec. 119.16  What are the reporting, record keeping, and related requirements for grantees?

    A grantee must keep records and meet the other requirements of 
section 115 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Riegle Act), as if it were a community 
development financial institution. (See 12 U.S.C. 4714). In addition to 
meeting requirements of the Riegle Act, a grantee must also maintain 
data allowing it to measure the impact of services provided by it and 
any subgrantees, and, if specifically required by the terms of the PRIME 
grant, measure the success rate of individual clients whom the grantees 
assist. SBA will detail such requirements in its Program Announcements.



Sec. 119.17  What types of oversight will SBA provide to grantees?

    (a) In addition to reports required under the Riegle Act, SBA will 
require reports in accordance with applicable OMB circulars. Such 
reports will include the following information:
    (1) For recipients of Technical Assistance and Capacity Building 
Grants, for the first two years of receiving grant funding, narrative 
performance reports and financial status reports will be required 
quarterly within 15 calendar days of the end of each quarter. 
Thereafter, grantees may request that SBA reduce the frequency of 
reports from quarterly to semi-annually. The frequency of reporting then 
will be determined at the discretion of SBA. In addition, details of 
expenditures will be required with each request for payment. Grantees 
will be required to submit audited financial statements on an annual 
basis, if available, or annual financial statements prepared by a 
licensed, independent public accountant, within 120 calendar days of the 
end of the grantee's fiscal year.
    (2) For recipients of Research and Development Grants, reports will 
be required in accordance with agreed upon milestones and as part of the 
disbursement process.
    (3) For recipients of Discretionary Grants, reports will be required 
as appropriate for the project, or on a schedule as described in 
paragraph(a)(1) of this section, whichever is more frequent.
    (b) In addition, SBA may, from time to time, make site visits to the 
grantee, and review all applicable books and records.



Sec. 119.18  What are the restrictions against lobbying?

    No assistance made available under the PRIME program may be expended 
by a grantee or subgrantee to pay any person to influence, or attempt to 
influence, any agency, elected official, officer, or employee of a 
Federal, State, or local government in connection with its participation 
in the program.



Sec. 119.19  Is fundraising an allowable expense under the PRIME program?

    Expenditures of grant funds for fundraising activities are not 
allowable costs under this program. Applicants must be able to raise 
matching funds without the assistance of grant funds. Unless the full 
requirement for matching funds is waived, the applicant must demonstrate 
that it has adequate fundraising resources to obtain the required non-
Federal matching funds to perform the project.



Sec. 119.20  Should grantees and subgrantees raise conflict of interest matters with SBA?

    Each grantee or subgrantee must provide SBA with a copy of its 
conflicts of interest policies prior to receipt of funding under the 
program. Such policies must clearly describe the grantee's or 
subgrantee's protections from conflicts of interest or the appearance 
thereof in the handling of grant funding and program provision under 
this program.



PART 120--BUSINESS LOANS--Table of Contents


          General Descriptions of SBA'S Business Loan Programs

Sec.
120.1  Which loan programs does this part cover?
120.2  Descriptions of the business loan programs.
120.3  Pilot programs.

                               Definitions

120.10  Definitions.

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           Subpart A--Policies Applying to All Business Loans

                        Eligibility Requirements

120.100  What are the basic eligibility requirements for all applicants 
          for SBA business loans?
120.101  Credit not available elsewhere.
120.102  Funds not available from alternative sources, including 
          personal resources of principals.
120.103  Are farm enterprises eligible?
120.104  Are businesses financed by SBICs eligible?
120.105  Special consideration for veterans.

          Ineligible Businesses and Eligible Passive Companies

120.110  What businesses are ineligible for SBA business loans?
120.111  What conditions must an Eligible Passive Company satisfy?

                            Uses of Proceeds

120.120  What are eligible uses of proceeds?
120.130  Restrictions on uses of proceeds.
120.131  Leasing part of new construction or existing building to 
          another business.

                          Ethical Requirements

120.140  What ethical requirements apply to participants?

                      Credit Criteria for SBA Loans

120.150  What are SBA's lending criteria?
120.151  What is the statutory limit for total loans to a Borrower?
120.160  Loan conditions.

            Requirements Imposed Under Other Laws and Orders

120.170  Flood insurance.
120.171  Compliance with child support obligations.
120.172  Flood-plain and wetlands management.
120.173  Lead-based paint.
120.174  Earthquake hazards.
120.175  Coastal barrier islands.
120.176  Compliance with other laws.

                   Enforceability Despite Rule Changes

120.180  Are rules enforceable if they are changed later?

                            Loan Applications

120.190  Where does an applicant apply for a loan?
120.191  The contents of a business loan application.
120.192  Approval or denial.
120.193  Reconsideration after denial.

                         Computerized SBA Forms

120.194  Use of computer forms.

                            Reporting of Fees

120.195  Disclosure of fees.

               Subpart B--Policies Specific to 7(a) Loans

                          Bonding Requirements

120.200  What bonding requirements exist during construction?

                     Limitations on Use of Proceeds

120.201  Refinancing unsecured or undersecured loans.
120.202  Restrictions on loans for changes in ownership.

         Maturities; Interest Rates; Loan and Guarantee Amounts

120.210  What percentage of a loan may SBA guarantee?
120.211  What limits are there on the amounts of direct loans?
120.212  What limits are there on loan maturities?
120.213  What fixed interest rates may a Lender charge?
120.214  What conditions apply for variable interest rates?
120.215  What interest rates apply to smaller loans?

                        Fees for Guaranteed Loans

120.220  Fees that Lender pays SBA.
120.221  Fees which the Lender may collect from a loan applicant.
120.222  Fees which the Lender or Associate may not collect from the 
          Borrower or share with third parties.
120.223   Subsidy recoupment fee payable to SBA by Borrower.

                    Subpart C--Special Purpose Loans

120.300  Statutory authority.

                 Disabled Assistance Loan Program (DAL)

120.310  What assistance is available for the disabled?
120.311  Definitions.
120.312  DAL-1 use of proceeds and other program conditions.
120.313  DAL-2 use of proceeds and other program conditions.
120.314  Resolving doubts about creditworthiness.
120.315  Interest rate and loan limit.

               Businesses Owned by Low Income Individuals

120.320  Policy.

                           Energy Conservation

120.330  Who is eligible for an energy conservation loan?
120.331  What devices or techniques are eligible for a loan?

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120.332  What are the eligible uses of proceeds?
120.333  Are there any special credit criteria?

                  Export Working Capital Program (EWCP)

120.340  What is the Export Working Capital Program?
120.341  Who is eligible?
120.342  What are eligible uses of proceeds?
120.343  Collateral.
120.344  Unique requirements of the EWCP.

                        International Trade Loans

120.345  Policy.
120.346  Eligibility.
120.347  Use of proceeds.
120.348  Amount of guarantee.

                    Qualified Employee Trusts (ESOP)

120.350  Policy.
120.351  Definitions.
120.352  Use of proceeds.
120.353  Eligibility.
120.354  Creditworthiness.

                          Veterans Loan Program

120.360  Which veterans are eligible?
120.361  Other conditions of eligibility.

                        Pollution Control Program

120.370  Policy.

                Loans to Participants in the 8(a) Program

120.375  Policy.
120.376  Special requirements.
120.377  Use of proceeds.

                 Defense Economic Transition Assistance

120.380  Program.
120.381  Eligibility.
120.382  Repayment ability.
120.383  Restrictions on loan processing.

                            CapLines Program

120.390  Revolving credit.

                          Builders Loan Program

120.391  What is the Builders Loan Program?
120.392  Who may apply?
120.393  Are there special application requirements?
120.394  What are the eligible uses of proceeds?
120.395  What is SBA's collateral position?
120.396  What is the term of the loan?
120.397  Are there any special restrictions?

                           Subpart D--Lenders

120.400  Loan Guarantee Agreements.

                         Participation Criteria

120.410  Requirements for all participating Lenders.
120.411  Preferences.
120.412  Other services Lenders may provide Borrowers.
120.413  Advertisement of relationship with SBA.

                        Miscellaneous Provisions

120.414  SBA access to Lender files.
120.415  Suspension or revocation of eligibility to participate.

                     Participating Lender Financings

120.420  Definitions.
120.421  Which Lenders may securitize?
120.422  Are all securitizations subject to this subpart?
120.423  Which 7(a) loans may a Lender securitize?
120.424  What are the basic conditions a Lender must meet to securitize?
120.425  What are the minimum elements that SBA will require before 
          consenting to a securitization?
120.426  What action will SBA take if a securitizer transfers the 
          subordinated tranche prior to the termination of the holding 
          period?
120.427  Will SBA approve a securitization application from a capital 
          impaired Securitizer?
120.428  What happens to a securitizer's other PLP responsibilities if 
          SBA suspends its PLP approval privilege?

                            Other Conveyances

120.430  What conveyances are covered by Secs. 120.430 through 120.435?
120.431  Which Lenders may sell, sell participations in, or pledge 7(a) 
          loans?
120.432  Under what circumstances does this subpart permit sales of, or 
          sales of participating interests in, 7(a) loans?
120.433  What are SBA's other requirements for sales and sales of 
          participating interests?
120.434  What are SBA's requirements for loan pledges?
120.435  Which loan pledges do not require notice to or consent by SBA?

                     Certified Lenders Program (CLP)

120.440  What is the Certified Lenders Program?
120.441  How does a Lender become a CLP Lender?
120.442  Suspension or revocation of CLP status.

                     Preferred Lenders Program (PLP)

120.450  What is the Preferred Lenders Program?
120.451  How does a Lender become a PLP Lender?
120.452  What are the requirements of PLP loan processing?

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120.453  What are the requirements of a PLP Lender in servicing and 
          liquidating SBA guaranteed loans?
120.454  PLP performance review.
120.455  Suspension or revocation of PLP status.

                 Small Business Lending Companies (SBLC)

120.470  What is an SBLC?
120.471  Records.
120.472  Reports to SBA.
120.473  Change of ownership or control.
120.474  Prohibited financing.
120.475  Audits.
120.476  Suspension or revocation.

                     Subpart E--Loan Administration

120.500  General.

                                Servicing

120.510  Servicing direct and immediate participation loans.
120.511  Servicing guaranteed loans.
120.512  Who services the loan after SBA honors its guarantee?
120.513  What servicing actions require the prior written consent of 
          SBA?

                 SBA'S Purchase of a Guaranteed Portion

120.520  When does SBA honor its guarantee?
120.521  What interest rate applies after SBA purchases its guaranteed 
          portion?
120.522  How much accrued interest does SBA pay to the Lender or 
          Registered Holder when SBA purchases the guaranteed portion?
120.523  What is the ``earliest uncured payment default''?
120.524  When is SBA released from liability on its guarantee?

          Deferment, Extension of Maturity and Loan Moratorium

120.530  Deferment of payment.
120.531  Extension of maturity.
120.532  What is a loan Moratorium?

                        Liquidation of Collateral

120.540  What are SBA's policies concerning the liquidation of 
          collateral and the sale of business loans and physical 
          disaster assistance loans, physical disaster business loans 
          and economic injury disaster loans?

                    Homestead Protection for Farmers

120.550  What is homestead protection for farmers?
120.551  Who is eligible for homestead protection?
120.552  Lease.
120.553  Appeal.
120.554  Conflict of laws.

                       Subpart F--Secondary Market

                     Fiscal and Transfer Agent (FTA)

120.600  Definitions.
120.601  SBA Secondary Market.

                              Certificates

120.610  Form and terms of Certificates.
120.611  Pools backing Pool Certificates.
120.612  Loans eligible to back Certificates.
120.613  Secondary Participation Guarantee Agreement.

                   The SBA Guarantee of a Certificate

120.620  SBA guarantee of a Pool Certificate.
120.621  SBA guarantee of an Individual Certificate.

                             Pool Assemblers

120.630  Qualifications to be a Pool Assembler.
120.631  Suspension or termination of Pool Assembler.

                        Miscellaneous Provisions

120.640  Administration of the Pool and Individual Certificates.
120.641  Disclosure to purchasers.
120.642  Requirements before the FTA issues Pool Certificates.
120.643  Requirements before the FTA issues Individual Certificates.
120.644  Transfers of Certificates.
120.645  Redemption of Certificates.
120.650  Registration duties of FTA in Secondary Market.
120.651  Claim to FTA by Registered Holder to replace Certificate.
120.652  FTA fees.

       Suspension or Revocation of Participant in Secondary Market

120.660  Suspension or revocation.

                      Subpart G--Microloan Program

120.700  What is the Microloan Program?
120.701  Definitions.
120.702  Are there limitations on who can be an Intermediary or on where 
          an Intermediary may operate?
120.703  How does an organization apply to become an Intermediary?
120.704  How are applications evaluated?
120.705  What is a Specialized Intermediary?
120.706  What are the terms and conditions of an SBA loan to an 
          intermediary?
120.707  What conditions apply to loans by Intermediaries to Microloan 
          borrowers?
120.708  What is the Intermediary's financial contribution?
120.709  What is the Microloan Revolving Fund?
120.710  What is the Loan Loss Reserve Fund?

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120.711  What rules govern Intermediaries?
120.712  How does an Intermediary get a grant to assist Microloan 
          borrowers?
120.713  Does SBA provide technical assistance to Intermediaries?
120.714  How are grants made to non-lending technical assistance 
          providers (NTAP)?
120.715  Does SBA guarantee any loans an Intermediary obtains from 
          another source?
120.716  Suspension or revocation of an Intermediary or NTAP.

            Subpart H--Development Company Loan Program (504)

120.800  The purpose of the 504 program.
120.801  How a 504 Project is financed.
120.802  Definitions.

                Certification Procedures to Become a CDC

120.810  Applications for certification as a CDC.
120.812  Probationary period for newly certified CDCs.

            Requirements for CDC Certification and Operation

120.820  CDC non-profit status and good standing.
108.821  CDC Area of Operations.
120.822  CDC membership.
120.823  CDC Board of Directors.
120.824  Professional management and staff.
120.825  Financial ability to operate.
120.826  Basic requirements for operating a CDC.
120.827  Other services a CDC may provide to small businesses.
120.828  Minimum level of 504 loan activity and restrictions on 
          portfolio concentrations.
120.829  Job Opportunity average a CDC must maintain.
120.830  Reports a CDC must submit.

                  Extending a CDC's Area of Operations

120.835  Application to expand an Area of Operations.
120.837  SBA decision on application for a new CDC or for an existing 
          CDC to expand Area of Operations.
120.839  Case-by-case application to make a 504 loan outside of a CDC's 
          Area of Operation.

                    Accredited Lenders Program (ALP)

120.840  Accredited Lenders Program (ALP).
120.841  Qualifications for the ALP.

                    Premier Certified Lenders Program

120.845  Premier Certified Lenders Program (PCLP).
120.846  Requirements for maintaining and renewing PCLP status.
120.847  Requirements for the Loan Loss Reserve Fund (LLRF).
120.848  Requirements for 504 loan processing, closing, servicing, 
          liquidating, and litigating by PCLP CDCs.

                 Associate Development Companies (ADCs)

120.850  Expiration of Associate Development Company designation.

                         Other CDC Requirements

120.851  CDC ethical requirements.
120.852  Restrictions regarding CDC participation in the Small Business 
          Investment Company (SBIC) program and the 7(a) loan program.

                              SBA Oversight

120.853  Oversight and evaluation of CDCs.

                         SBA Enforcement Actions

120.854  Grounds for taking enforcement action against a CDC.
120.855  Types of enforcement actions.
120.856  Enforcement procedures.
120.857  Voluntary transfer and surrender of CDC certification.

                   Project Economic Development Goals

120.860  Required objectives.
120.861  Job creation or retention.
120.862  Other economic development objectives.

                 Leasing Policies Specific to 504 Loans

120.870  Leasing Project Property.
120.871  Leasing part of Project Property to another business.

               Loan-Making Policies Specific to 504 Loans

120.880  Basic eligibility requirements.
120.881  Ineligible Projects for 504 loans.
120.882  Eligible Project costs for 504 loans.
120.883  Eligible administrative costs for 504 loans.
120.884  Ineligible costs for 504 loans.

                            Interim Financing

120.890  Source of interim financing.
120.891  Certifications of disbursement and completion.
120.892  Certifications of no adverse change.

                           Permanent Financing

120.900  Sources of permanent financing.

                       The Borrower's Contribution

120.910  Borrower contributions.
120.911  Land contributions.
120.912  Borrowed contributions.
120.913  Limitations on any contributions by a Licensee.

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                            Third Party Loans

120.920  Required participation by the Third Party Lender.
120.921  Terms of Third Party loans.
120.922  Pre-existing debt on the Project Property.
120.923  Policies on subordination.
120.925  Preferences.
120.926  Referral fee.

                        504 Loans and Debentures

120.930  Amount.
120.931  504 lending limits.
120.932  Interest rate.
120.933  Maturity.
120.934  Collateral.
120.935  Deposit from the Borrower that a CDC may require.
120.937  Assumption.
120.938  Default.
120.939  Borrower prohibition.
120.940  Prepayment of the 504 loan or Debenture.
120.941  Certificates.

                   Debenture Sales and Service Agents

120.950  SBA and CDC must appoint agents.
120.951  Selling agent.
120.952  Fiscal agent.
120.953  Trustee.
120.954  Central Servicing Agent.
120.955  Agent bonds and records.
120.956  Suspension or revocation of brokers and dealers.

                                Closings

120.960  Responsibility for closing.
120.961  Construction escrow accounts.

                                Servicing

120.970  Servicing of 504 loans and Debentures.

                                  Fees

120.971  Allowable fees paid by Borrower.
120.972  Third Party Lender participation fee and CDC fee.

         Enforceability of 501, 502 and 503 Loans and Other Laws

120.990  501, 502 and 503 loans.
120.991  Effect of other laws.

    Authority: 15 U.S.C. 634 (b)(6), 636(a) and (h), 696(3), and 
697(a)(2).

    Source: 61 FR 3235, Jan. 31, 1996, unless otherwise noted.

          General Descriptions of SBA's Business Loan Programs



Sec. 120.1  Which loan programs does this part cover?

    This part regulates SBA's financial assistance to small businesses 
under its general business loan programs (``7(a) loans'') authorized by 
section 7(a) of the Small Business Act (``the Act''), 15 U.S.C. 636(a), 
its microloan demonstration loan program (``Microloans'') authorized by 
section 7(m) of the Act, 15 U.S.C. 636(m), and its development company 
program (``504 loans'') authorized by Title V of the Small Business 
Investment Act, 15 U.S.C. 695 to 697f (``Title V''). These three 
programs constitute the business loan programs of the SBA.



Sec. 120.2  Descriptions of the business loan programs.

    (a) 7(a) loans. (1) 7(a) loans provide financing for general 
business purposes and may be:
    (i) A direct loan by SBA;
    (ii) An immediate participation loan by a Lender and SBA; or
    (iii) A guaranteed loan (deferred participation) by which SBA 
guarantees a portion of a loan made by a Lender.
    (2) A guaranteed loan is initiated by a Lender agreeing to make an 
SBA guaranteed loan to a small business and applying to SBA for SBA's 
guarantee under a blanket guarantee agreement (participation agreement) 
between SBA and the Lender. If SBA agrees to guarantee (authorizes) a 
portion of the loan, the Lender funds and services the loan. If the 
small business defaults on the loan, SBA's guarantee requires SBA to 
purchase its portion of the outstanding balance, upon demand by the 
Lender and subject to specific conditions. Regulations specific to 7(a) 
loans are found in subpart B of this part.
    (b) Microloans. SBA makes loans and loan guarantees to non-profit 
Intermediaries that make short-term loans up to $25,000 to eligible 
small businesses for general business purposes, except payment of 
personal debts. SBA also makes grants to Intermediaries for use in 
providing management assistance and counseling to small businesses. 
Regulations specific to these

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loans are found in subpart G of this part.
    (c) 504 loans. Projects involving 504 loans require long-term fixed-
asset financing for small businesses. A Certified Development Company 
(CDC) provides the final portion of this financing with a 504 loan made 
from the proceeds of a Debenture issued by the CDC, guaranteed 100 
percent by SBA (with the full faith and credit of the United States), 
and sold to investors. The regulations specific to these loans are found 
in subpart H of this part.



Sec. 120.3  Pilot programs.

    The Administrator of SBA may from time to time suspend, modify, or 
waive rules for a limited period of time to test new programs or ideas. 
The Administrator shall publish a document in the Federal Register 
explaining the reasons for these actions.

                               Definitions



Sec. 120.10  Definitions.

    The following terms have the same meaning wherever they are used in 
this part. Defined terms are capitalized wherever they appear.
    Associate. (1) An Associate of a Lender or CDC is:
    (i) An officer, director, key employee, or holder of 20 percent or 
more of the value of the Lender's or CDC's stock or debt instruments, or 
an agent involved in the loan process;
    (ii) Any entity in which one or more individuals referred to in 
paragraphs (1)(i) of this definition or a Close Relative of any such 
individual owns or controls at least 20 percent.
    (2) An Associate of a small business is:
    (i) An officer, director, owner of more than 20 percent of the 
equity, or key employee of the small business;
    (ii) Any entity in which one or more individuals referred to in 
paragraphs (2)(i) of this definition owns or controls at least 20 
percent; and
    (iii) Any individual or entity in control of or controlled by the 
small business (except a Small Business Investment Company (``SBIC'') 
licensed by SBA).
    (3) For purposes of this definition, the time during which an 
Associate relationship exists commences six months before the following 
dates and continues as long as the certification, participation 
agreement, or loan is outstanding:
    (i) For a CDC, the date of certification by SBA;
    (ii) For a Lender, the date of application for a loan guarantee on 
behalf of an applicant; or
    (iii) For a small business, the date of the loan application to SBA, 
the CDC, the Intermediary, or the Lender.
    Authorization is SBA's written agreement providing the terms and 
conditions under which SBA will make or guarantee business loans. It is 
not a contract to make a loan.
    Borrower is the obligor of an SBA business loan.
    Certified Development Company (``CDC'') is an entity authorized by 
SBA to deliver 504 financing to small businesses.
    Close Relative is a spouse; a parent; or a child or sibling, or the 
spouse of any such person.
    Eligible Passive Company is a small entity or trust which does not 
engage in regular and continuous business activity, which leases real or 
personal property to an Operating Company for use in the Operating 
Company's business, and which complies with the conditions set forth in 
Sec. 120.111.
    Intermediary is the entity in the Microloan program that receives 
SBA financial assistance and makes loans to small businesses in amounts 
up to $25,000.
    Lender is an institution that has executed a participation agreement 
with SBA under the guaranteed loan program.
    Loan Instruments are the Authorization, note, instruments of 
hypothecation, and all other agreements and documents related to a loan.
    Operating Company is an eligible small business actively involved in 
conducting business operations now or about to be located on real 
property owned by an Eligible Passive Company, or using or about to use 
in its business operations personal property owned by an Eligible 
Passive Company.
    Preference is any arrangement giving a Lender or a CDC a preferred 
position

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compared to SBA relating to the making, servicing, or liquidation of a 
business loan with respect to such things as repayment, collateral, 
guarantees, control, maintenance of a compensating balance, purchase of 
a Certificate of deposit or acceptance of a separate or companion loan, 
without SBA's consent.
    Rentable Property is the total square footage of all buildings or 
facilities used for business operations.
    Rural Area is a political subdivision or unincorporated area in a 
non-metropolitan county (as defined by the Department of Agriculture), 
or, if in a metropolitan county, any such subdivision or area with a 
resident population under 20,000 which is designated by SBA as rural.
    Service Provider is an entity that contracts with a Lender or CDC to 
perform management, marketing, legal or other services.
    SOPs are SBA Standard Operating Procedures, as issued and revised by 
SBA from time to time.

[61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2117, Jan. 13, 1999; 68 
FR 57980, Oct. 7, 2003]



           Subpart A--Policies Applying to All Business Loans

                        Eligibility Requirements



Sec. 120.100  What are the basic eligibility requirements for all applicants for SBA business loans?

    To be eligible for an SBA business loan, a small business applicant 
must:
    (a) Be an operating business (except for loans to Eligible Passive 
Companies);
    (b) Be organized for profit;
    (c) Be located in the United States;
    (d) Be small under the size requirements of part 121 of this chapter 
(including affiliates). See subpart H of this part for the size 
standards of part 121 of this chapter which apply only to 504 loans; and
    (e) Be able to demonstrate a need for the desired credit.



Sec. 120.101  Credit not available elsewhere.

    SBA provides business loan assistance only to applicants for whom 
the desired credit is not otherwise available on reasonable terms from 
non-Federal sources. SBA requires the Lender or CDC to certify or 
otherwise show that the desired credit is unavailable to the applicant 
on reasonable terms and conditions from non-Federal sources without SBA 
assistance, taking into consideration the prevailing rates and terms in 
the community in or near where the applicant conducts business, for 
similar purposes and periods of time. Submission of an application to 
SBA by a Lender or CDC constitutes certification by the Lender or CDC 
that it has examined the availability of credit to the applicant, has 
based its certification upon that examination, and has substantiation in 
its file to support the certification.



Sec. 120.102  Funds not available from alternative sources, including personal resources of principals.

    (a) An applicant for a business loan must show that the desired 
funds are not available from the personal resources of any owner of 20 
percent or more of the equity of the applicant. SBA will require the use 
of personal resources from any such owner as an injection to reduce the 
SBA funded portion of the total financing package (i.e., any SBA loans 
and any other financing, including loans from any other source) when 
that owner's liquid assets exceed the amounts specified in paragraphs 
(a) (1) through (3) of this section. When the total financing package:
    (1) Is $250,000 or less, each 20 percent owner of the applicant must 
inject any personal liquid assets which are in excess of two times the 
total financing package or $100,000, whichever is greater;
    (2) Is between $250,001 and $500,000, each 20 percent owner of the 
applicant must inject any personal liquid assets which are in excess of 
one and one-half times the total financing package or $500,000, 
whichever is greater;
    (3) Exceeds $500,000, each 20 percent owner of the applicant must 
inject any personal liquid assets which are in excess of one times the 
total financing package or $750,000, whichever is greater.

[[Page 218]]

    (b) Any liquid assets in excess of the applicable amount set forth 
in paragraph (a) of this section must be used to reduce the SBA portion 
of the total financing package. These funds must be injected prior to 
the disbursement of the proceeds of any SBA financing.
    (c) For purposes of this section, liquid assets means cash or cash 
equivalent, including savings accounts, CDs, stocks, bonds, or other 
similar assets. Equity in real estate holdings and other fixed assets 
are not to be considered liquid assets.



Sec. 120.103  Are farm enterprises eligible?

    Federal financial assistance to agricultural enterprises is 
generally made by the United States Department of Agriculture (USDA), 
but may be made by SBA under the terms of a Memorandum of Understanding 
between SBA and USDA. Farm-related businesses which are not agricultural 
enterprises are eligible businesses under SBA's business loan programs.



Sec. 120.104  Are businesses financed by SBICs eligible?

    SBA may make or guarantee loans to a business financed by an SBIC if 
SBA's collateral position will be superior to that of the SBIC. SBA may 
also make or guarantee a loan to an otherwise eligible small business 
which temporarily is owned or controlled by an SBIC under the 
regulations in part 107 of this chapter. SBA neither guarantees SBIC 
loans nor makes loans jointly with SBICs.



Sec. 120.105  Special consideration for veterans.

    SBA will give special consideration to a small business owned by a 
veteran or, if the veteran chooses not to apply, to a business owned or 
controlled by one of the veteran's dependents. If the veteran is 
deceased or permanently disabled, SBA will give special consideration to 
one survivor or dependent. SBA will process the application of a 
business owned or controlled by a veteran or dependent promptly, resolve 
close questions in the applicant's favor, and pay particular attention 
to maximum loan maturity. For SBA loans, a veteran is a person honorably 
discharged from active military service.

          Ineligible Businesses and Eligible Passive Companies



Sec. 120.110  What businesses are ineligible for SBA business loans?

    The following types of businesses are ineligible:
    (a) Non-profit businesses (for-profit subsidiaries are eligible);
    (b) Financial businesses primarily engaged in the business of 
lending, such as banks, finance companies, and factors (pawn shops, 
although engaged in lending, may qualify in some circumstances);
    (c) Passive businesses owned by developers and landlords that do not 
actively use or occupy the assets acquired or improved with the loan 
proceeds (except Eligible Passive Companies under Sec. 120.111);
    (d) Life insurance companies;
    (e) Businesses located in a foreign country (businesses in the U.S. 
owned by aliens may qualify);
    (f) Pyramid sale distribution plans;
    (g) Businesses deriving more than one-third of gross annual revenue 
from legal gambling activities;
    (h) Businesses engaged in any illegal activity;
    (i) Private clubs and businesses which limit the number of 
memberships for reasons other than capacity;
    (j) Government-owned entities (except for businesses owned or 
controlled by a Native American tribe);
    (k) Businesses principally engaged in teaching, instructing, 
counseling or indoctrinating religion or religious beliefs, whether in a 
religious or secular setting;
    (l) Consumer and marketing cooperatives (producer cooperatives are 
eligible);
    (m) Loan packagers earning more than one third of their gross annual 
revenue from packaging SBA loans;
    (n) Businesses with an Associate who is incarcerated, on probation, 
on parole, or has been indicted for a felony or a crime of moral 
turpitude;
    (o) Businesses in which the Lender or CDC, or any of its Associates 
owns an equity interest;
    (p) Businesses which:
    (1) Present live performances of a prurient sexual nature; or

[[Page 219]]

    (2) Derive directly or indirectly more than de minimis gross revenue 
through the sale of products or services, or the presentation of any 
depictions or displays, of a prurient sexual nature;
    (q) Unless waived by SBA for good cause, businesses that have 
previously defaulted on a Federal loan or Federally assisted financing, 
resulting in the Federal government or any of its agencies or 
Departments sustaining a loss in any of its programs, and businesses 
owned or controlled by an applicant or any of its Associates which 
previously owned, operated, or controlled a business which defaulted on 
a Federal loan (or guaranteed a loan which was defaulted) and caused the 
Federal government or any of its agencies or Departments to sustain a 
loss in any of its programs. For purposes of this section, a compromise 
agreement shall also be considered a loss;
    (r) Businesses primarily engaged in political or lobbying 
activities; and
    (s) Speculative businesses (such as oil wildcatting).



Sec. 120.111  What conditions must an Eligible Passive Company satisfy?

    An Eligible Passive Company must use loan proceeds to acquire or 
lease, and/or improve or renovate, real or personal property (including 
eligible refinancing), that it leases to one or more Operating Companies 
for conducting the Operating Company's business (references to Operating 
Company in paragraphs (a) and (b) of this section mean each Operating 
Company). Any ownership structure or legal form may qualify as an 
Eligible Passive Company.
    (a) Conditions that apply to all legal forms:
    (1) The Operating Company must be an eligible small business, and 
the proposed use of the proceeds must be an eligible use if the 
Operating Company were obtaining the financing directly;
    (2) The Eligible Passive Company (with the exception of a trust) and 
the Operating Company each must be small under the appropriate size 
standards in part 121 of this chapter;
    (3) The lease between the Eligible Passive Company and the Operating 
Company must be in writing and must be subordinated to SBA's mortgage, 
trust deed lien, or security interest on the property. Also, the 
Eligible Passive Company (as landlord) must furnish as collateral for 
the loan an assignment of all rents paid under the lease;
    (4) The lease between the Eligible Passive Company and the Operating 
Company, including options to renew exercisable solely by the Operating 
Company, must have a remaining term at least equal to the term of the 
loan;
    (5) The Operating Company must be a guarantor or a co-borrower (with 
the Eligible Passive Company) of the loan (in a 7(a) loan including 
working capital, the Operating Company must be a co-borrower); and
    (6) Each holder of an ownership interest constituting at least 20 
percent of the Eligible Passive Company and the Operating Company must 
guarantee the loan (the trustee shall execute the guarantee on behalf of 
any trust).
    (b) Additional conditions that apply to trusts. The eligibility 
status of the trustor will determine trust eligibility. All donors to 
the trust will be deemed to have trustor status for eligibility 
purposes. A trust qualifying as an Eligible Passive Company may engage 
in other activities as authorized by its trust agreement. The trustee 
must warrant and certify that the trust will not be revoked or 
substantially amended for the term of the loan without the consent of 
SBA. The trustor must guarantee the loan. For purposes of this section, 
the trustee shall certify to SBA that:
    (1) The trustee has authority to act;
    (2) The trust has the authority to borrow funds, pledge trust 
assets, and lease the property to the Operating Company;
    (3) The trustee has provided accurate, pertinent language from the 
trust agreement confirming the above; and
    (4) The trustee has provided and will continue to provide SBA with a 
true and complete list of all trustors and donors.

[61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1, 1996, as amended at 64 
FR 2117, Jan. 13, 1999]

[[Page 220]]

                            Uses of Proceeds



Sec. 120.120  What are eligible uses of proceeds?

    A small business must use an SBA business loan for sound business 
purposes. The uses of proceeds are prescribed in each loan's 
Authorization.
    (a) A Borrower may use loan proceeds from any SBA loan to:
    (1) Acquire land (by purchase or lease);
    (2) Improve a site (e.g., grading, streets, parking lots, 
landscaping), including up to 5 percent for community improvements such 
as curbs and sidewalks;
    (3) Purchase one or more existing buildings;
    (4) Convert, expand or renovate one or more existing buildings;
    (5) Construct one or more new buildings; and/or
    (6) Acquire (by purchase or lease) and install fixed assets (for a 
504 loan, these assets must have a useful life of at least 10 years and 
be at a fixed location, although short-term financing for equipment, 
furniture, and furnishings may be permitted where essential to and a 
minor portion of the 504 Project).
    (b) A Borrower may also use 7(a) and microloan proceeds for:
    (1) Inventory;
    (2) Supplies;
    (3) Raw materials; and
    (4) Working capital (if the Operating Company is a co-Borrower with 
an Eligible Passive Company, part of the loan proceeds may be applied 
for working capital if used for that purpose only by the Operating 
Company).
    (c) A Borrower may use 7(a) loan proceeds for refinancing certain 
outstanding debts.



Sec. 120.130  Restrictions on uses of proceeds.

    SBA will not authorize nor may a Borrower use loan proceeds for the 
following purposes (including the replacement of funds used for any such 
purpose):
    (a) Payments, distributions or loans to Associates of the applicant 
(except for ordinary compensation for services rendered);
    (b) Refinancing a debt owed to a Small Business Investment Company 
(``SBIC'');
    (c) Floor plan financing or other revolving line credit, except 
under Sec. 120.390;
    (d) Investments in real or personal property acquired and held 
primarily for sale, lease, or investment (except for a loan to an 
Eligible Passive Company or to a small contractor under Sec. 120.310);
    (e) A purpose which does not benefit the small business; or
    (f) Any use restricted by Secs. 120.201 through 120.203 and 120.884 
(specific to 7(a) loans and 504 loans respectively).



Sec. 120.131  Leasing part of new construction or existing building to 
another business.

    (a) If the SBA financing (whether 7(a) or 504) is for the 
construction of a new building, a Borrower may permanently lease up to 
20 percent of the Rentable Property to one or more tenants if the 
Borrower permanently occupies and uses no less than 60 percent of the 
Rentable Property, and plans to permanently occupy and use within three 
years some of the remaining space not immediately occupied and not 
permanently leased and plans to permanently occupy and use within ten 
years all of the remaining space not permanently leased. If the Borrower 
is an Eligible Passive Company which leases 100 percent of the new 
building's space to one or more Operating Companies, the Operating 
Company, or Operating Companies together, must follow the same rules set 
forth in this paragraph.
    (b) If the SBA financing (whether 7(a) or 504) is for the 
acquisition, renovation, or reconstruction of an existing building, the 
Borrower may permanently lease up to 49 percent of the Rentable Property 
if the Borrower permanently occupies and uses no less than 51 percent of 
the Rentable Property. If the Borrower is an Eligible Passive Company 
which leases 100 percent of the space of the existing building to one or 
more Operating Companies, the Operating Company, or Operating Companies 
together, must follow the same rules set forth in this paragraph.

[68 FR 51679, Aug. 28, 2003]

[[Page 221]]

                          Ethical Requirements



Sec. 120.140  What ethical requirements apply to participants?

    Lenders, Intermediaries, and CDCs (in this section, collectively 
referred to as ``Participants''), must act ethically and exhibit good 
character. Ethical indiscretion of an Associate of a Participant or a 
member of a CDC will be attributed to the Participant. A Participant 
must promptly notify SBA if it obtains information concerning the 
unethical behavior of an Associate. The following are examples of such 
unethical behavior. A Participant may not:
    (a) Self-deal;
    (b) Have a real or apparent conflict of interest with a small 
business with which it is dealing (including any of its Associates or an 
Associate's Close Relatives) or SBA;
    (c) Own an equity interest in a business that has received or is 
applying to receive SBA financing (during the term of the loan or within 
6 months prior to the loan application);
    (d) Be incarcerated, on parole, or on probation;
    (e) Knowingly misrepresent or make a false statement to SBA;
    (f) Engage in conduct reflecting a lack of business integrity or 
honesty;
    (g) Be a convicted felon, or have an adverse final civil judgment 
(in a case involving fraud, breach of trust, or other conduct) that 
would cause the public to question the Participant's business integrity, 
taking into consideration such factors as the magnitude, repetition, 
harm caused, and remoteness in time of the activity or activities in 
question;
    (h) Accept funding from any source that restricts, prioritizes, or 
conditions the types of small businesses that the Participant may assist 
under an SBA program or that imposes any conditions or requirements upon 
recipients of SBA assistance inconsistent with SBA's loan programs or 
regulations;
    (i) Fail to disclose to SBA all relationships between the small 
business and its Associates (including Close Relatives of Associates), 
the Participant, and/or the lenders financing the Project of which it is 
aware or should be aware;
    (j) Fail to disclose to SBA whether the loan will:
    (1) Reduce the exposure of a Participant or an Associate of a 
Participant in a position to sustain a loss;
    (2) Directly or indirectly finance the purchase of real estate, 
personal property or services (including insurance) from the Participant 
or an Associate of the Participant;
    (3) Repay or refinance a debt due a Participant or an Associate of a 
Participant; or
    (4) Require the small business, or an Associate (including Close 
Relatives of Associates), to invest in the Participant (except for 
institutions which require an investment from all members as a condition 
of membership, such as a Production Credit Association);
    (k) Issue a real estate forward commitment to a builder or 
developer; or
    (l) Engage in any activity which taints its objective judgment in 
evaluating the loan.

[61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57980, Oct. 7, 2003]

                      Credit Criteria for SBA Loans



Sec. 120.150  What are SBA's lending criteria?

    The applicant (including an Operating Company) must be creditworthy. 
Loans must be so sound as to reasonably assure repayment. SBA will 
consider:
    (a) Character, reputation, and credit history of the applicant (and 
the Operating Company, if applicable), its Associates, and guarantors;
    (b) Experience and depth of management;
    (c) Strength of the business;
    (d) Past earnings, projected cash flow, and future prospects;
    (e) Ability to repay the loan with earnings from the business;
    (f) Sufficient invested equity to operate on a sound financial 
basis;
    (g) Potential for long-term success;
    (h) Nature and value of collateral (although inadequate collateral 
will not be the sole reason for denial of a loan request); and
    (i) The effect any affiliates (as defined in part 121 of this 
chapter) may have on the ultimate repayment ability of the applicant.

[[Page 222]]



Sec. 120.151  What is the statutory limit for total loans to a Borrower?

     The aggregate amount of the SBA portions of all loans to a single 
Borrower, including the Borrower's affiliates as defined in Sec. 121.103 
of this chapter, must not exceed a guaranty amount of $1,000,000, except 
as otherwise authorized by statute for a specific program. The maximum 
loan amount for any one 7(a) loan is $2,000,000. The amount of any loan 
received by an Eligible Passive Company applies to the loan limit of 
both the Eligible Passive Company and the Operating Company.

[61 FR 3235, Jan. 31, 1996, as amended at 68 FR 51680, Aug. 28, 2003]



Sec. 120.160  Loan conditions.

    The following requirements are normally required by SBA for all 
business loans:
    (a) Personal guarantees. Holders of at least a 20 percent ownership 
interest generally must guarantee the loan. SBA, in its discretion, 
consulting with the Participating Lender, may require other appropriate 
individuals to guarantee the loan as well, except SBA will not require 
personal guarantees from those owning less than 5% ownership.
    (b) Appraisals. SBA may require professional appraisals of the 
applicant's and principals' assets, a survey, or a feasibility study.
    (c) Hazard Insurance. SBA requires hazard insurance on all 
collateral.
    (d) Taxes. The applicant may not use any of the proceeds to pay 
past-due Federal and state payroll taxes.

            Requirements Imposed Under Other Laws and Orders



Sec. 120.170  Flood insurance.

    Under the Flood Disaster Protection Act of 1973 (Sec. 205(b) of Pub. 
L. 93-234; 87 Stat. 983 (42 U.S.C. 4000 et seq.)), a loan recipient must 
obtain flood insurance if any building (including mobile homes), 
machinery, or equipment acquired, installed, improved, constructed, or 
renovated with the proceeds of SBA financial assistance is located in a 
special flood hazard area. The requirement applies also to any inventory 
(business loan program), fixtures or furnishings contained or to be 
contained in the building. Mobile homes on a foundation are buildings. 
SBA, Lenders, CDCs, and Intermediaries must notify Borrowers that flood 
insurance must be maintained.



Sec. 120.171  Compliance with child support obligations.

    Any holder of 50% or more of the ownership interest in the recipient 
of an SBA loan must certify that he or she is not more than 60 days 
delinquent on any obligation to pay child support arising under:
    (a) An administrative order;
    (b) A court order;
    (c) A repayment agreement between the holder and a custodial parent; 
or
    (d) A repayment agreement between the holder and a State agency 
providing child support enforcement services.



Sec. 120.172  Flood-plain and wetlands management.

    (a) All loans must conform to requirements of Executive Orders 
11988, ``Flood Plain Management'' (3 CFR, 1977 Comp., p. 117) and 11990, 
``Protection of Wetlands'' (3 CFR, 1977 Comp., p. 121). Lenders, 
Intermediaries, CDCs, and SBA must comply with requirements applicable 
to them. Applicants must show:
    (1) Whether the location for which financial assistance is proposed 
is in a floodplain or wetland;
    (2) If it is in a floodplain, that the assistance is in compliance 
with local land use plans; and
    (3) That any necessary construction or use permits will be issued.
    (b) Generally, there is an 8-step decision making process with 
respect to:
    (1) Construction or acquisition of anything, other than a building;
    (2) Repair and restoration equal to more than 50% of the market 
value of a building; or
    (3) Replacement of destroyed structures.
    (c) SBA may determine for the following types of actions, on a case-
by-case basis, that the full 8-step process is not warranted and that 
only the first step (determining if a proposed action is in the base 
floodplain) need be completed:

[[Page 223]]

    (1) Actions located outside the base floodplain;
    (2) Repairs, other than to buildings, that are less than 50% of the 
market value;
    (3) Replacement of building contents, materials, and equipment;
    (4) Hazard mitigation measures;
    (5) Working capital loans; or
    (6) SBA loan assistance of $1,500,000 or less.



Sec. 120.173  Lead-based paint.

    If loan proceeds are for the construction or rehabilitation of a 
residential structure, lead-based paint may not be used on any interior 
surface, or on any exterior surface that is readily accessible to 
children under the age of seven years.



Sec. 120.174  Earthquake hazards.

    When loan proceeds are used to construct a new building or an 
addition to an existing building, the construction must conform with the 
``National Earthquake Hazards Reduction Program (``NEHRP'') Recommended 
Provisions for the Development of Seismic Regulations for New 
Buildings'' (which can be obtained from the Federal Emergency Management 
Agency, Publications Office, Washington, DC) or a code identified by SBA 
as being substantially equivalent.



Sec. 120.175  Coastal barrier islands.

    SBA and Intermediaries may not make or guarantee any loan within the 
Coastal Barrier Resource System.



Sec. 120.176  Compliance with other laws.

    All SBA loans are subject to all applicable laws, including (without 
limitation) the civil rights laws (see parts 112, 113, 117 and 136 of 
this chapter), prohibiting discrimination on the grounds of race, color, 
national origin, religion, sex, marital status, disability or age. SBA 
requests agreements or evidence to support or document compliance with 
these laws, including reports required by applicable statutes or the 
regulations in this chapter.

                   Enforceability Despite Rule Changes



Sec. 120.180  Are rules enforceable if they are changed later?

    Regulations and contractual provisions in effect at the time of a 
transaction govern an SBA loan financing transaction, notwithstanding 
subsequent rule or contract changes. SBA may conduct an enforcement 
action regarding any violation of provisions of regulations or contracts 
applicable at the time, but no longer in effect or in use.

                            Loan Applications



Sec. 120.190  Where does an applicant apply for a loan?

    An applicant for a business loan should apply to:
    (a) A Lender for a guaranteed or immediate participation loan;
    (b) A CDC for a 504 loan;
    (c) An Intermediary for a Microloan; or
    (d) SBA for a direct loan.



Sec. 120.191  The contents of a business loan application.

    For most business loans, SBA requires that an application for a 
business loan contain, among other things, a description of the history 
and nature of the business, the amount and purpose of the loan, the 
collateral offered for the loan, current financial statements, 
historical financial statements (or tax returns if appropriate) for the 
past three years, IRS tax verification, and a business plan, when 
applicable. Personal histories and financial statements will be required 
from principals of the applicant (and the Operating Company, if 
applicable).



Sec. 120.192  Approval or denial.

    Applicants receive notice of approval or denial by the Lender, CDC, 
Intermediary, or SBA, as appropriate. Notice of denial will include the 
reasons. If a loan is approved, an Authorization will be issued.



Sec. 120.193  Reconsideration after denial.

    An applicant or recipient of a business loan may request 
reconsideration of a denied loan or loan modification

[[Page 224]]

request within 6 months of denial. Applicants denied due to a size 
determination can appeal that determination under part 121 of this 
chapter. All others must be submitted to the office that denied the 
original request. To prevail, the applicant must demonstrate that it has 
overcome all legitimate reasons for denial. Six months after denial, a 
new application is required. If the reconsideration is denied, a second 
and final reconsideration may be considered by the Associate 
Administrator for Financial Assistance (AA/FA), whose decision is final.

                         Computerized SBA Forms



Sec. 120.194  Use of computer forms.

    Any Applicant or Participant may use computer generated SBA 
application forms, closing forms, and other forms designated by SBA if 
the forms are exact reproductions of SBA forms.

                            Reporting of Fees



Sec. 120.195  Disclosure of fees.

    An Applicant for a business loan must identify to SBA the name of 
each Agent as defined in part 103 of this chapter that helped the 
applicant obtain the loan, describing the services performed, and 
disclosing the amount of each fee paid or to be paid by the applicant to 
the Agent in conjunction with the performance of those services.



               Subpart B--Policies Specific to 7(a) Loans

                          Bonding Requirements



Sec. 120.200  What bonding requirements exist during construction?

    On 7(a) loans which finance construction, the Borrower must supply a 
100 percent payment and performance bond and builder's risk insurance, 
unless waived by SBA.

                     Limitations on Use of Proceeds



Sec. 120.201  Refinancing unsecured or undersecured loans.

    A Borrower may not use 7(a) loan proceeds to pay any creditor in a 
position to sustain a loss causing a shift to SBA of all or part of a 
potential loss from an existing debt.



Sec. 120.202  Restrictions on loans for changes in ownership.

    A Borrower may not use 7(a) loan proceeds to purchase a portion of a 
business or a portion of another owner's interest. One or more current 
owners may use loan proceeds to purchase the entire interest of another 
current owner, or a Borrower can purchase ownership of an entire 
business.

         Maturities; Interest Rates; Loan and Guarantee Amounts



Sec. 120.210  What percentage of a loan may SBA guarantee?

    SBA's guarantee percentage must not exceed the applicable percentage 
established in section 7(a) of the Act. The maximum allowable guarantee 
percentage on a loan will be determined by the loan amount. Effective 
December 21, 2000, loans of $150,000 or less may receive a maximum 
guaranty of 85 percent. Loans more than $150,000 may receive a maximum 
guaranty of 75 percent, except as otherwise authorized by law.

[61 FR 3235, Jan. 31, 1996, as amended at 68 FR 51680, Aug. 28, 2003]



Sec. 120.211  What limits are there on the amounts of direct loans?

    (a) The statutory limit for direct loans made under the authority of 
section 7(a)(1)-(19) of the Small Business Act is $350,000. SBA has 
established an administrative limit of $150,000 for direct loans. The 
AA/FA may authorize acceptance of an application up to the statutory 
limit.
    (b) The statutory limit for direct loans made under the authority of 
section 7(a)(20) is $750,000. SBA has established an administrative 
limit of $150,000. The Associate Administrator for Minority Enterprise 
Development may authorize the acceptance of an application that exceeds 
the administrative limit.
    (c) The statutory limit on SBA's portion of an immediate 
participation loan is $350,000. The administrative limit is the lesser 
of 75 percent of the loan or $150,000. The AA/FA may authorize 
exceptions to the administrative limit up to $350,000.

[[Page 225]]



Sec. 120.212  What limits are there on loan maturities?

    The term of a loan shall be:
    (a) The shortest appropriate term, depending upon the Borrower's 
ability to repay;
    (b) Ten years or less, unless it finances or refinances real estate 
or equipment with a useful life exceeding ten years; and
    (c) A maximum of 25 years, including extensions. (A portion of a 
loan used to acquire or improve real property may have a term of 25 
years plus an additional period needed to complete the construction or 
improvements.)



Sec. 120.213  What fixed interest rates may a Lender charge?

    (a) Fixed Rates for Guaranteed Loans. A loan may have a reasonable 
fixed interest rate. SBA periodically publishes the maximum allowable 
rate in the Federal Register.
    (b) Direct loans. A statutory formula based on the cost of money to 
the Federal government determines the interest rate on direct loans. SBA 
publishes the rate periodically in the Federal Register.



Sec. 120.214  What conditions apply for variable interest rates?

    A Lender may use a variable rate of interest, upon SBA's approval. 
SBA's maximum allowable rates apply only to the initial rate on the date 
SBA received the loan application. SBA shall approve the use of a 
variable interest rate under the following conditions:
    (a) Frequency. The first change may occur on the first calendar day 
of the month following initial disbursement, using the base rate (see 
paragraph (c) of this section) in effect on the first business day of 
the month. After that, changes may occur no more often than monthly.
    (b) Range of fluctuation. The amount of fluctuation shall be equal 
to the movement in the base rate. The difference between the initial 
rate and the ceiling rate may be no greater than the difference between 
the initial rate and the floor rate.
    (c) Base rate. The base rate shall be the prime rate in effect on 
the first business day of the month, printed in a national financial 
newspaper published each business day, or the SBA Optional Peg Rate 
which SBA publishes quarterly in the Federal Register.
    (d) Maturities under 7 years. For loans with maturities under seven 
years, the maximum interest rate shall not exceed two and one-quarter (2 
1/4 ) percentage points over the base rate.
    (e) Maturities of 7 years or more. For loans with maturities of 
seven or more years, the maximum interest rate shall not exceed two and 
three-quarters (2 3/4) percentage points over the base rate.
    (f) Amortization. Initial amortization of principal and interest may 
be recomputed and reassessed as interest rates fluctuate, as directed by 
SBA. With prior approval of SBA, the Lender may use certain other 
amortization methods, except that SBA does not allow balloon payments.



Sec. 120.215  What interest rates apply to smaller loans?

    For a loan over $25,000 but not exceeding $50,000, the interest rate 
may be one percent more than the maximum interest rate described above. 
For a loan of $25,000 or less, the maximum interest rate described above 
may be increased by two percentage points.

[61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1, 1996]

                        Fees for Guaranteed Loans



Sec. 120.220  Fees that Lender pays SBA.

    A Lender must pay a guaranty fee to SBA for each loan it makes. If 
the guarantee fee is not paid, SBA may terminate the guarantee. 
Acceptance of the guaranty fee by SBA does not waive any right of SBA 
arising from a Lender's negligence, misconduct or violation of any 
provision of these regulations, the guaranty agreement, or the loan 
authorization.
    (a) Amount of guaranty fee. (1) In general. Except to the extent 
paragraph (a)(2) of this section applies, for a loan with a maturity of 
twelve (12) months or less, the guarantee fee which the Lender must pay 
to SBA is one-quarter (\1/4\) of one percent of the guaranteed portion 
of the loan. For a loan with a maturity of more than twelve (12) months, 
the guarantee fee is:

[[Page 226]]

    (i) 2 percent of the guaranteed portion of a loan if the total 
amount of the loan is not more than $150,000,
    (ii) 3 percent of the guaranteed portion of a loan if the total 
amount is more than $150,000 but not more than $700,000, and
    (iii) 3.5 percent of the guaranteed portion of a loan if the total 
loan amount is more than $700,000.
    (2) For loans approved October 1, 2002, through September 30, 2004. 
For a loan with a maturity of twelve (12) months or less, the guarantee 
fee which the Lender must pay to SBA is one-quarter (\1/4\) of one 
percent of the guaranteed portion of the loan. For a loan with a 
maturity of more than twelve (12) months, the guarantee fee is:
    (i) 1 percent of the guaranteed portion of the loan if the total 
loan amount is not more than $150,000,
    (ii) 2.5 percent of the guaranteed portion of a loan if the total 
loan amount is more than $150,000, but not more than $700,000, and
    (iii) 3.5 percent of the guaranteed portion if the total loan amount 
is more than $700,000.
    (b) When the guaranty fee is payable. For a loan with a maturity of 
twelve (12) months or less, the Lender must pay the guaranty fee to SBA 
with its application for a guaranty. The Lender may charge the Borrower 
for the fee when the loan is approved by SBA. For a loan with a maturity 
in excess of twelve (12) months, the Lender must pay the guaranty fee to 
SBA within 90 days after SBA gives its loan approval. The Lender may 
charge the Borrower the fee after the Lender has made the first 
disbursement of the loan. The Borrower may use the loan proceeds to pay 
the guaranty fee. However, the first disbursement must not be made 
solely or primarily to pay the guaranty fee.
    (c) Refund of guaranty fee. For a loan with a maturity of twelve 
(12) months or less, SBA will refund the guaranty fee if the loan 
application is withdrawn prior to approval by SBA; if SBA declines to 
guarantee the loan; or if SBA substantially changes the Lender's loan 
terms and then approves the loan, but SBA's modified terms are 
unacceptable to the Lender. In the latter case, the Lender must request 
a refund in writing within 30 calendar days of SBA's approval. For a 
loan with a maturity of more than twelve (12) months, SBA will refund 
the guaranty fee if the Lender has not made any disbursement and the 
lender requests in writing the refund and cancellation of the SBA 
guaranty.
    (d) Lender's retention of portion of guaranty fee. With respect to a 
loan with a maturity of more than twelve (12) months, where the total 
loan amount is no more than $150,000 Lender may retain not more than 25 
percent of the guaranty fee.
    (e) If the guarantee fee is not paid, SBA may terminate the 
guarantee. The Borrower may use working capital loan proceeds to 
reimburse the Lender for the guarantee fee. Acceptance of the guarantee 
fee by SBA shall not waive any right of SBA arising from the Lender's 
misconduct or violation of any provision of this part, the guarantee 
agreement, the Authorization, or other loan documents.
    (f) Lender's annual service fee payable to SBA. (1) In general. 
Except to the extent paragraph (f)(2) of this section applies, the 
lender shall pay SBA an annual service fee equal to 0.5 percent of the 
outstanding balance of the guaranteed portion of each loan. The service 
fee cannot be charged to the Borrower. SBA may institute a late fee 
charge for delinquent payments of the annual service fee to cover 
administrative costs associated with collecting delinquent fees.
    (2) For loans approved from October 1, 2002, through September 30, 
2004. The lender shall pay SBA an annual service fee equal to 0.25 
percent of the outstanding balance of the guaranteed portion of each 
loan. The service fee cannot be charged to the Borrower. SBA may 
institute a late fee charge for delinquent payments of the annual 
service fee to cover administrative costs associated with collecting 
delinquent fees.

[61 FR 3235, Jan. 31, 1996; 61 FR 11471, Mar. 20, 1996, as amended at 68 
FR 51680, Aug. 28, 2003; 68 FR 56554, Oct. 1, 2003]

[[Page 227]]



Sec. 120.221  Fees which the Lender may collect from a loan applicant.

    (a) Service and packaging fees. The Lender may charge an applicant 
reasonable fees (customary for similar Lenders in the geographic area 
where the loan is being made) for packaging and other services. The 
Lender must advise the applicant in writing that the applicant is not 
required to obtain or pay for unwanted services. The applicant is 
responsible for deciding whether fees are reasonable. SBA may review 
these fees at any time. Lender must refund any such fee considered 
unreasonable by SBA.
    (b) Extraordinary servicing. Subject to prior written SBA approval, 
if all or part of a loan will have extraordinary servicing needs, the 
Lender may charge the applicant a service fee not to exceed 2 percent 
per year on the outstanding balance of the part requiring special 
servicing.
    (c) Out-of-pocket expenses. The Lender may collect from the 
applicant necessary out-of-pocket expenses such as filing or recording 
fees.
    (d) Late payment fee. The Lender may charge the Borrower a late 
payment fee not to exceed 5 percent of the regular loan payment.
    (e) No prepayment fee. The Lender may not charge a fee for full or 
partial prepayment of a loan.



Sec. 120.222  Fees which the Lender or Associate may not collect from the Borrower or share with third parties.

    The Lender or its Associate may not:
    (a) Require the applicant or Borrower to pay the Lender, an 
Associate, or any party designated by either, any fees or charges for 
goods or services, including insurance, as a condition for obtaining an 
SBA guaranteed loan (unless permitted by this part);
    (b) Charge an applicant any commitment, bonus, broker, commission, 
referral or similar fee;
    (c) Charge points or add-on interest;
    (d) Share any premium received from the sale of an SBA guaranteed 
loan in the secondary market with a Service Provider, packager, or other 
loan-referral source; or
    (e) Charge the Borrower for legal services, unless they are hourly 
charges for requested services actually rendered.



Sec. 120.223  Subsidy recoupment fee payable to SBA by Borrower.

    (a) The subsidy recoupment fee is payable to SBA when:
    (1) Loan has a maturity of 15 years or more.
    (2) Borrower makes a voluntary prepayment (or several prepayments in 
the aggregate) during any one of the first three successive 12 month 
periods following the first disbursement of the loan. Prepayment is 
defined as a payment of principal in excess of the amount due according 
to the amortization schedule.
    (3) The prepayment (or several prepayments in the aggregate) is more 
than 25 percent of the highest outstanding principal balance of the loan 
in any one of the first three successive 12 month periods following the 
first disbursement.
    (b) When all the conditions above exist, the following subsidy 
recoupment fees apply:
    (1) If the prepayment is made during the first 12 month period after 
first disbursement, the charge is 5 percent of the total amount of all 
prepayments made during such period;
    (2) If the prepayment is made during the second 12 month period 
after first disbursement, the charge is 3 percent of the total amount of 
all prepayments made during that period; and
    (3) If the prepayment is made during the third 12 month period after 
first disbursement, the charge is 1 percent of the total amount of all 
prepayments made during that period.

[68 FR 51680, Aug. 28, 2003]



                    Subpart C--Special Purpose Loans



Sec. 120.300  Statutory authority.

    Congress has authorized several special purpose programs in various 
subsections of section 7(a) of the Act. Generally, 7(a) loan policies, 
eligibility requirements and credit criteria enumerated in subpart B of 
this part apply to these programs. The sections of this subpart 
prescribe the special conditions applying to each special purpose 
program. As with other business loans,

[[Page 228]]

special purpose loans are available only to the extent funded by annual 
appropriations.

                 Disabled Assistance Loan Program (DAL)



Sec. 120.310  What assistance is available for the disabled?

    Section 7(a)(10) of the Act authorizes SBA to guarantee or make 
direct loans to the disabled. SBA distinguishes two kinds of assistance:
    (a) DAL-1. DAL-1 Financial Assistance is available to non-profit 
public or private organizations for disabled individuals that employ 
such individuals; or
    (b) DAL-2. DAL-2 Financial Assistance is available to:
    (1) Small businesses wholly owned by disabled individuals; and
    (2) Disabled individuals to establish, acquire, or operate a small 
business.



Sec. 120.311  Definitions.

    (a) Organization for the disabled means one which:
    (1) Is organized under federal or state law to operate in the 
interest of disabled individuals;
    (2) Is non-profit;
    (3) Employs disabled individuals for seventy-five percent of the 
time needed to produce commodities or services for sale; and
    (4) Complies with occupational and safety standards prescribed by 
the Department of Labor.
    (b) Disabled individual means a person who has a permanent physical, 
mental or emotional impairment, defect, ailment, disease or disability 
which limits the type of employment for which the person would otherwise 
be qualified.



Sec. 120.312  DAL-1 use of proceeds and other program conditions.

    (a) DAL-1 applicants must submit appropriate documents to establish 
program eligibility.
    (b) Generally, applicants may use loan proceeds for any 7(a) loan 
purposes. Loan proceeds may not be used:
    (1) To purchase or construct facilities if construction grants and 
mortgage assistance are available from another Federal source; or
    (2) For supportive services (expenses incurred by a DAL-1 
organization to subsidize wages of low producers, health and 
rehabilitation services, management, training, education, and housing of 
disabled workers).
    (c) SBA does not consider a DAL-1 organization to have a conflict of 
interest if one or more of its Associates is an Associate of the Lender.



Sec. 120.313  DAL-2 use of proceeds and other program conditions.

    (a) The DAL-2 loan proceeds may be used for any 7(a) loan purposes.
    (b) An applicant may use DAL-2 loan proceeds to acquire an eligible 
small business without complying with the change of ownership conditions 
in Sec. 120.202.
    (c) A DAL-2 applicant must submit evidence from a physician, 
psychiatrist, or other qualified professional as to the permanent nature 
of the disability and the limitation it places on the applicant.



Sec. 120.314  Resolving doubts about creditworthiness.

    For the purpose of the DAL Program, SBA shall resolve doubts 
concerning the creditworthiness of an applicant in favor of the 
applicant. However, the applicant must present satisfactory evidence of 
repayment ability. Personal guarantees of Associates are not required 
for purposes of DAL-1 financial assistance.



Sec. 120.315  Interest rate and loan limit.

    The interest rate on direct DAL loans is three percent. There is an 
administrative limit of $150,000 on a direct DAL loan.

               Businesses Owned by Low Income Individuals



Sec. 120.320  Policy.

    Section 7(a)(11) of the Act authorizes SBA to guarantee or make 
direct loans to establish, preserve or strengthen small business 
concerns:
    (a) Located in an area having high unemployment according to the 
Department of Labor;
    (b) Located in an area in which a high percentage of individuals 
have a

[[Page 229]]

low income inadequate to satisfy basic family needs; and
    (c) More than 50 percent owned by low income individuals.

                           Energy Conservation



Sec. 120.330  Who is eligible for an energy conservation loan?

    SBA may make or guarantee loans to assist a small business to 
design, engineer, manufacture, distribute, market, install, or service 
energy devices or techniques designed to conserve the Nation's energy 
resources.



Sec. 120.331  What devices or techniques are eligible for a loan?

    Eligible energy conservation devices or techniques include:
    (a) Solar thermal equipment;
    (b) Photovoltaic cells and related equipment;
    (c) A product or service which increases the energy efficiency of 
existing equipment, methods of operation or systems which use fossil 
fuels, and which is on the Energy Conservation Measures list of the 
Secretary of Energy;
    (d) Equipment producing energy from wood, biological waste, grain or 
other biomass energy sources;
    (e) Equipment for cogeneration of energy, district heating or 
production of energy from industrial waste;
    (f) Hydroelectric power equipment;
    (g) Wind energy conversion equipment; and
    (h) Engineering, architectural, consulting, or other professional 
services necessary or appropriate for any of the devices or techniques 
in paragraphs (a) through (g) of this section.



Sec. 120.332  What are the eligible uses of proceeds?

    (a) Acquire property. The Borrower may use the loan proceeds to 
acquire land necessary for imminent plant construction, buildings, 
machinery, equipment, furniture, fixtures, facilities, supplies, and 
material needed to accomplish any of the eligible program purposes in 
Sec. 120.330.
    (b) Research and development. Up to 30% of loan proceeds may be used 
for research and development:
    (1) Of an existing product or service; or
    (2) A new product or service.
    (c) Working capital. The Borrower may use proceeds for working 
capital for entering or expanding in the energy conservation market.



Sec. 120.333  Are there any special credit criteria?

    In addition to regular credit evaluation criteria, SBA shall weigh 
the greater risk associated with energy projects. SBA shall consider 
such factors as quality of the product or service, technical 
qualifications of the applicant's management, sales projections, and 
financial status.

                  Export Working Capital Program (EWCP)



Sec. 120.340  What is the Export Working Capital Program?

    Under the EWCP, SBA guarantees short-term working capital loans made 
by participating lenders to exporters (section 7(a)(14) of the Act). 
Loan maturities may be for up to three years with annual renewals. 
Proceeds can be used only to finance export transactions. Loans can be 
for single or multiple export transactions. An export transaction is the 
production and payment associated with a sale of goods or services to a 
foreign buyer.



Sec. 120.341  Who is eligible?

    In addition to the eligibility criteria applicable to all 7(a) 
loans, an applicant must be in business for one full year at the time of 
application, but not necessarily in the exporting business. SBA may 
waive this requirement if the applicant has sufficient export trade 
experience or other managerial experience.



Sec. 120.342  What are eligible uses of proceeds?

    Loan proceeds may be used:
    (a) To acquire inventory;
    (b) To pay the manufacturing costs of goods for export;
    (c) To purchase goods or services for export;
    (d) To support standby letters of credit;
    (e) For pre-shipment working capital; and

[[Page 230]]

    (f) For post-shipment foreign accounts receivable financing.



Sec. 120.343  Collateral.

    A Borrower must give SBA a first security interest sufficient to 
cover 100 percent of the EWCP loan amount (such as insured accounts 
receivable or letters of credit). Collateral must be located in the 
United States, its territories or possessions.



Sec. 120.344  Unique requirements of the EWCP.

    (a) An applicant must submit cash flow projections to support the 
need for the loan and the ability to repay. After the loan is made, the 
loan recipient must submit continual progress reports.
    (b) SBA does not limit the amount of extraordinary servicing fees, 
as referenced in Sec. 120.221(b), under the EWCP.
    (c) SBA does not prescribe the interest rates for the EWCP, but will 
monitor these rates for reasonableness.

                        International Trade Loans



Sec. 120.345  Policy.

    Section 7(a)(16) of the Act authorizes SBA to guarantee loans to 
small businesses that are:
    (a) Engaged or preparing to engage in international trade; or
    (b) Adversely affected by import competition.



Sec. 120.346  Eligibility.

    (a) An applicant must establish that:
    (1) The loan proceeds will significantly expand an existing export 
market or develop new export markets; or
    (2) The applicant business is adversely affected by import 
competition; and
    (3) Upgrading facilities or equipment will improve the applicant's 
competitive position.
    (b) The applicant must have a business plan reasonably supporting 
its projected export sales.



Sec. 120.347  Use of proceeds.

    The Borrower may use loan proceeds to acquire, construct, renovate, 
modernize, improve, or expand facilities and equipment to be used in the 
United States to produce goods or services involved in international 
trade, and to develop and penetrate foreign markets.



Sec. 120.348  Amount of guarantee.

    SBA can guarantee up to $1,250,000 for a combination of fixed-asset 
financing and working capital, supplies and EWCP assistance. The fixed-
asset portion of the loan cannot exceed $1,000,000 and the non-fixed-
asset portion cannot exceed $750,000.

                    Qualified Employee Trusts (ESOP)



Sec. 120.350  Policy.

    Section 7(a)(15) of the Act authorizes SBA to guarantee a loan to a 
qualified employee trust (``ESOP'') to:
    (a) Help finance the growth of its employer's small business; or
    (b) Purchase ownership or voting control of the employer.



Sec. 120.351  Definitions.

    All terms specific to ESOPs have the same definition for purposes of 
this section as in the Internal Revenue Service (IRS) Code (title 26 of 
the United States Code) or regulations (26 CFR chapter I).



Sec. 120.352  Use of proceeds.

    Loan proceeds may be used for two purposes.
    (a) Qualified employer securities. A qualified employee trust may 
relend loan proceeds to the employer by purchasing qualified employer 
securities. The small business concern may use these funds for any 
general 7(a) purpose.
    (b) Control of employer. A qualified employee trust may use loan 
proceeds to purchase a controlling interest (51 percent) in the 
employer. Ownership and control must vest in the trust by the time the 
loan is repaid.



Sec. 120.353  Eligibility.

    SBA may assist a qualified employee trust (or equivalent trust) that 
meets the requirements and conditions for an ESOP prescribed in all 
applicable IRS, Treasury and Department of Labor (DOL) regulations. In 
addition, the following conditions apply:
    (a) The small business must provide the funds needed by the trust to 
repay the loan; and

[[Page 231]]

    (b) The small business must provide adequate collateral.



Sec. 120.354  Creditworthiness.

    In determining repayment ability, SBA shall not consider the 
personal assets of the employee-owners of the trust. SBA shall consider 
the earnings history and projected future earnings of the employer small 
business. SBA may consider the business and management experience of the 
employee-owners.

                          Veterans Loan Program



Sec. 120.360  Which veterans are eligible?

    SBA may guarantee or make direct loans to a small business 51 
percent owned by one or more of the following eligible veterans:
    (a) Vietnam-era veterans who served for a period of more than 180 
days between August 5, 1964, and May 7, 1975, and were discharged other 
than dishonorably;
    (b) Disabled veterans of any era with a minimum compensable 
disability of 30 percent; or
    (c) A veteran of any era who was discharged for disability.



Sec. 120.361  Other conditions of eligibility.

    (a) Management and daily operations of the business must be directed 
by one or more of the veteran owners whose veteran status was used to 
qualify for the loan.
    (b) This direct loan program is available only if private sector 
financing and guaranteed loans are not available.
    (c) A veteran may qualify only once for this program on a direct 
loan basis.

                        Pollution Control Program



Sec. 120.370  Policy.

    Section 7(a)(12) of the Act authorizes SBA to guarantee loans up to 
$1,000,000 to an eligible small business to plan, design or install a 
pollution control facility. An applicant must meet the eligibility 
requirements for 7(a) loans.

                Loans to Participants in the 8(a) Program



Sec. 120.375  Policy.

    Section 7(a)(20) of the Act authorizes SBA to provide direct 
(unilaterally or together with Lenders) or guaranteed loans to firms 
participating in the 8(a) Program.



Sec. 120.376  Special requirements.

    The following special conditions apply (otherwise, 7(a) loan 
eligibility criteria apply):
    (a) The Associate Administrator of Minority Enterprise Development 
(``MED'') may waive the direct loan administrative ceiling of $150,000, 
and raise it to $750,000.
    (b) The SBA portion of a guaranteed loan must not exceed $750,000.
    (c) The interest rate on a guaranteed loan shall be the same as on 
7(a) guaranteed business loans. The interest rate on a direct loan shall 
be one percent less than on a regular direct loan.
    (d) For a direct loan or SBA's portion of an immediate participation 
loan, SBA shall subordinate its security interest on all collateral to 
other debt of the applicant.



Sec. 120.377  Use of proceeds.

    The loan proceeds shall not be used for debt refinancing. Only a 
manufacturing concern may use loan proceeds for working capital.

                 Defense Economic Transition Assistance



Sec. 120.380  Program.

    Section 7(a)(21) of the Act authorizes SBA to guarantee loans to 
help eligible small businesses transition from defense to civilian 
markets, or eligible individuals adversely impacted by base closures or 
defense cutbacks to acquire or open and operate a small business.



Sec. 120.381  Eligibility.

    (a) Eligible small businesses. A small business is eligible if it 
has been detrimentally impacted by the closure (or substantial 
reduction) of a Department of Defense installation, or the termination 
(or substantial reduction) of a Department of Defense Program on which 
the small business was a prime

[[Page 232]]

contractor, subcontractor, or supplier at any tier.
    (b) Eligible individual. An eligible individual, for purposes of 
this program, includes the following persons involuntarily separated 
from their position or voluntarily terminated under a program offering 
inducements to encourage early retirement:
    (1) A member of the Armed Forces of the United States (honorably 
discharged);
    (2) A civilian employee of the Department of Defense; or
    (3) An employee of a prime contractor, sub-contractor, or supplier 
at any tier of a Department of Defense program.
    (c) Defense loan and technical assistance (DELTA). The DELTA program 
provides financial and technical assistance to defense dependent small 
businesses which have been adversely affected by defense reductions. The 
goal of the program is to assist these businesses to diversify into the 
commercial market while remaining part of the defense industrial base. 
Complete information on eligibility and other rules is available from 
each SBA district office.



Sec. 120.382  Repayment ability.

    SBA shall resolve reasonable doubts concerning the small business' 
proposed business plan for transition to non-defense-related markets in 
favor of the loan applicant in determining the sound value of the 
proposed loan.



Sec. 120.383  Restrictions on loan processing.

    Since greater risk may be associated with a loan to an applicant 
under this program, a Certified Lender or Preferred Lender shall not 
make a defense economic assistance loan under the PLP or CLP programs.

                            CapLines Program



Sec. 120.390  Revolving credit.

    (a) CapLines finances eligible small businesses' short-term, 
revolving and non-revolving working-capital needs. SBA regulations 
governing the 7(a) loan program govern business loans made under this 
program. Under CapLines, SBA generally can guarantee up to $750,000.
    (b) CapLines proceeds can be used to finance the cyclical, 
recurring, or other identifiable short-term operating capital needs of 
small businesses. Proceeds can be used to create current assets or used 
to provide financing against the current assets that already exist.

                          Builders Loan Program



Sec. 120.391  What is the Builders Loan Program?

    Under section 7(a)(9) of the Act, SBA may make or guarantee loans to 
finance small general contractors to construct or rehabilitate 
residential or commercial property for resale. This program provides an 
exception under specified conditions to the general rule against 
financing investment property. ``Construct'' and ``rehabilitate'' mean 
only work done on-site to the structure, utility connections and 
landscaping.



Sec. 120.392  Who may apply?

    A construction contractor or home-builder with a past history of 
profitable construction or rehabilitation projects of comparable type 
and size may apply. An applicant may subcontract the work. Subcontracts 
in excess of $25,000 may require 100 percent payment and performance 
bonds.



Sec. 120.393  Are there special application requirements?

    (a) An applicant must submit documentation from:
    (1) A mortgage lender indicating that permanent mortgage money is 
available to qualified purchasers to buy such properties;
    (2) A real estate broker indicating that a market exists for the 
proposed building and that it will be compatible with its neighborhood; 
and
    (3) An architect, appraiser or engineer agreeing to make inspections 
and certifications to support interim disbursements.
    (b) The Borrower may substitute a letter from a qualified Lender for 
one or more of the letters.



Sec. 120.394  What are the eligible uses of proceeds?

    A Borrower must use the loan proceeds solely to acquire, construct 
or

[[Page 233]]

substantially rehabilitate an individual residential or commercial 
building for sale. ``Substantial'' means rehabilitation expenses of more 
than one-third of the purchase price or fair market value at the time of 
the application. A Borrower may use up to 20 percent of the proceeds to 
acquire land, and up to 5 percent for community improvements such as 
curbs and sidewalks.



Sec. 120.395  What is SBA's collateral position?

    SBA will require a lien on the building which must be in no less 
than a second position.



Sec. 120.396  What is the term of the loan?

    The loan must not exceed sixty (60) months plus the estimated time 
to complete construction or rehabilitation.



Sec. 120.397  Are there any special restrictions?

    The borrower must not use loan proceeds to purchase vacant land for 
possible future construction or to operate or hold rental property for 
future rehabilitation. SBA may allow rental of the property only if the 
rental will improve the ability to sell the property. The sale must be a 
legitimate change of ownership.



                           Subpart D--Lenders



Sec. 120.400  Loan Guarantee Agreements.

    SBA may enter into a Loan Guarantee Agreement with a Lender to make 
deferred participation (guaranteed) loans. Such an agreement does not 
obligate SBA to participate in any specific proposed loan that a Lender 
may submit. The existence of a Loan Guarantee Agreement does not limit 
SBA's rights to deny a specific loan or establish general policies. See 
also Secs. 120.441(b) and 120.451(d) concerning Supplemental Guarantee 
Agreements.

                         Participation Criteria



Sec. 120.410  Requirements for all participating Lenders.

    A Lender must:
    (a) Have a continuing ability to evaluate, process, close, disburse, 
service and liquidate small business loans;
    (b) Be open to the public for the making of such loans (not be a 
financing subsidiary, engaged primarily in financing the operations of 
an affiliate);
    (c) Have continuing good character and reputation, and otherwise 
meet and maintain the ethical requirements of Sec. 120.140
    (d) Be supervised and examined by a State or Federal regulatory 
authority, satisfactory to SBA; and
    (e) In order to make Low Documentation loans, be:
    (1) A bank or thrift institution which has executed an SBA Form 750, 
Loan Guaranty Agreement, and which has at least 20 qualified loans 
outstanding as of the call report date closest to the date of its fiscal 
year end, or
    (2) An institution other than a bank or thrift institution which has 
executed an SBA Form 750, Loan Guaranty Agreement, and which has at 
least 20 qualified loans outstanding as of its latest fiscal year end. 
For purposes of this paragraph (e), a qualified loan is one which was 
initially approved in the amount of $100,000 or less and is classified 
as a commercial, industrial or commercial real estate loan for purposes 
of call reporting. A lender may request an exception to the requirements 
of this paragraph (e) from the SBA Associate Administrator for Financial 
Assistance.

[61 FR 3235, Jan. 31, 1996, as amended at 62 FR 302, Jan. 3, 1997]



Sec. 120.411  Preferences.

    An agreement to participate under the Act may not establish any 
Preferences in favor of the Lender.



Sec. 120.412  Other services Lenders may provide Borrowers.

    Subject to Sec. 120.140 Lenders, their Associates or the designees 
of either may provide services to and contract for goods with a Borrower 
only after full disbursement of the loan to the small business or to an 
account not controlled by the Lender, its Associate, or the designee. A 
Lender, an Associate, or a designee providing such services must do so 
under a written contract with the small business, based on time

[[Page 234]]

and hourly charges, and must maintain time and billing records for 
examination by SBA. Fees cannot exceed those charged by established 
professional consultants providing similar services. See also 
Sec. 120.195.



Sec. 120.413  Advertisement of relationship with SBA.

    A Lender may refer in its advertising to its participation with SBA. 
The advertising may not:
    (a) State or imply that the Lender, or any of its Borrowers, has or 
will receive preferential treatment from SBA;
    (b) Be false or misleading; or
    (c) Make use of SBA's seal.

                        Miscellaneous Provisions



Sec. 120.414  SBA access to Lender files.

    A Lender must allow SBA's authorized representatives, during normal 
business hours, access to its files to review, inspect and copy all 
records and documents relating to SBA guaranteed loans.

[61 FR 3235, Jan. 31, 1996. Redesignated at 64 FR 6509, Feb. 10, 1999]



Sec. 120.415  Suspension or revocation of eligibility to participate.

    SBA may suspend or revoke the eligibility of a Lender to participate 
in the 7(a) program because of a violation of SBA regulations, a breach 
of any agreement with SBA, a change of circumstance resulting in the 
Lender's inability to meet operational requirements, or a failure to 
engage in prudent lending practices. Proceedings for such purposes will 
be conducted in accordance with the provisions of part 134 of this 
chapter. A suspension or revocation will not invalidate a guarantee 
previously provided by SBA.

[61 FR 3235, Jan. 31, 1996. Redesignated at 64 FR 6509, Feb. 10, 1999]

                     Participating Lender Financings

    Source: Sections 120.420 through 120.428 appear at 64 FR 6507-6509, 
Feb. 10, 1999, unless otherwise noted.



Sec. 120.420  Definitions.

    (a) 7(a) Loans--All references to 7(a) loans under this subpart 
include loans made under section 7(a) of the Small Business Act (15 
U.S.C. 631 et seq.) and loans made under section 502 of the Small 
Business Investment Act (15 U.S.C. 661 et seq.), both of which may be 
securitized under this subpart.
    (b) Bank Regulatory Agencies--The bank regulatory agencies are the 
Federal Deposit Insurance Corporation, the Federal Reserve Board, the 
Office of the Comptroller of the Currency, and the Office of Thrift 
Supervision.
    (c) Benchmark Number--The maximum number of percentage points that a 
securitizer's Currency Rate can decrease without triggering the PLP 
suspension provision set forth in Sec. 120.425. SBA will publish the 
Benchmark Number in the Federal Register.
    (d) Currency Rate--A securitizer's ``Currency Rate'' is the dollar 
balance of its 7(a) guaranteed loans that are less than 30 days past due 
divided by the dollar balance of its portfolio of 7(a) guaranteed loans 
outstanding, as calculated quarterly by SBA, excluding loans approved in 
SBA's current fiscal year.
    (e) Currency Rate Percentage--The relationship between the 
securitizer's Currency Rate and the SBA 7(a) loan portfolio Currency 
Rate as calculated by dividing the securitizer's Currency Rate by the 
SBA 7(a) loan portfolio Currency Rate.
    (f) Good Standing--A Lender is in ``good standing'' with SBA if it:
    (1) Is in compliance with all applicable:
    (i) Laws and regulations;
    (ii) Policies; and
    (iii) Procedures;
    (2) Is in good financial condition as determined by SBA;
    (3) Is not under investigation or indictment for, or has not been 
convicted of, or had a judgment entered against it for a felony or 
fraud, or charges relating to a breach of trust or violation of a law or 
regulation protecting the integrity of business transactions or 
relationships; and
    (4) Does not have any officer or employee who has been under 
investigation or indictment for, or has been convicted of, or had a 
judgment entered against him for a felony or fraud, or charges relating 
to a breach of trust or

[[Page 235]]

violation of a law or regulation protecting the integrity of business 
transactions or relationships unless, the Securitization Committee has 
determined that good standing exists despite the existence of such 
person.
    (g) Initial Currency Rate--The Initial Currency Rate (ICR) is the 
securitizer's benchmark Currency Rate. SBA will calculate the 
securitizer's ICR as of the end of the calendar quarter immediately 
prior to the first securitization completed after April 12, 1999. This 
calculation will include all 7(a) loans which are outstanding and were 
approved in any fiscal year prior to SBA's current fiscal year. Each 
quarter, SBA will compare each securitizer's Currency Rate to its ICR.
    (h) Initial Currency Rate Percentage--The Initial Currency Rate 
Percentage (ICRP) measures the relationship between a securitizer's 
Initial Currency Rate and the SBA 7(a) loan portfolio Currency Rate at 
the time of the first securitization after April 12, 1999. The ICRP is 
calculated by dividing the securitizer's Currency Rate by the SBA 7(a) 
loan portfolio Currency Rate. SBA will calculate the securitizer's ICRP 
as of the end of the calendar quarter immediately prior to the first 
securitization completed after April 12, 1999.
    (i) Loss Rate--A securitizer's ``loss rate,'' as calculated by SBA, 
is the aggregate principal amount of the securitizer's 7(a) loans 
determined uncollectable by SBA for the most recent 10-year period, 
excluding SBA's current fiscal year activity, divided by the aggregate 
original principal amount of 7(a) loans disbursed by the securitizer 
during that period.
    (j) Nondepository Institution--A ``nondepository institution'' is a 
Small Business Lending Company (``SBLC'') regulated by SBA or a Business 
and Industrial Development Company (``BIDCO'') or other nondepository 
institution participating in SBA's 7(a) program.
    (k) Securitization--A ``securitization'' is the pooling and sale of 
the unguaranteed portion of SBA guaranteed loans to a trust, special 
purpose vehicle, or other mechanism, and the issuance of securities 
backed by those loans to investors in either a private placement or 
public offering.



Sec. 120.421  Which Lenders may securitize?

    All SBA participating Lenders may securitize subject to SBA's 
approval.



Sec. 120.422  Are all securitizations subject to this subpart?

    All securitizations are subject to this subpart. Until additional 
regulations are promulgated, SBA will consider securitizations involving 
multiple Lenders on a case by case basis, using the conditions in 
Sec. 120.425 as a starting point. SBA will consider securitizations by 
affiliates as single Lender securitizations for purposes of this 
subpart.



Sec. 120.423  Which 7(a) loans may a Lender securitize?

    A Lender may only securitize 7(a) loans that will be fully disbursed 
within 90 days of the securitization's closing date. If the amount of a 
fully disbursed loan increases after a securitization settles, the 
Lender must retain the increased amount.



Sec. 120.424  What are the basic conditions a Lender must meet to securitize?

    To securitize, a Lender must:
    (a) Be in good standing as determined by the Associate Administrator 
for Financial Assistance (AA/FA);
    (b) Use a securitization structure which is satisfactory to SBA;
    (c) Use documents acceptable to SBA, including SBA's model multi-
party agreement, as amended from time to time;
    (d) Obtain SBA's written consent, which it may withhold in its sole 
discretion, prior to executing a commitment to securitize; and
    (e) Cause the original notes to be stored at the FTA, as defined in 
Sec. 120.600, and other loan documents to be stored with a party 
approved by SBA.



Sec. 120.425  What are the minimum elements that SBA will require before consenting to a securitization?

    A securitizer must comply with the following three conditions:

[[Page 236]]

    (a) Capital Requirement--All securitizers must be considered to be 
``well capitalized'' by their regulator. SBA will consider a depository 
institution to be in compliance with this section if it meets the 
definition of ``well capitalized'' used by its bank regulator. SBA's 
capital requirement does not change the requirements that banks already 
meet. For nondepository institutions, SBA, as the regulator, will 
consider a non-depository institution to be ``well capitalized'' if it 
maintains a minimum unencumbered paid in capital and paid in surplus 
equal to at least 10 percent of its assets, excluding the guaranteed 
portion of 7(a) loans. The capital charge applies to the remaining 
balance outstanding on the unguaranteed portion of the securitizer's 
7(a) loans in its portfolio and in any securitization pools. Each 
nondepository institution must submit annual audited financial 
statements demonstrating that it has met SBA's capital requirement.
    (b) Subordinated Tranche--A securitizer or its wholly owned 
subsidiary must retain a tranche of the securities issued in the 
securitization (subordinated tranche) equal to the greater of two times 
the securitizer's Loss Rate or 2 percent of the principal balance 
outstanding at the time of securitization of the unguaranteed portion of 
the loans in the securitization. This tranche must be subordinate to all 
other securities issued in the securitization including other 
subordinated tranches. The securitizer or its wholly owned subsidiary 
may not sell, pledge, transfer, assign, sell participations in, or 
otherwise convey the subordinated tranche during the first 6 years after 
the closing date of the securitization. The securities evidencing the 
subordinated tranche must bear a legend stating that the securities may 
not be sold until 6 years after the issue date. SBA's Securitization 
Committee may modify the formula for determining the tranche size for a 
securitizer creating a securitization from a pool of loans located in a 
region affected by a severe economic downturn if the Securitization 
Committee concludes that enforcing this section might exacerbate the 
adverse economic conditions in the region. SBA will work with the 
securitizer to verify the accuracy of the data used to make the Loss 
Rate calculation.
    (c) PLP Privilege Suspension.
    (1) Suspension: If a securitizer's Currency Rate declines, SBA may 
suspend the securitizer's PLP unilateral loan approval privileges (PLP 
approval privileges) if the decline from the securitizer's ICR is more 
than the Benchmark Number as published in the Federal Register from time 
to time and the securitizer's Currency Rate Percentage is less than its 
ICRP. The securitizer will first be placed on probation for one quarter. 
If, at the end of the probationary quarter the securitizer has not met 
either of the following conditions in paragraph (c)(1)(i) or (c)(1)(ii) 
of this section, SBA will suspend the securitizer's PLP approval 
privileges and will not approve additional securitization requests from 
that securitizer. SBA will provide written notice at least 10 days prior 
to the effective date of suspension. The suspension will last a minimum 
of 3 months. During the suspension period, the securitizer must use 
Certified Lender or Regular Procedures to process 7(a) loan 
applications. The prohibition will end if, at the end of the 
probationary quarter: (i) the securitizer has improved its Currency Rate 
to above its ICR less the Benchmark Number; or (ii) its Currency Rate 
Percentage is either the same or greater than its ICRP.
    (2) Reinstatement: The suspension will remain in effect until the 
securitizer meets either the condition in paragraph (c)(1)(i) or 
(c)(1)(ii) of this section. If the securitizer meets either condition by 
the end of the 3-month period, notifies SBA with acceptable 
documentation, and SBA agrees, SBA will reinstate the securitizer. If 
the securitizer cannot meet either condition, the suspension will remain 
in effect. The securitizer may then petition the SBA Securitization 
Committee (Committee) for reinstatement. The Committee will review the 
reinstatement petition and determine if the securitizer's PLP approval 
privilege and securitization status should be reinstated. The Committee 
may consider the economic conditions in the securitizer's market area, 
the

[[Page 237]]

securitizer's efforts to improve its Currency Rate, and the quality of 
the securitizer's 7(a) loan packages and servicing. The Committee will 
consider only one petition by a securitizer per quarter.
    (3) The Benchmark Number. SBA will monitor the Benchmark Number. If 
economic conditions or policy considerations warrant, SBA may modify the 
Benchmark Number to protect the safety and soundness of the 7(a) 
program.
    (4) Data. SBA will calculate Currency Rate and Currency Rate 
Percentages quarterly from financial information that securitizers 
provide. SBA will work with a securitizer to verify the accuracy of the 
data used to make the Currency Rate calculation.

[64 FR 6508, Feb. 10, 1999, as amended at 65 FR 49481, Aug. 14, 2000]



Sec. 120.426  What action will SBA take if a securitizer transfers the subordinated tranche prior to the termination of the holding period?

    If a securitizer transfers the subordinated tranche prior to the 
termination of the holding period, SBA will suspend immediately the 
securitizer's ability to make new 7(a) loans. The securitizer will have 
30 calendar days to submit an explanation to SBA's Securitization 
Committee (``Committee''). The Committee will have 30 calendar days to 
review the explanation and determine whether to lift the suspension. If 
an explanation is not received within 30 calendar days or the 
explanation is not satisfactory to the Committee, SBA may transfer the 
servicing of the applicable securitized loans, including the 
securitizers' servicing fee on the guaranteed and unguaranteed portions 
and the premium protection fee on the guaranteed portion, to another SBA 
participating Lender.



Sec. 120.427  Will SBA approve a securitization application from a capital impaired Securitizer?

    If a securitizer does not maintain the level of capital required by 
this subpart, SBA will not approve a securitization application from 
that securitizer.



Sec. 120.428  What happens to a securitizer's other PLP responsibilities if SBA suspends its PLP approval privilege?

    The securitizer must continue to service and liquidate loans 
according to its PLP Supplemental Agreement.

                            Other Conveyances

    Source: Sections 120.430 through 120.435 appear at 64 FR 6509, 6510, 
Feb. 10, 1999, unless otherwise noted.



Sec. 120.430  What conveyances are covered by Secs. 120.430 through 120.435?

    Sections 120.430 through 120.435 cover all other transactions in 
which a Lender sells, sells a participating interest in, or pledges an 
SBA guaranteed loan other than for the purpose of securitizing and other 
than conveyances covered under Subpart F, Secondary Market, of this 
part.



Sec. 120.431  Which Lenders may sell, sell participations in, or pledge 7(a) loans?

    All Lenders may sell, sell participations in, or pledge 7(a) loans 
in accordance with this subpart.



Sec. 120.432  Under what circumstances does this subpart permit sales of, or sales of participating interests in, 7(a) loans?

    (a) A Lender may sell all of its interest in a 7(a) loan to another 
Lender operating under a current Loan Guarantee Agreement (SBA Form 750) 
(``participating Lender''), with SBA's prior written consent, which SBA 
may withhold in its sole discretion. A Lender may not sell any of its 
interest in a 7(a) loan to a nonparticipating Lender. The purchasing 
Lender must take possession of the promissory note and other loan 
documents, and service the sold 7(a) loan. The purchasing Lender 
purchases the loan subject to SBA's existing rights including its right 
to deny liability on its guarantee as provided in Sec. 120.524. After 
purchase, the purchased loan will be subject to the purchasing Lender's 
Loan Guarantee Agreement.
    (b) A Lender may sell, or sell a participating interest in, a part 
of a 7(a) loan to another participating Lender. If the Lender retains 
ownership of a

[[Page 238]]

part of the unguaranteed portion of the loan equal to at least 10 
percent of the outstanding principal balance of the loan, the Lender 
must give SBA prior written notice of the transaction, and the Lender 
must continue to hold the note and service the loan. If a Lender retains 
ownership of a part of the unguaranteed portion of the loan equal to 
less than 10 percent of the outstanding principal balance of the loan, 
the Lender must obtain SBA's prior written consent to the transaction, 
which consent SBA may withhold in its sole discretion. The Lender must 
continue to hold the note and other loan documents, and service the loan 
unless SBA otherwise agrees in its sole discretion.
    (c) For purposes of determining the percentage of ownership a Lender 
has retained, SBA will not consider a Lender to be the owner of the part 
of a loan in which it has sold a participating interest.



Sec. 120.433  What are SBA's other requirements for sales and sales of participating interests?

    SBA requires the following:
    (a) The Lender must be in good standing as determined by the AA/FA; 
and
    (b) In transactions requiring SBA's consent, all documentation must 
be satisfactory to SBA, including, if SBA determines it to be necessary, 
a multi-party agreement.



Sec. 120.434  What are SBA's requirements for loan pledges?

    (a) Except as set forth in Sec. 120.435, SBA must give its prior 
written consent to all pledges of any portion of a 7(a) loan, which 
consent SBA may withhold in its sole discretion;
    (b) The Lender must be in good standing as determined by the AA/FA;
    (c) All loan documents must be satisfactory to SBA and must include 
a multi-party agreement among SBA, Lender, the pledgee, FTA and such 
other parties as SBA determines are necessary;
    (d) The Lender must use the proceeds of the loan secured by the 7(a) 
loans only for financing 7(a) loans and for costs and expenses directly 
connected with the borrowing for which the loans are pledged;
    (e) The Lender must remain the servicer of the loans and retain 
possession of all loan documents other than the original promissory 
notes;
    (f) The Lender must deposit the original promissory notes at the 
FTA; and
    (g) The Lender must retain an economic interest in and the ultimate 
risk of loss on the unguaranteed portion of the loans.



Sec. 120.435  Which loan pledges do not require notice to or consent by SBA?

    Notwithstanding the provisions of Sec. 120.434(d), 7(a) loans may be 
pledged for the following purposes without notice to or consent by SBA:
    (a) Treasury tax and loan accounts;
    (b) The deposit of public funds;
    (c) Uninvested trust funds;
    (d) Discount borrowings at a Federal Reserve Bank; or
    (e) Advances by a Federal Home Loan Bank.

                     Certified Lenders Program (CLP)



Sec. 120.440  What is the Certified Lenders Program?

    Under the Certified Lenders Program (CLP), designated Lenders 
process, close, service, and may liquidate, SBA guaranteed loans. SBA 
gives priority to applications and servicing actions submitted by 
Lenders under this program, and will provide expedited loan processing 
or servicing. All other rules in this part 120 relating to the 
operations of Lenders apply to CLP Lenders.

[61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1, 1996]



Sec. 120.441  How does a Lender become a CLP Lender?

    (a) An SBA field office may nominate a Lender or a Lender may 
request a field office to consider it for CLP status. SBA district 
directors may approve and renew a Lender's CLP status. The district 
director will consider whether the Lender:
    (1) Has the ability to process, close, service and liquidate loans;

[[Page 239]]

    (2) Has a satisfactory performance history with SBA, including the 
submission of complete and accurate loan guarantee application packages;
    (3) Has an acceptable SBA purchase rate; and
    (4) Has shown the ability to work well with the local SBA office.
    (b) If the district director does not approve a request for CLP 
status, the Lender may appeal to the AA/FA, whose decision will be 
final. If SBA grants CLP status, it applies only in the field office 
that processed the CLP designation. A CLP Lender must execute a 
Supplemental Guarantee Agreement that will specify a term not to exceed 
two years.



Sec. 120.442  Suspension or revocation of CLP status.

    The AA/FA may suspend or revoke CLP status upon written notice 
providing the reasons at least 10 business days prior to the effective 
date of the suspension or revocation. Reasons for suspension or 
revocation may include a loan performance record unacceptable to SBA, 
failure to make the required number of loans under the expedited 
procedures, or violations of applicable statutes, regulations or 
published SBA policies and procedures. A CLP Lender may appeal the 
suspension or revocation made under this section under procedures found 
in part 134 of this chapter. The action of the AA/FA remains in effect 
pending resolution of the appeal.

                     Preferred Lenders Program (PLP)



Sec. 120.450  What is the Preferred Lenders Program?

    Under the Preferred Lenders Program (PLP), designated Lenders 
process, close, service, and liquidate SBA guaranteed loans with reduced 
requirements for documentation to and prior approval by SBA.



Sec. 120.451  How does a Lender become a PLP Lender?

    (a) An SBA field office serving the area in which a Lender's office 
is located can nominate the Lender, or a Lender can request a field 
office to consider it for PLP status. The SBA field office will forward 
its recommendation to an SBA centralized loan processing center which 
will submit its recommendation and supporting documentation to the AA/FA 
for final decision.
    (b) In making its decision, SBA considers whether the Lender:
    (1) Has the required ability to process, close, service and 
liquidate loans;
    (2) Has the ability to develop and analyze complete loan packages; 
and
    (3) Has a satisfactory performance history with SBA.
    (c) If the Lender is approved, the AA/FA will designate the area in 
which it can make PLP loans.
    (d) Before it can operate as a PLP Lender, the approved Lender must 
execute a Supplemental Guarantee Agreement, which will specify a term 
not to exceed two years.
    (e) When a PLP's Supplemental Guarantee Agreement expires, SBA may 
recertify it as a PLP Lender for an additional term not to exceed two 
years. Prior to recertification, SBA will review a PLP Lender's loans, 
policies and procedures. The recertification decision of the AA/FA is 
final.
    (f) A PLP Lender may request an expansion of the territory in which 
it can process PLP loans by submitting its request to a loan processing 
center. The center will obtain the recommendation of each SBA office in 
the area into which the PLP Lender would like to expand its PLP 
operations. The center will forward the recommendations to the AA/FA for 
final decision. If a PLP Lender is not a CLP Lender in a territory into 
which it seeks to expand its PLP status, it automatically obtains CLP 
status in that territory when it is granted PLP status for the 
territory.



Sec. 120.452  What are the requirements of PLP loan processing?

    (a) Subparts A and B of this part govern the making of PLP loans, 
except for the following:
    (1) Certain types of businesses, loans, and loan programs are not 
eligible for PLP, as detailed in published SBA policy and procedures.
    (2) A Lender may not make a PLP business loan which reduces its 
existing credit exposure for any Borrower, except in cases where an 
interim loan(s) has been made for other than

[[Page 240]]

real estate construction purposes to the Borrower which was approved by 
the Lender within 90 days of receipt of the issuance fo a subsequent PLP 
loan number.
    (3) SBA will not guarantee more than the specified statutory 
percentage of any PLP loan.
    (b) A PLP Lender notifies SBA of its approval of a PLP loan by 
submitting to SBA's loan processing center appropriate documentation 
signed by two of the PLP's authorized representatives. SBA will attach 
the SBA guarantee and notify the PLP Lender of the SBA loan number (if 
it does not identify a problem with eligibility, and funds are 
available).
    (c) The PLP Lender is responsible for all PLP loan decisions 
regarding eligibility (including size) and creditworthiness. The PLP 
Lender is also responsible for confirming that all PLP loan closing 
decisions are correct, and that it has complied with all requirements of 
law and SBA regulations.



Sec. 120.453  What are the requirements of a PLP Lender in servicing and liquidating SBA guaranteed loans?

    The PLP Lender must service and liquidate its SBA guaranteed loan 
portfolio (including its non-PLP loans) using generally accepted 
commercial banking standards employed by prudent lenders. The PLP Lender 
must liquidate any defaulted SBA guaranteed loan in its portfolio unless 
SBA advises in writing that SBA will liquidate the loan. The PLP Lender 
must submit a liquidation plan to SBA prior to commencing liquidation 
action. The PLP Lender may take any necessary servicing action, or 
liquidation action consistent with a plan, for any SBA guaranteed loan 
in its portfolio, except it may not:
    (a) Take any action that confers a Preference on the Lender; and
    (b) Accept a compromise settlement without prior written SBA 
consent.

[61 FR 3235, Jan. 31, 1996, as amended at 64 FR 6510, Feb. 10, 1999]



Sec. 120.454  PLP performance review.

    SBA may review the performance of a PLP Lender. SBA may charge the 
PLP Lender a fee to cover the costs of this review.



Sec. 120.455  Suspension or revocation of PLP status.

    The AA/FA may suspend or revoke PLP status upon written notice 
providing the reasons at least 10 business days prior to the effective 
date of the suspension or revocation. Reasons for suspension or 
revocation may include loan performance unacceptable to SBA, failure to 
make the required number of loans under the expedited procedures, or 
violations of applicable statutes, regulations or published SBA policies 
and procedures. A PLP Lender may appeal the suspension or revocation 
made under this section under procedures found in part 134 of this 
chapter. The action of the AA/FA remains in effect pending resolution of 
the appeal.

                 Small Business Lending Companies (SBLC)



Sec. 120.470  What is an SBLC?

    A Small Business Lending Company (SBLC) is a nondepository lending 
institution licensed by SBA. SBA supervises, examines, and regulates 
SBLCs. An SBLC is subject to all applicable SBA regulations, including 
those governing Lenders. SBA has imposed a moritorium on licensing new 
SBLC's since January, 1982.
    (a) An SBLC may only make:
    (1) Loans under section 7(a) (except section 7(a)(13)) of the Act in 
participation with SBA; and/or
    (2) SBA guaranteed loans to micro-Lenders in the SBA Microloan 
program (see subpart G of this part). Such loans are subject to the same 
conditions as guaranteed loans made to SBA-designated microlenders by 
SBA participating Lenders.
    (b) In addition to complying with Secs. 120.400 through 120.413, an 
SBLC must meet the following requirements:
    (1) Business structure. It must be a corporation (profit or non-
profit).
    (2) Written agreement. It must sign a written agreement with SBA.
    (3) Capital structure. It must have unencumbered paid-in capital and 
paid-in surplus of at least $1,000,000, or ten percent of the aggregate 
of its share of all outstanding loans, whichever is more.

[[Page 241]]

    (4) Capital impairment. It must avoid capital impairment at all 
times. Impairment exists if the retained earnings deficit of an SBLC 
exceeds 50 percent of combined paid-in capital and paid-in-surplus, 
excluding treasury stock. An SBLC must give SBA prompt written notice of 
any capital impairment within 30 calendar days of the month-end 
financial report that first reflects the impairment. Until the 
impairment is cured, an SBLC may not present any loans to SBA for 
guarantee.
    (5) Issuance of securities. Without prior written SBA approval, it 
must not issue any securities (including stock options and debt 
securities) except stock dividends and common stock issued for cash or 
direct obligations of, or obligations fully guaranteed as to principal 
and interest by, the United States.
    (6) Voluntary capital reduction. Without prior written SBA approval, 
it must not voluntarily reduce its capital, or purchase and hold more 
than 2 percent of any class or combination of classes of its stock.
    (7) Reserves for losses. It must maintain a reserve in the amount of 
anticipated losses on loans and receivables.
    (8) Internal control. It must adopt a plan designed to safeguard its 
funds and other assets, to assure the reliability of its personnel, and 
to maintain the accuracy of its financial data.
    (9) Dual control. It must maintain dual control over disbursement of 
funds and withdrawal of securities. An SBLC may disburse funds only by 
checks or wire transfers authorized by signatures of two or more 
officers covered by the SBLC's fidelity bond, except that checks in an 
amount of $1,000 or less may be signed by one bonded officer. There must 
be two or more bonded officers, or one bonded officer and a bonded 
employee to open safe deposit boxes or withdraw securities from 
safekeeping. The SBLC shall furnish to each depository bank, custodian, 
or entity providing safe deposit boxes a certified copy of the 
resolution implementing these control procedures.
    (10) Fidelity insurance. It must maintain a Brokers Blanket Bond, 
Standard Form 14, or Finance Companies Blanket Bond, Standard Form 15, 
or such other form of coverage as SBA may approve, in a minimum amount 
of $500,000 executed by a surety holding a certificate of authority from 
the Secretary of the Treasury pursuant to 31 U.S.C. 9304-9308.
    (11) Common control. It must not control, be controlled by, or be 
under common control with, another SBLC. Without prior written SBA 
approval, an Associate of one SBLC shall not be an Associate of another 
SBLC or of any entity which directly or indirectly controls or is under 
common control with another SBLC.
    (12) Management. An SBLC must employ full time professional 
management.
    (13) Borrowed funds. Without SBA's prior written approval, it must 
not be capitalized with borrowed funds. Shareholders owning 10 percent 
or more of any class of its stock shall not use borrowed funds to 
purchase the stock unless the net worth of the shareholders is at least 
twice the amount borrowed or unless the shareholders receive SBA's prior 
written approval for a lower ratio.



Sec. 120.471  Records.

    Each SBLC must comply with the following requirements concerning 
records:
    (a) Maintenance of Records. It must maintain accurate and current 
financial records, including books of account, minutes of stockholder, 
directors, and executive committee meetings, and all documents and 
supporting materials relating to the SBLC's transactions at its 
principal business office. Securities held by a custodian pursuant to a 
written agreement shall be exempt from this requirement.
    (b) Preservation of records. (1) It must preserve in a manner 
permitting immediate retrieval the following documentation for the 
financial statements required by Sec. 120.472 (and of the accompanying 
certified public accountant's opinion), for the following specified 
periods:
    (i) Preserve permanently:
    (A) All general and subsidiary ledgers (or other records) reflecting 
asset, liability, capital stock and surplus, income, and expense 
accounts;

[[Page 242]]

    (B) All general and special journals (or other records forming the 
basis for entries in such ledgers); and
    (C) The corporate charter, bylaws, application for determination of 
eligibility to participate with SBA, and all minutes books, capital 
stock certificates or stubs, stock ledgers, and stock transfer 
registers;
    (ii) Preserve for at least 6 years following final disposition of 
the related loan:
    (A) All applications for financing;
    (B) Lending, participation, and escrow agreements;
    (C) Financing instruments; and
    (D) All other documents and supporting material relating to such 
loans, including correspondence.
    (2) Records and other documents referred to in this section may be 
preserved electronically if the original is available for retrieval 
within a reasonable period.



Sec. 120.472  Reports to SBA.

    An SBLC must submit the following to the AA/FA:
    (a) An audited financial statement prepared by a certified public 
accountant within three months after the close of each fiscal year, and 
interim financial reports when requested by SBA;
    (b) A report of any legal or administrative proceeding, by or 
against the SBLC, or against an officer, director, or employee of the 
SBLC for an alleged breach of official duty, within 10 days after 
initiating or learning of the proceeding, as well as notification of the 
terms of any settlement or final judgment (in addition to any reporting 
under applicable SBA Forms);
    (c) Copies of any report furnished to its stockholders (including 
any prospectus, letter, or other publication concerning the financial 
operations of the SBLC);
    (d) A summary of any changes in the SBLC's organization or 
financing, such as:
    (1) Any change in its name, address or telephone number;
    (2) Any change in its charter, bylaws, or its officers or directors 
(to be accompanied by a statement of personal history on an approved SBA 
form);
    (3) Any changes in capitalization (including those identified in 
Sec. 120.470);
    (4) Any changes affecting the eligibility of the SBLC to continue to 
participate as an SBLC; and
    (5) Notice of a pledge of stock within 30 calendar days of the 
transaction if 10 percent or more of the stock is pledged by any person 
(or group of persons acting in concert) as collateral for indebtedness, 
and such pledge does not involve a transfer for which prior written 
approval of SBA is required under Sec. 120.473;
    (e) Such other reports as SBA may require from time to time by 
written directive.



Sec. 120.473  Change of ownership or control.

    (a) Any change of ownership or control without prior written 
approval of SBA is prohibited. An SBLC must request approval of any such 
change from the AA/FA. Pending the approval, the SBLC may not register 
the proposed new owners on its transfer books nor permit them to 
participate in any manner in the conduct of the SBLC's affairs. Change 
of ownership or control includes:
    (1) Any transfer of 10 percent or more of any class of the SBLC's 
stock, and any agreement providing for such transfer;
    (2) Any transfer that could result in the beneficial ownership by 
any person or group of persons acting in concert of 10 percent or more 
of any class of its stock, and any agreement providing for such 
transfer;
    (3) Any merger, consolidation, or reorganization; or
    (4) Any other transaction or agreement that transfers control of the 
SBLC.
    (b) If transfer of ownership or control is subject to the approval 
of any State or Federal chartering, licensing, or other regulatory 
authority, copies of any documents filed with such authority must, at 
the same time, be transmitted to the AA/FA.



Sec. 120.474  Prohibited financing.

    An SBLC may not make a loan to a small business that has received 
financing (or a commitment for financing) from an SBIC that is an 
Associate of the SBLC.

[[Page 243]]



Sec. 120.475  Audits.

    Every SBLC is subject to periodic audits by SBA's Office of 
Inspector General, Auditing Division, and the cost of such audits will 
be assessed against the SBLC, except for the first audit. Fees are 
structured based on the SBLC's assets as of the date of the latest 
audited financial statement submitted to SBA before the audit. The fee 
schedule is set forth in SBA's Standard Operating Procedures manual.



Sec. 120.476  Suspension or revocation.

    SBA may revoke or suspend an SBLC for a violation of law, these 
regulations, or any agreement with SBA. An appeal can be made following 
the procedures set forth in part 134 of this chapter.



                     Subpart E--Loan Administration



Sec. 120.500  General.

    This subpart outlines the general loan administration policies 
applicable to loan servicing and liquidation.

                                Servicing



Sec. 120.510  Servicing direct and immediate participation loans.

    SBA services the direct loans that it makes. Generally, the Lender 
services immediate participation loans that it makes and in which SBA 
participates.



Sec. 120.511  Servicing guaranteed loans.

    The Lender services guaranteed loans, holds the Loan Instruments and 
receives the Borrower's payments of principal and interest.



Sec. 120.512  Who services the loan after SBA honors its guarantee?

    Generally, after SBA honors its guarantee, the Lender must continue 
to hold the Loan Instruments and service and liquidate the loan. The 
Lender must execute a Certificate of Interest showing SBA's percentage 
of the loan, and must submit a liquidation plan to SBA for each loan to 
be liquidated. If SBA elects to service or liquidate the loan, the 
Lender must assign the Loan Instruments to SBA.



Sec. 120.513  What servicing actions require the prior written consent of SBA?

    Except as otherwise provided in a Supplemental Guarantee Agreement 
with the Lender, SBA must give its prior written consent before the 
Lender takes any of the following actions:
    (a) Alters substantially the terms or conditions of any Loan 
Instrument (for example, any increase in the principal amount or change 
in the interest rate, or action conferring a Preference on the Lender);
    (b) Releases collateral having a cumulative value in excess of 20 
percent of the original loan amount;
    (c) Accelerates the maturity of the note;
    (d) Sues upon any Loan Instrument;
    (e) Compromises or waives any claim against any Borrower, guarantor, 
obligor or standby creditor arising out of any Loan Instrument; or
    (f) Increases the amount of any prior lien held by the Lender on the 
collateral securing the loan.

                 SBA'S Purchase of a Guaranteed Portion



Sec. 120.520  When does SBA honor its guarantee?

    (a) SBA, in its sole discretion, may purchase a guaranteed portion 
of a loan at any time. A Lender may demand in writing that SBA honor its 
guarantee if the Borrower is in default on any installment for more than 
60 calendar days (or less if SBA agrees) and the default has not been 
cured. If a Borrower cures a default before a Lender requests purchase 
by SBA, the Lender's right to request purchase on that default lapses.
    (b) Purchase by SBA of the guaranteed portion does not waive any of 
SBA's rights to recover money paid on the guarantee, based upon the 
Lender's negligence, misconduct, or violation of this part, including 
those actions listed in Sec. 120.524(a), the Loan Guarantee Agreement or 
the Loan Instruments.



Sec. 120.521  What interest rate applies after SBA purchases its guaranteed portion?

    When SBA purchases the guaranteed portion of a fixed interest rate 
loan,

[[Page 244]]

the rate of interest remains as stated in the note. On loans with a 
fluctuating interest rate, the interest rate that the Borrower owes will 
be at the rate in effect at the time of the earliest uncured payment 
default, or the rate in effect at the time of purchase (where no default 
has occurred).



Sec. 120.522  How much accrued interest does SBA pay to the Lender or Registered Holder when SBA purchases the guaranteed portion?

    (a) Rate of interest. If SBA purchases the guaranteed portion from a 
Lender or from a Registered Holder (if sold in the Secondary Market), it 
will pay accrued interest at:
    (1) The rate in the note if it is a fixed rate loan; or
    (2) The rate in effect on the date of the earliest uncured payment 
default, or of SBA's purchase (if there has been no default).
    (b) Payment to Lender. If the Lender submits a complete purchase 
request to SBA within 120 days of the earliest uncured payment default, 
SBA will pay accrued interest to the Lender from the last interest paid-
to-date up to the date of payment. If the Lender requests SBA to 
purchase after 120 days from the date of the earliest uncured payment 
default date, SBA will pay only 120 days of interest. For LowDoc loans, 
the interest paid to the Lender will be governed by the Supplemental 
Guarantee Agreement.
    (c) Payment to Registered Holder. SBA will pay a Registered Holder 
all accrued interest up to the date of payment.
    (d) Extension of the 120 day period. Before the 120 days expire, the 
SBA field office may extend the period if the Lender and SBA agree that 
the Borrower can cure the default within a reasonable and definite 
period of time or that the benefits from doing so otherwise will exceed 
the costs of SBA paying additional interest. If the 120 days have 
passed, only the AA/FA or designee can extend the period.



Sec. 120.523  What is the ``earliest uncured payment default''?

    The earliest uncured payment default is the date of the earliest 
failure by a Borrower to pay a regular installment of principal and/or 
interest when due. Payments made by the Borrower before a Lender makes 
its request to SBA to purchase are applied to the earliest uncured 
payment default. If the installment is paid in full, the earliest 
uncured payment default date will advance to the next unpaid installment 
date. If a Borrower makes any payment after the Lender makes its request 
to SBA to purchase, the earliest uncured payment default date does not 
change because the Lender has already exercised its right to request 
purchase.



Sec. 120.524  When is SBA released from liability on its guarantee?

    (a) SBA is released from liability on a loan guarantee (in whole or 
in part, within SBA's exclusive discretion), if any of the events below 
occur:
    (1) The Lender has failed to comply materially with any of the 
provisions of these regulations, the Loan Guarantee Agreement, or the 
Authorization;
    (2) The Lender has failed to make, close, service, or liquidate a 
loan in a prudent manner;
    (3) The Lender's improper action or inaction has placed SBA at risk;
    (4) The Lender has failed to disclose a material fact to SBA 
regarding a guaranteed loan in a timely manner;
    (5) The Lender has misrepresented a material fact to SBA regarding a 
guaranteed loan;
    (6) SBA has received a written request from the Lender to terminate 
the guarantee;
    (7) The Lender has not paid the guarantee fee within the period 
required under SBA rules and regulations;
    (8) The Lender has failed to request that SBA purchase a guarantee 
within 120 days after maturity of the loan;
    (9) The Lender has failed to use required SBA forms or exact 
electronic copies; or
    (10) The Borrower has paid the loan in full.
    (b) If SBA determines, after purchasing its guaranteed portion of a 
loan, that any of the events set forth in paragraph (a) of this section 
occurred in connection with that loan, SBA is entitled to recover any 
money paid on the guarantee plus interest from the Lender responsible 
for those events.

[[Page 245]]

    (c) If the Lender's loan documentation indicates that one or more of 
the events in paragraph (a) of this section may have occurred, SBA may 
undertake such investigation as it deems necessary to determine whether 
to honor or deny the guarantee, and may withhold a decision on whether 
to honor the guarantee until the completion of such investigation.
    (d) Any information provided to SBA prior to Lender's request for 
SBA to honor its guarantee shall not prejudice SBA's right to deny 
liability for a guarantee if one or more of the events listed in 
paragraph (a) of this section occur.
    (e) Unless SBA provides written notice to the contrary, the Lender 
remains responsible for all loan servicing ad liquidation actions until 
SBA honors its guarantee in full.

          Deferment, Extension of Maturity and Loan Moratorium



Sec. 120.530  Deferment of payment.

    SBA may agree to defer payments on a business loan for a stated 
period of time, and use such other methods as it considers necessary and 
appropriate to help in the successful operation of the Borrower. This 
policy applies to all business loan programs, including 504 loans.



Sec. 120.531  Extension of maturity.

    SBA may agree to extend the maturity of a loan for up to 10 years 
beyond its original maturity if the extension will aid in the orderly 
repayment of the loan.



Sec. 120.532  What is a loan Moratorium?

    SBA may assume a Borrower's obligation to repay principal and 
interest on a loan by agreeing to make the payments to the Lender on 
behalf of the Borrower under terms and conditions set by SBA. This 
relief is called a ``Moratorium.'' Complete information concerning this 
program may be obtained from local SBA offices.

                        Liquidation of Collateral



Sec. 120.540  What are SBA's policies concerning the liquidation of 
collateral and the sale of business loans and physical disaster assistance loans, physical disaster business loans and economic injury disaster loans?

    (a) Liquidation policy. SBA or the Lender may liquidate collateral 
securing a loan if the loan is in default or there is no reasonable 
prospect that the loan can be repaid within a reasonable period.
    (b) Sale and conversion of loans. Without the consent of the 
Borrower, SBA may:
    (1) Sell a direct loan;
    (2) Convert a guaranteed or immediate participation loan to a direct 
loan; or
    (3) Convert an immediate participation loan to a guaranteed loan or 
a loan owned solely by the Lender.
    (4) Sell direct and purchased 7(a) and 501, 502, 503 and 504 loans 
and physical disaster home loans, physical disaster business loans and 
economic injury disaster loans in asset sales. SBA will offer these 
loans for sale to qualified bidders by means of competitive procedures 
at publicly advertised sales. Bidder qualifications will be set for each 
sale in accordance with the terms and conditions of each sale.
    (c) Disposal of collateral and assets acquired through foreclosure 
or conveyance. SBA or the Lender may sell real and personal property 
(including contracts and claims) pledged to secure a loan that is in 
default in accordance with the provisions of the related security 
instrument (see Sec. 120.550 for Homestead Protection for Farmers).
    (1) Competitive bids or negotiated sales. Generally, SBA will offer 
loan collateral and acquired assets for public sale through competitive 
bids at auctions or sealed bid sales. The Lender may use negotiated 
sales if consistent with its usual practice for similar non-SBA assets.
    (2) Lease of acquired property. Normally, neither SBA nor a Lender 
will rent or lease acquired property or grant options to purchase. SBA 
and the Lender will consider proposals for a lease if it appears a 
property cannot be sold advantageously and the lease may be terminated 
on reasonable notice

[[Page 246]]

upon receipt of a favorable purchase offer.
    (d) Recoveries and security interests shared. SBA and the Lender 
will share pro rata (in accordance with their respective interests in a 
loan) all loan payments or recoveries, including proceeds from asset 
sales, all reasonable expenses (including advances for the care, 
preservation, and maintenance of collateral securing the loan and the 
payment of senior lienholders), and any security interest or guarantee 
(excluding SBA's guarantee) which the Lender or SBA may hold or receive 
in connection with a loan.
    (e) Guarantors. Guarantors of financial assistance have no rights of 
contribution against SBA on an SBA guaranteed or direct loan. SBA is not 
deemed to be a co-guarantor with any other guarantors.
    (f) Notice. If upon default in repayment, SBA acquires a Premier 
Certified Lenders Program (PCLP) loan and identifies such loan for 
inclusion in a bulk asset sale of defaulted or repurchased loans or 
other financings, SBA must give prior notice to any Premier Certified 
Lenders (``Premier CDC'') which has a contingent liability with respect 
to the PCLP loan. SBA must give the notice to the Premier CDC as soon as 
possible after the loan is identified for inclusion in such sale, but 
not less than 90 days before the date SBA first makes any records on 
such loan available for examination by prospective purchasers prior to 
such loan being offered in a package of loans for bulk sale.

[61 FR 3235, Jan. 31, 1996, as amended at 64 FR 44110, Aug. 13, 1999; 65 
FR 17133, Mar. 31, 2000; 68 FR 51680, Aug. 28, 2003]

                    Homestead Protection for Farmers



Sec. 120.550  What is homestead protection for farmers?

    SBA may lease to a farmer-Borrower the farm residence occupied by 
the Borrower and a reasonable amount of adjoining property (no more than 
10 acres and seven farm buildings), if they were acquired by SBA as a 
result of a defaulted farm loan made or guaranteed by SBA (see the 
Consolidated Farm and Rural Development Act, 7 U.S.C. 1921, for 
qualifying loan purposes).



Sec. 120.551  Who is eligible for homestead protection?

    SBA must notify the Borrower in possession of the availability of 
these homestead protection rights within 30 days after SBA acquires the 
property. A farmer-Borrower must:
    (a) Apply for the homestead occupancy to the SBA field office which 
serviced the loan within 90 days after SBA acquires the property;
    (b) Provide evidence that the farm produces farm income reasonable 
for the area and economic conditions;
    (c) Show that at least 60 percent of the Borrower and spouse's gross 
annual income came from farm or ranch operations in at least any two out 
of the last six calendar years;
    (d) Have resided on the property during the previous six years; and
    (e) Be personally liable for the debt.



Sec. 120.552  Lease.

    If approved, the applicant must personally occupy the residence 
during the term of the lease and pay a reasonable rent to SBA. The lease 
will be for a period of at least 3 years, but no more than 5 years. A 
lease of less than 5 years may be renewed, but not beyond 5 years from 
the original lease date. During or at the end of the lease period, the 
lessee has a right of first refusal to reacquire the homestead property 
under terms and conditions no less favorable than those offered to any 
other purchaser.



Sec. 120.553  Appeal.

    If the application is denied, the Borrower may appeal the decision 
to the AA/FA. Until the conclusion of any appeal, the Borrower may 
retain possession of the homestead property.



Sec. 120.554  Conflict of laws.

    In the event of a conflict between the homestead provisions at 
Secs. 120.550 through 120.553 of this part, and any state law relating 
to the right of a Borrower to designate for separate sale or to redeem 
part or all of the real property securing a loan foreclosed by the 
Lender, state law shall prevail.

[[Page 247]]



                       Subpart F--Secondary Market

                     Fiscal and Transfer Agent (FTA)



Sec. 120.600  Definitions.

    (a) Certificate is the document the FTA issues representing a 
beneficial fractional interest in a Pool (Pool Certificate), or an 
undivided interest in the entire guaranteed portion of an individual 
7(a) guaranteed loan (Individual Certificate).
    (b) Current means that no repayment from a Borrower to a Lender is 
over 29 days late measured from the due date of the payment on the 
records of the FTA's central registry (Pools) or the entity servicing 
the loan (individual guaranteed portion).
    (c) FTA is the SBA's fiscal and transfer agent.
    (d) Note Rate is the interest rate on the Borrower's note.
    (e) Net Rate is the interest rate on an individual guaranteed 
portion of a loan in a Pool.
    (f) Pool is an aggregation of SBA guaranteed portions of loans made 
by Lenders.
    (g) Pool Assembler is a financial institution that:
    (1) Organizes and packages a Pool by acquiring the SBA guaranteed 
portions of loans from Lenders;
    (2) Resells fractional interests in the Pool to Registered Holders; 
and
    (3) Directs the FTA to issue Certificates.
    (h) Pool Rate is the interest rate on a Pool Certificate.
    (i) Registered Holder is the Certificate owner listed in FTA's 
records.
    (j) SBA's Secondary Market Program Guide is an issuance from SBA 
which describes the characteristics of Secondary Market transactions.



Sec. 120.601  SBA Secondary Market.

    The SBA secondary market (``Secondary Market'') consists of the sale 
of Certificates, representing either the entire guaranteed portion of an 
individual 7(a) guaranteed loan or an undivided interest in a Pool 
consisting of the SBA guaranteed portions of a number of 7(a) guaranteed 
loans. By the terms of such Certificate, SBA guarantees a Registered 
Holder timely payment of principal and interest from the loan or loans 
underlying the Certificate. Transactions involving interests in Pools or 
the sale of individual guaranteed portions of loans are governed by the 
contracts entered into by the parties, SBA's Secondary Market Program 
Guide, and this subpart. See sections 5 (f), (g), and (h) of the Small 
Business Act (15 U.S.C. 634 (f), (g) and (h)).

                              Certificates



Sec. 120.610  Form and terms of Certificates.

    (a) General form and content. Each Certificate must be registered 
with the FTA. SBA must approve the terms of the Certificate.
    (b) Face amount of Pool Certificate. The face amount of a Pool 
Certificate cannot be less than a minimum amount as specified in the 
Program Guide, and the dollar amount of Certificates must be in 
increments which SBA will specify in the Program Guide (except for one 
Certificate in each Pool). SBA may change these requirements based upon 
an analysis of market conditions and program experience, and will 
publish any such change in the Federal Register.
    (c) Basis of payment for Pool Certificates. Principal installments 
and interest payments are based on the unpaid principal balance of the 
portion of the Pool represented by a Pool Certificate. All prepayments 
on loans in the Pool must be passed through to the appropriate 
Registered Holders with the regularly scheduled payments to such 
Holders.
    (d) Basis of payment for Individual Certificates. Principal 
installments and interest payments are based on the unpaid principal 
balance of the SBA guaranteed portion of the loan supporting an 
Individual Certificate. The Certificate must provide for a pass through 
to the Registered Holder of payments which the FTA receives from a 
Lender or any entity servicing the loan, less applicable fees.
    (e) Interest rate on Pool Certificate. The interest rate on a Pool 
Certificate must be equal to the lowest Net Rate on any individual 
guaranteed portion of a loan in the Pool.

[[Page 248]]



Sec. 120.611  Pools backing Pool Certificates.

    (a) Pool characteristics. As set forth in the Program Guide, each 
Pool must have:
    (1) A minimum number of guaranteed portions of loans;
    (2) A minimum aggregate principal balance of the guaranteed 
portions;
    (3) A maximum percentage of the Pool which an individual guaranteed 
portion may constitute;
    (4) A maximum allowable difference between the highest and lowest 
note interest rates;
    (5) A maximum allowable difference between the remaining terms to 
maturity of the loans in the Pool; and
    (6) A minimum weighted average maturity at Pool formation.
    (b) Adjustment of Pool characteristics. SBA may adjust the Pool 
characteristics periodically based upon program experience and market 
conditions.



Sec. 120.612  Loans eligible to back Certificates.

    (a) Pool Certificates are backed by the SBA guaranteed portions of 
loans comprising the Pool. An Individual Certificate is backed by the 
SBA guaranteed portion of a single loan. Any such loan must:
    (1) Be current as of the date the Pool is formed or the individual 
guaranteed portion of a loan is initially sold in the Secondary Market;
    (2) Be guaranteed under the Act; and
    (3) Meet such other standards as SBA may determine to be necessary 
for the successful operation of the Secondary Market program.
    (b) The loans that back a Pool must meet the SBA requirements in 
effect at the time the Pool is formed.



Sec. 120.613  Secondary Participation Guarantee Agreement.

    When a Lender wants to sell the guaranteed portion of a loan, it 
enters into a Secondary Participation Guarantee Agreement (``SPGA'') 
with SBA and the prospective purchaser. The terms of sale between the 
Lender and the purchaser cannot require the Lender or SBA to repurchase 
the guaranteed portion of the loan except in accordance with the terms 
of the SPGA. Before execution of the SPGA, the Lender must:
    (a) Submit to FTA a copy of the proposed SPGA, the note, and such 
other documents as SBA may require;
    (b) Except for export working capital loans, disburse to the 
Borrower the full amount of the loan; and
    (c) Pay SBA all guarantee fees relevant to the loan in full.

[61 FR 3235, Jan. 31, 1996, as amended at 68 FR 51680, Aug. 28, 2003]

                   The SBA Guarantee of a Certificate



Sec. 120.620  SBA guarantee of a Pool Certificate.

    (a) Extent of Guarantee. SBA guarantees to a Registered Holder the 
timely payment of principal and interest installments and any prepayment 
or other recovery of principal to which the Registered Holder is 
entitled. If the Borrower of a loan in a Pool backing the Certificates 
does not make a required installment payment, SBA, through the FTA, will 
make advances to maintain the schedule of interest and principal 
payments to the Registered Holders.
    (b) SBA guarantee backed by full faith and credit. SBA's guarantee 
of the Pool Certificate is backed by the full faith and credit of the 
United States.



Sec. 120.621  SBA guarantee of an Individual Certificate.

    (a) Extent of SBA guarantee. With respect to Individual 
Certificates, SBA guarantees to purchase from the Registered Holder the 
guaranteed portion of the loan for an amount equal to the unpaid 
principal and accrued interest due as of the date of SBA's purchase, 
less deductions for applicable fees. Unlike the SBA guarantee with 
respect to pooled loans, SBA does not guarantee timely payment on 
Individual Certificates.
    (b) What triggers the SBA guarantee. SBA's guarantee to the 
Registered Holder may be called upon when:
    (1) The Borrower remains in uncured default for 60 days on payments 
of principal or interest due on the note;
    (2) The Lender fails to send to the FTA on a timely basis payments 
it received from the Borrower; or

[[Page 249]]

    (3) The FTA fails to send to the Registered Holder on a timely basis 
any payments it has received from the Lender.
    (c) Full faith and credit. SBA's guarantee to the Registered Holder 
is backed by the full faith and credit of the United States.

                             Pool Assemblers



Sec. 120.630  Qualifications to be a Pool Assembler.

    (a) Application to become Pool Assembler. The application to become 
a Pool Assembler is available from the AA/FA. In order to qualify as a 
Pool Assembler, an entity must send the application to the AA/FA, with 
an application fee, and certify that it:
    (1) Is regulated by the appropriate agency as defined in section 
3(a)(34)(G) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(34)(G));
    (2) Meets all financial and other applicable requirements of its 
regulatory authority and the Government Securities Act of 1986, as 
amended (Pub. L. 99-571, 100 Stat. 3208);
    (3) Has the financial capability to assemble acceptable and eligible 
guaranteed loan portions in sufficient quantity to support the issuance 
of Pool Certificates; and
    (4) Is in good standing with SBA (as the AA/FA determines), the 
Office of the Comptroller of the Currency (``OCC'') if it is a national 
bank, the Federal Deposit Insurance Corporation if it is a bank not 
regulated by the OCC, or the National Association of Securities Dealers 
if it is a member.
    (b) Approval by SBA. An entity may not submit Pool applications to 
the FTA until SBA has approved the application to become a Pool 
Assembler.
    (c) Conduct of business by Pool Assembler. An entity continues to 
qualify as a Pool Assembler so long as it:
    (1) Meets the eligibility standards in paragraph (a) of this 
section;
    (2) Conducts its business in accordance with SBA regulations and 
accepted securities or banking industry practices, ethics, and 
standards; and
    (3) Maintains its books and records in accordance with generally 
accepted accounting principles or in accordance with the guidelines of 
the regulatory body governing its activities.



Sec. 120.631  Suspension or termination of Pool Assembler.

    (a) Suspension or termination. The AA/FA may suspend a Pool 
Assembler from operating in the Secondary Market for up to 18 months or 
terminate its status as a Pool Assembler, if the Pool Assembler (and/or 
its Associates):
    (1) Does not comply with any of the requirements in Sec. 120.630 (a) 
and (c);
    (2) Has been indicted or otherwise formally charged with, or 
convicted of, a misdemeanor or felony;
    (3) Has received an adverse civil judgment that it has committed a 
breach of trust or a violation of a law or regulation protecting the 
integrity of business transactions or relationships;
    (4) Has not formed a Pool for at least three years; or
    (5) Is under investigation by its regulating authority for 
activities which may affect its fitness to participate in the Secondary 
Market.
    (b) Suspension procedures. The AA/FA shall notify a Pool Assembler 
by certified mail, return receipt requested, of the decision to suspend 
and the reasons therefore at least 10 business days prior to the 
effective date of the suspension. The Pool Assembler may appeal the 
suspension made under this section pursuant to the procedures set forth 
in part 134 of this chapter. The action of the AA/FA shall remain in 
effect pending resolution of the appeal.
    (c) Notice of termination. In order to terminate a Pool Assembler, 
the AA/FA must issue an order to show cause why the SBA should not 
terminate the Pool Assembler's participation in the Secondary Market. 
The Pool Assembler may appeal the termination made under this section 
pursuant to procedures set forth in part 134 of this chapter. The action 
of the AA/FA shall remain in effect pending resolution of the appeal.

                        Miscellaneous Provisions



Sec. 120.640  Administration of the Pool and Individual Certificates.

    (a) FTA responsibility. The FTA has the responsibility to administer 
each Pool or Individual Certificate. It shall maintain a registry of 
Registered Holders and other information as SBA requires.

[[Page 250]]

    (b) Self-liquidating. Each Pool or individual guaranteed portion of 
a loan in the Secondary Market is self-liquidating because of Borrower 
payments or prepayments, redemption by SBA, and/or payments by SBA or 
the Lender after default by the Borrower. Substitution of the guaranteed 
portions of existing loans for defaulted loans is not permitted.
    (c) SBA's right to subrogation. If SBA pays a claim under a 
guarantee with respect to a Certificate issued under this subpart, it 
must be subrogated fully to the rights satisfied by such payment.
    (d) SBA ownership rights not limited. No Federal, State or local law 
can preclude or limit the exercise by SBA of its ownership rights in the 
portions of loans constituting the Pool against which the Certificates 
are issued.



Sec. 120.641  Disclosure to purchasers.

    (a) Information to purchaser. Prior to any sale, the Pool Assembler, 
Registered Holder of an Individual Certificate, or any subsequent seller 
must disclose to the purchaser, verbally or in writing, information on 
the terms, conditions, and yield as described in the SBA Secondary 
Market Program Guide.
    (b) Information on transfer document. The seller must provide the 
same information described in paragraph (a) of this section in writing 
on the transfer document when the seller submits it to the FTA. After 
the sale of an Individual Certificate, the FTA will provide the 
disclosure information in writing to the purchaser.
    (c) Information in prospectus. If the Registered Holder is a trust, 
investment Pool, mutual fund or other security, it must disclose the 
information in paragraph (a) of this section to investors through a 
prospectus and other promotional material if an Individual Certificate 
or Pool Certificate is placed into or used as the backing for the 
investment vehicle.



Sec. 120.642  Requirements before the FTA issues Pool Certificates.

    Before the FTA issues any Pool Certificate, the Pool Assembler must 
deliver to it the following documents:
    (a) A properly completed Pool application form;
    (b) Either:
    (1) Individual Certificates evidencing the guaranteed portions 
comprising the Pool; or
    (2) An executed SPGA and related documentation for the loans whose 
guaranteed portions are to be part of the Pool; and
    (c) Any other documentation which SBA may require.



Sec. 120.643  Requirements before the FTA issues Individual Certificates.

    (a) FTA issuance of initial Certificate. Before the FTA can issue 
the Individual Certificate for a guaranteed portion of a loan, the 
original seller must provide the following documents to the FTA:
    (1) An executed SPGA;
    (2) A copy of the note representing the guaranteed loan; and
    (3) Any other documentation which SBA may require.
    (b) Review of documentation. SBA may review or require the FTA to 
review any documentation before the FTA issues a Certificate.



Sec. 120.644  Transfers of Certificates.

    (a) General rule. Certificates are transferable. Transfers in the 
Secondary Market must comply with Article 8 of the Uniform Commercial 
Code of the State of New York. The seller must use the detached form of 
assignment (SBA Form 1088), unless the seller and purchaser choose to 
use another form which the SBA approves. The FTA may refuse to issue a 
Certificate until it is satisfied that the documents of transfer are 
complete.
    (b) Transfer on FTA records. In order for the transfer of a 
Certificate to be effective the FTA must reflect it on its records.
    (c) Contents of letter of transmittal accompanying the transfer of 
Certificates. (1) A letter of transmittal must accompany each 
Certificate which a Registered Holder submits to the FTA for transfer. 
The Registered Holder must supply the following information in the 
letter:
    (i) Pool number, if applicable;
    (ii) Certificate number;
    (iii) Name of purchaser of Certificate;

[[Page 251]]

    (iv) Address and tax identification number of the purchaser;
    (v) Name and telephone number of the person handling or facilitating 
the transfer;
    (vi) Instructions for the delivery of the new Certificate.
    (2) The Registered Holder must also send the fee which the FTA 
charges for this service. The FTA will supply fee information to the 
Registered Holder.
    (d) Lender cannot purchase guaranteed portion of loan it made. The 
Lender (or its Associate) that made a 7(a) guaranteed loan cannot 
purchase the guaranteed portion of that loan in the Secondary Market. If 
a Lender does purchase the guaranteed portion of one of its own loans, 
it shall not have the unconditional guarantee of SBA.



Sec. 120.645  Redemption of Certificates.

    (a) Redemption of Individual Certificate. The prepayment of the 
underlying loan or a default on such loan will trigger the redemption of 
the Certificate by FTA/SBA in accordance with the procedures prescribed 
in the SPGA.
    (b) Redemption of Pool Certificate. The FTA and SBA may redeem a 
Pool Certificate because of prepayment or default of all loans in a 
Pool.



Sec. 120.650  Registration duties of FTA in Secondary Market.

    The FTA registers all Certificates. This means it issues, transfers 
title to, and redeems them. All financial transactions relating to a 
guaranteed portion of a loan flow through the FTA. In fulfilling its 
obligation to keep the central registry current, the FTA may, with SBA's 
approval, obtain any necessary information from the parties involved in 
the Secondary Market.



Sec. 120.651  Claim to FTA by Registered Holder to replace Certificate.

    (a) To replace a Certificate because of loss, theft, destruction, 
mutilation, or defacement, the Registered Holder must:
    (1) Give the FTA information about the Certificate and the facts 
relating to the claim;
    (2) File an indemnity bond acceptable to SBA and the FTA with a 
surety to protect the interests of SBA and the FTA;
    (3) Pay the FTA its fee to replace a Certificate; and
    (4) Use an affidavit of loss (form available from the FTA) to 
report:
    (i) The name and address of the Registered Holder (and the name and 
capacity of any representative actually filing the claim);
    (ii) The Certificate by Pool number, if applicable;
    (iii) The Certificate number;
    (iv) The original principal amount;
    (v) The name in which the Certificate was registered;
    (vi) Any assignment, endorsement or other writing on the 
Certificate; and
    (vii) A statement of the circumstances of the theft or loss.
    (b) When the FTA receives notice of the theft or loss, it will stop 
any transfer of the Certificate. The Registered Holder must send to the 
FTA all available portions of a mutilated or defaced Certificate. When 
the Registered Holder completes these steps, the FTA will replace the 
Certificate.



Sec. 120.652  FTA fees.

    The FTA may charge reasonable servicing fees, transfer fees, and 
other fees as the SBA and FTA may negotiate under contract.

       Suspension or Revocation of Participant in Secondary Market



Sec. 120.660  Suspension or revocation.

    (a) Suspension or revocation of Lender, broker, dealer, or 
Registered Holder for violation of Secondary Market rules and 
regulations. The AA/FA may suspend or revoke the privilege of a Lender, 
broker, dealer, or Registered Holder to sell, purchase, broker, or deal 
in loans or Certificates for:
    (1) Committing a serious violation, in SBA's discretion, of:
    (i) The regulations governing the Secondary Market; or
    (ii) Any provisions in the contracts entered into by the parties, 
including SBA Forms 1085, 1086, 1088 and 1454; or
    (2) Knowingly submitting false or fraudulent information to the SBA 
or FTA.
    (b) Additional rules for suspension or revocation of broker or 
dealer. In addition to acting under paragraph (a) of this section, the 
AA/FA may suspend or

[[Page 252]]

revoke the privilege of any broker or dealer to sell or otherwise deal 
in Certificates in the Secondary Market if:
    (1) Its supervisory agency has revoked or suspended the broker or 
dealer from engaging in the securities business, or is investigating the 
firm or broker for a practice which SBA considers, in its sole 
discretion, to be relevant to the broker's or dealer's fitness to 
participate in the Secondary Market;
    (2) The broker or dealer has been indicted or otherwise formally 
charged with a misdemeanor or felony which bears on its fitness to 
participate in the Secondary Market; or
    (3) A civil judgment is entered holding that the broker or dealer 
has committed a breach of trust or a violation of any law or regulation 
protecting the integrity of business transactions or relationships.
    (c) Notice to suspend or revoke. The AA/FA shall notify the affected 
party in writing, providing the reasons therefore, at least 10 business 
days prior to the effective date of the suspension or revocation. The 
affected party may appeal the suspension or revocation made under this 
section pursuant to the procedures set forth in part 134 of this 
chapter. The action of the AA/FA will remain in effect pending 
resolution of the appeal. Revocation will last a minimum of five years.



                      Subpart G--Microloan Program



Sec. 120.700  What is the Microloan Program?

    The Microloan Program assists women, low income individuals, 
minority entrepreneurs, and other small businesses which need small 
amounts of financial assistance. Under this program, SBA makes direct 
and guaranteed loans to Intermediaries (as defined below) who use the 
proceeds to make loans to eligible borrowers. SBA may also make grants 
under the program to Intermediaries and other qualified nonprofit 
entities to be used for marketing, management, and technical assistance 
to the program's target population.

[61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001]



Sec. 120.701  Definitions.

    (a) Deposit account is a demand, time, savings, passbook, or similar 
account maintained with an insured depository institution (not including 
an account evidenced by a Certificate of Deposit).
    (b) Economically Distressed Area is a county or equivalent division 
of local government of a state in which, according to the most recent 
available data from the United States Bureau of the Census, 40 percent 
or more of the residents have an annual income that is at or below the 
poverty level.
    (c) Grant is a Federal award of money, or property in lieu of money 
(including cooperative agreements) to an eligible grantee that must 
account for its use. The term does not include the provision of 
technical assistance, revenue sharing, loans, loan guarantees, interest 
subsidies, insurance, direct appropriations, or any fellowship or other 
lump sum award.
    (d) Insured depository institution has the same meaning as in 
section 3(c) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
    (e) Intermediary is an entity participating in the Microloan 
Demonstration Program which makes and services Microloans to eligible 
small businesses and which provides marketing, management, and technical 
assistance to its borrowers. It may be:
    (1) A private, nonprofit community development corporation or other 
entity;
    (2) A consortium of private, nonprofit community development 
corporations or other entities;
    (3) A quasi-governmental economic development entity, other than a 
state, county, municipal government or any agency thereof; or
    (4) An agency of or a nonprofit entity established by a Native 
American Tribal Government.
    (f) Microloan is a short-term, fixed interest rate loan of not more 
than $35,000 made by an Intermediary to an eligible small business.
    (g) Non-Federal sources are sources of funds other than the Federal 
Government and may include indirect costs or in-kind contributions paid 
for under non-Federal programs. Community Block Development Grants are 
considered non-Federal sources.

[[Page 253]]

    (h) Non-lending technical assistance provider (NTAP) is an entity 
which receives grant funds from SBA to provide technical assistance to 
Microloan borrowers.
    (i) Specialized Intermediary is an Intermediary which maintains a 
portfolio of Microloans averaging $10,000 or less.

[61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001; 
66 FR 47878, Sept. 14, 2001]



Sec. 120.702  Are there limitations on who can be an Intermediary or on where an Intermediary may operate?

    (a) Prior experience requirement. To be eligible to be an 
Intermediary, an organization must:
    (1) Have made and serviced short-term fixed rate loans of not more 
than $35,000 to newly established or growing small businesses for at 
least one year: and
    (2) Have at least one year of experience providing technical 
assistance to its borrowers.
    (b) Limitation to one state. An Intermediary may not operate in more 
than one state unless the AA/FA determines that it would be in the best 
interests of the small business community for it to operate across state 
lines.

[61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47878, Sept. 14, 2001]



Sec. 120.703  How does an organization apply to become an Intermediary?

    (a) Application Process. Organizations interested in becoming 
Intermediaries should contact SBA for information on the application 
process.
    (b) Documentation in support of application. The application must 
include a detailed narrative statement describing:
    (1) The types of businesses assisted in the past and those the 
applicant intends to assist with Microloans;
    (2) The average size of the loans made in the past and the average 
size of intended Microloans;
    (3) The extent to which the applicant will make Microloans to small 
businesses in rural areas;
    (4) The geographic area in which the applicant intends to operate, 
including a description of the economic and demographic conditions 
existing in the intended area of operations;
    (5) The availability and cost of obtaining credit for small 
businesses in the area;
    (6) The applicant's experience and qualifications in providing 
marketing, management, and technical assistance to small businesses; and
    (7) Any plan to use other technical assistance resources (such as 
counselors from the Service Corps of Retired Executives) to help 
Microloan borrowers.



Sec. 120.704  How are applications evaluated?

    (a) Evaluation criteria. In selecting Intermediaries, SBA will 
attempt to insure that Microloans are available to small businesses in 
all industries and particularly to small businesses located in urban and 
rural areas.
    (b) Preference for organizations which make very small loans. In 
selecting Intermediaries, SBA will give priority to applicants which 
maintain a portfolio of loans averaging $10,000 or less.
    (c) Consideration of quasi-governmental organizations. Generally, 
SBA will consider applications by quasi-governmental organizations only 
when it determines that program services for a particular geographic 
area would be best provided by such organization.

[61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47878, Sept. 14, 2001]



Sec. 120.705  What is a Specialized Intermediary?

    At the end of an Intermediary's first year of participation in the 
program, SBA will determine whether it qualifies as a Specialized 
Intermediary. An Intermediary qualifies as a Specialized Intermediary if 
it maintains a portfolio of Microloans averaging $10,000 or less. 
Specialized Intermediaries qualify for more favorable interest rates on 
SBA loans. If, after the first year, an Intermediary qualifies as a 
Specialized Intermediary, the special interest rate is applied 
retroactively to SBA loans made to the Intermediary. After the first 
year SBA will determine an Intermediary's qualifications as a 
Specialized Intermediary annually, based on its lending practices during 
the term of its participation in the program. Specialized Intermediaries 
also

[[Page 254]]

qualify for a greater amount of technical assistance grant funding.

[61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47878, Sept. 14, 2001]



Sec. 120.706  What are the terms and conditions of an SBA loan to an Intermediary?

    (a) Loan Amount. An Intermediary may not borrow more than $750,000 
in the first year of participation in the program. In later years, the 
Intermediary's obligation to SBA may not exceed an aggregate of $3.5 
million, subject to statutory limitations on the total amount of funds 
available per state.
    (b) Repayment terms. During the first year of the loan, an 
Intermediary is not required to make any payments, but interest accrues 
from the date that SBA disburses the loan proceeds to the Intermediary. 
After that, SBA will determine the periodic payments. The loan must be 
repaid within 10 years.
    (c) Interest rate. The interest rate is equal to the rate applicable 
to five-year obligations of the United States Treasury, adjusted to the 
nearest one-eighth percent, less 1.25 percent. However, the interest 
rate for Specialized Intermediaries is equal to the rate applicable to 
five-year obligations of the United States Treasury, adjusted to the 
nearest one-eighth percent, less two percent.
    (d) Collateral. As security for repayment of the SBA loan, an 
Intermediary must pledge to SBA a first lien position in the MRF 
(described below), LLRF (described below), and all notes receivable from 
Microloans.
    (e) Default. If for any reason an Intermediary is unable to make 
payment to SBA when due, SBA may accelerate maturity of the loan and 
demand payment in full. In this event, or if an Intermediary violates 
this part or the terms of its loan agreement, it must surrender 
possession of all collateral described in paragraph (d) of this section 
to SBA. The Intermediary is not obligated to pay SBA any loss or 
deficiency which may remain after liquidation of the collateral unless 
the loss was caused by fraud, negligence, violation of any of the 
ethical requirements of Sec. 120.140, or violation of any other 
provision of this part.
    (f) Fees. SBA does not charge Intermediaries any fees for loans 
under this Program. An Intermediary may, however, pay minimal closing 
costs to third parties, such as filing and recording fees.

[61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001]



Sec. 120.707  What conditions apply to loans by Intermediaries to Microloan borrowers?

    (a) General. An intermediary may make Microloans to any small 
business eligible to receive financial assistance under this part. A 
borrower may also use Microloan proceeds to establish a nonprofit child 
care business. Proceeds from Microloans may be used only for working 
capital and acquisition of materials, supplies, furniture, fixtures, and 
equipment. SBA does not review Microloans for creditworthiness.
    (b) Amount and maturity. Generally, Intermediaries should not make a 
Microloan of more than $10,000 to any borrower. An Intermediary may not 
make a Microloan of more than $20,000 unless the borrower demonstrates 
that it is unable to obtain credit elsewhere at comparable interest 
rates and that it has good prospects for success. An Intermediary may 
not make a Microloan of more than $35,000, and no borrower may owe an 
Intermediary more than $35,000 at any one time. Each Microloan must be 
repaid within six years.
    (c) Interest rate. The maximum interest rate that can be charged a 
Microloan borrower is:
    (1) On loans of more than $10,000, the interest rate charged on the 
SBA loan to the Intermediary, plus 7.75 percentage points; and
    (2) On loans of $10,000 or less, the interest rate charged on the 
SBA loan to the Intermediary, plus 8.5 percentage points.

[61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001; 
66 FR 47878, Sept. 14, 2001]



Sec. 120.708  What is the Intermediary's financial contribution?

    The Intermediary must contribute from non-Federal sources an amount 
equal to 15 percent of any loan that it receives from SBA. The 
contribution

[[Page 255]]

may not be borrowed. For purposes of this program, Community Development 
Block Grants are considered non-Federal sources.



Sec. 120.709  What is the Microloan Revolving Fund?

    The Microloan Revolving Fund (``MRF'') is an interest-bearing 
Deposit Account into which an Intermediary must deposit the proceeds 
from SBA loans, its contributions from non-Federal sources, and payments 
from its Microloan borrowers. An Intermediary may only withdraw from 
this account the money needed to establish the Loan Loss Reserve Fund 
(Sec. 120.710), proceeds for each Microloan it makes, and any payments 
to be made to SBA.



Sec. 120.710  What is the Loan Loss Reserve Fund?

    (a) General. The Loan Loss Reserve Fund (``LLRF'') is an interest-
bearing Deposit Account which an Intermediary must establish to pay any 
shortage in the MRF caused by delinquencies or losses on Microloans. An 
Intermediary must maintain the LLRF until it has repaid all obligations 
it owes SBA.
    (b) Level of Loan Loss Reserve Fund. Until it is in the Microloan 
program for at least five years, an Intermediary must maintain a balance 
on deposit in its LLRF equal to 15 percent of the outstanding balance of 
the notes receivable owed to it by its Microloan borrowers 
(``Portfolio'').
    (c) SBA review of Loan Loss Reserve Fund. After an Intermediary has 
been in the Microloan program for five years, it may request SBA's 
Associate Administrator for Financial Assistance (``AA/FA'') to reduce 
the percentage of its Portfolio which it must maintain in its LLRF to an 
amount equal to the actual average loan loss rate during the preceding 
five-year period. Upon receipt of such request, the AA/FA will review 
the Intermediary's annual loss rate for the most recent five-year period 
preceding the request.
    (d) Reduction of Loan Loss Reserve Fund. The AA/FA has the authority 
to reduce the percentage of an Intermediary's Portfolio that it must 
maintain in its LLRF to an amount equal to the actual average loan loss 
rate during the preceding five-year period. The AA/FA can not reduce the 
LLRF to less than ten percent of the Portfolio.
    (e) What must an intermediary demonstrate to get a reduction in Loan 
Loss Reserve Fund? To get a reduction in its LLRF, an Intermediary must 
demonstrate to the satisfaction of the AA/FA that:
    (1) Its average annual loss rate during the preceding five years is 
less than fifteen percent, and
    (2) No other factors exist that may impair the Intermediary's 
ability to repay all obligations which it owes to the SBA under the 
Microloan program.

[61 FR 3235, Jan. 31, 1996, as amended at 65 FR 17439, Apr. 3, 2000]



Sec. 120.711  What rules govern Intermediaries?

    Intermediaries must operate in accordance with applicable statutes, 
regulations, policy notices, SBA's Standard Operating Procedures (SOPs), 
and the information in the application.



Sec. 120.712  How does an Intermediary get a grant to assist Microloan borrowers?

    (a) General. An Intermediary is eligible to receive grant funding 
from SBA of not more than 25 percent of the outstanding balance of all 
SBA loans to the Intermediary. The Intermediary must contribute, solely 
from non-Federal sources, an amount equal to 25 percent of the grant. 
Contributions may be made in cash or in kind.
    (b) Limitations on grant funds. An Intermediary may not borrow its 
contribution. It may only use grant funds to provide Microloan borrowers 
with marketing, management, and technical assistance, except that:
    (1) Up to 25 percent of the grant funds may be used to provide 
information and technical assistance to prospective Microloan borrowers; 
and
    (2) Grant monies may be used to attend training required by SBA. 
Intermediaries may not enter into third party contracts for the 
provision of technical assistance to program clients.
    (c) Exception to contribution requirement. Intermediaries which make 
at least 50 percent of their loans to small

[[Page 256]]

businesses located in or owned by residents of Economically Distressed 
Areas are not subject to the contribution requirement in paragraph (a) 
of this section.
    (d) Intermediaries eligible to receive additional grant monies. An 
Intermediary may receive an additional SBA grant equal to five percent 
of the outstanding balance of all loans received from SBA (with no 
obligation to contribute additional matching funds) if:
    (1) The Intermediary makes at least 25 percent of its loans to small 
businesses located in or owned by residents of an Economically 
Distressed Area; or
    (2) The Intermediary is a Specialized Intermediary.
    (e) Third party contracts for technical assistance. An Intermediary 
may use no more than 25 percent of the grant funds it receives from SBA 
for contracts with third parties for the latter to provide technical 
assistance to Microloan borrowers.

[61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001]



Sec. 120.713  Does SBA provide technical assistance to Intermediaries?

    SBA may procure technical assistance for an Intermediary to improve 
its knowledge, skill, and understanding of microlending by awarding a 
grant to a more experienced Intermediary. SBA may also obtain such 
a