[Federal Register Volume 81, Number 78 (Friday, April 22, 2016)]
[Rules and Regulations]
[Pages 23563-23566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09302]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 81, No. 78 / Friday, April 22, 2016 / Rules
and Regulations
[[Page 23563]]
SMALL BUSINESS ADMINISTRATION
13 CFR Part 115
RIN 3245-AG70
Surety Bond Guarantee Program; Miscellaneous Amendments
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: The Small Business Administration (SBA) is issuing this final
rule to change the regulations for SBA's Surety Bond Guarantee Program
in four areas. First, as a condition for participating in the Prior
Approval and Preferred Surety Bond Programs, this rule clarifies that a
Surety must directly employ underwriting and claims staffs sufficient
to perform and manage these functions, and that final settlement
authority for claims and recovery is vested only in salaried employees
of the Surety. Second, this rule provides that all costs incurred by
the Surety's salaried claims staff are ineligible for reimbursement by
SBA, except the amounts actually paid for reasonable and necessary
travel expenses. In addition, the Surety may seek reimbursement for
amounts paid for specialized services that are provided by outside
consultants in connection with the processing of a claim. Third, the
rule modifies the criteria for determining when a Principal that caused
a Loss to SBA is ineligible for a bond guaranteed by SBA. Fourth, the
rule modifies the criteria for admitting Sureties to the Preferred
Surety Bond Program by increasing the Surety's underwriting limitation,
as certified by the U.S. Treasury Department on its list of acceptable
sureties, from at least $2 million to at least $6.5 million.
DATES: This rule is effective May 23, 2016.
FOR FURTHER INFORMATION CONTACT: Barbara J. Brannan, Office of Surety
Guarantees, (202) 205-6545 or email: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background Information
The U.S. Small Business Administration (SBA) guarantees bid,
payment and performance bonds for small and emerging contractors who
cannot obtain surety bonds through regular commercial channels. SBA's
guarantee gives Sureties an incentive to provide bonding for small
businesses and, thereby, assists small businesses in obtaining greater
access to contracting opportunities. SBA's guarantee is an agreement
between a Surety and SBA that SBA will assume a certain percentage of
the Surety's loss should a contractor default on the underlying
contract.
On April 14, 2015, SBA published a notice of proposed rulemaking
with a request for comments in the Federal Register (80 FR 19886). The
rule proposed to change the regulations governing SBA's Surety Bond
Guarantee Program (SBG Program) in the following four areas that had
prompted questions from participating Sureties:
(1) The rule proposed to clarify that to participate in the Prior
Approval and Preferred Surety Bond (PSB) Programs, a Surety must
directly employ underwriting and claims staffs sufficient to perform
and manage these functions, and that final settlement authority for
claims and recoveries must be vested only in the Surety's salaried
claims staff.
(2) The rule proposed to specify that the costs that the Surety
incurs for its salaried claims staff are ineligible for reimbursement
by SBA and that the Surety may seek reimbursement for amounts actually
paid by the Surety for specialized services that are provided by an
outside consultant, which is not an Affiliate of the Surety, in
connection with the processing of a claim, provided that such services
are beyond the capability of the Surety's salaried claims staff.
(3) The rule proposed to modify the conditions under which a
Principal, and its Affiliates, would be deemed ineligible for a bond
guaranteed by SBA in the circumstance where the Principal has
previously defaulted on an SBA guaranteed surety bond. The rule
provided that a Principal, or any of its Affiliates, would lose
eligibility for further SBA bond guarantees if the Principal, or any of
its Affiliates, had defaulted on an SBA guaranteed bond resulting in a
Loss (as defined in 13 CFR 115.16) that had not been fully reimbursed
to SBA, or if SBA had not been fully reimbursed for any Imminent Breach
payments. It also provided that the Principal, or any of its
Affiliates, may be reinstated only if SBA had been fully repaid for the
Loss or for the Imminent Breach payment, unless SBA's Office of Surety
Guarantees (OSG) found good cause for reinstating the Principal. In
addition, the discharge of the indebtedness in bankruptcy would no
longer be specifically included as a condition for reinstatement, but
the circumstances of such discharge could be considered as part of
OSG's good cause analysis for reinstatement. The Proposed Rule also
clarified that the same standards regarding the loss of eligibility and
the conditions for reinstatement would apply to both the Prior Approval
Program and the PSB Program.
(4) The rule proposed to modify the criteria for admitting a Surety
to participate in the PSB Program by increasing the Surety's
underwriting limitation, as certified by the U.S. Treasury Department
on its list of acceptable sureties on Federal bonds, from at least $2
million to at least $6.5 million.
The comment period was open until June 15, 2015, and SBA received
comments from one trade association and one surety company. One other
comment was received from an individual, but this comment did not
relate to the Proposed Rule or the SBG Program.
One of the commenters indicated its support for the proposed
changes that modify the conditions under which a Principal, and its
Affiliates, would be deemed ineligible for a bond guaranteed by SBA and
that modify the requirements for reinstatement. The commenter also
expressed support for SBA's effort to address the failure of some
participating Sureties to maintain adequate in-house claims personnel,
and to ensure that participating Sureties handle their SBA-guaranteed
bond claims in the same manner as their other bond claims.
However, both commenters expressed concern that the proposed
changes to 13
[[Page 23564]]
CFR 115.11 and 115.16(e)(1) would not create clear standards with
respect to when SBA would reimburse Sureties for the costs of using
outside consultants in connection with bond claims. Under the proposed
13 CFR 115.16(e)(1), a Surety may seek reimbursement for ``[a]mounts
actually paid by the Surety for specialized services that are provided
under contract by an outside consultant, which is not an Affiliate of
the Surety, in connection with the processing of a claim, provided that
such services are beyond the capability of the Surety's salaried claims
staff.'' The commenters were concerned that this standard is too
limiting, and instead suggested that SBA amend 13 CFR 115.16(e)(2) to
allow Sureties to seek reimbursement for the ``reasonable'' costs of
any outside consultants. The commenters indicated that this standard
would cover a broader range of consultants, such as construction,
accounting or other professionals, that assist Sureties in
investigating and settling claims. They argued that the services of
these outside consultants may become necessary to avoid delay and to
mitigate expenses and that these expenses would be recoverable from the
Principal under the General Indemnity Agreement obtained under 13 CFR
115.17(a).
SBA has considered the suggestion but has concluded that the
reasonable cost standard proposed by the commenters does not adequately
reflect the requirement that Sureties employ sufficient in-house staff
to handle all customary claims and recovery functions. SBA expects
participating Sureties to employ adequate in-house staff to perform
these functions and to bear the full cost of performing such functions.
The Proposed Rule does recognize that there may be circumstances where
an outside consultant with a particular expertise beyond the
capabilities of the Surety's salaried claims staff is needed in
connection with a claim, and would allow Sureties to seek reimbursement
for the costs of such expertise. As described in the preamble to the
Proposed Rule, an example of such ``specialized services . . . beyond
the capability of the Surety's salaried claims staff'' would be the
services of a structural engineer that are needed to evaluate the
Principal's compliance with engineering specifications, and a commenter
agreed with this example. SBA believes that its proposed language is
sufficiently broad to cover the various situations that may arise.
In addition, a commenter suggested that the proposed requirement in
13 CFR 115.11 that the Surety must have a salaried staff ``to perform
all claims and recovery functions'' be revised by removing the term
``all'' to account for those instances where outside consultants are
retained to assist in claim and recovery functions. Instead of removing
the term ``all'', SBA is revising this section to recognize that the
Surety may seek reimbursement for specialized services provided by
outside consultants under 13 CFR 115.16(e)(1). Again, SBA expects that
these consultants will be needed to provide a specialized service that
is beyond the expertise of the Surety's salaried claims staff.
Finally, both commenters stated that travel by in-house claims
staff is often necessary and expressed concern that the proposed
language in 13 CFR 115.16(f)(1) excludes travel costs as a
reimburseable expense. SBA agrees that Sureties may seek reimbursement
for reasonable and necessary travel expenses by their in-house claims
staff, and has amended the language in 13 CFR 115.16(e)(1) and
115.16(f)(1) accordingly.
II. Section-by-Section Analysis
Section 115.11. As proposed, this provision required that an
applicant have a salaried staff that is employed directly (not an agent
or other individual or entity under contract with the applicant) to
oversee its underwriting functions and to perform all claims and
recovery functions. For clarity, SBA is revising this section to
recognize that, with respect to claims functions, a Surety may contract
with an outside consultant for a specialized service the costs of which
may be reimbursable under 13 CFR 115.16(e)(1). SBA expects Sureties to
employ salaried claims staff capable of handling the routine processing
and administration of claims and recovery, and to not seek
reimbursement for the costs of these functions under 115.16(e)(1),
except, as revised by this final rule, Sureties may seek reimbursement
for the reasonable and necessary travel expenses of its salaried claims
staff. This section also provides that final settlement authority for
claims and recovery actions must be vested only in the applicant's
``claims staff'' and, for clarity and consistency, SBA is revising this
phrase to read ``salaried claims staff''. There are no other changes to
this section as proposed.
Section 115.13(a). As proposed, this provision added a new
paragraph (7) to provide that, to be eligible for an SBA guaranteed
bond, neither the Principal nor any of its Affiliates may be ineligible
for an SBA guaranteed bond under the grounds set forth in 13 CFR
115.14. There are no changes to this provision as proposed.
Section 115.14. SBA is modifying the criteria regarding the loss of
the Principal's eligibility for future assistance and the conditions
for reinstatement by providing that a Principal loses eligibility for
further SBA bond guarantees if the Principal, or any of its Affiliates,
has defaulted on an SBA guaranteed bond that resulted in a Loss (as
defined in 13 CFR 115.16) that has not been fully reimbursed to SBA, or
if SBA has not been fully reimbursed for any Imminent Breach payments.
OSG will have the authority to waive this requirement for good cause.
In addition, as proposed, the same criteria on ineligibility and
conditions for reinstatement would apply to both the Prior Approval
Program and the PSB Program. As the same conditions for reinstatement
will apply to both the Prior Approval Program and the PSB Program, the
conditions for reinstatement set forth in 13 CFR 115.36(b) and (c) will
be moved in their entirety to 13 CFR 115.14(b) and (c), and the heading
of this section will be changed to ``Loss of Principal's eligibility
for future assistance and reinstatement of Principal.''
There are no changes to this provision as proposed.
Section 115.16(e)(1). As proposed, this provision provided that SBA
would reimburse amounts actually paid by a Surety for specialized
services provided under contract by outside consultants in connection
with the processing of a claim, provided that such services are beyond
the capability of the Surety's salaried claims staff. Based on
comments, SBA is revising this provision to allow the Surety to seek
reimbursement for travel expenses incurred by the Surety's claims
staff, and to provide that the cost of the consultant's services and
the travel expenses of the Surety's claims staff must be reasonable and
necessary, and must specifically concern 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.
These changes, coupled with the changes made to 115.11, clarify that a
Surety cannot outsource routine claims functions and responsibilities
or include such costs in its reimbursement requests submitted to SBA
under the bond guarantee agreement. With the exception of specialized
work that falls outside the scope of the routine processing and
administration of claims, the Surety will perform the claims function
at no cost to the Agency (other
[[Page 23565]]
than the reasonable and necessary travel costs of claims staff).
Section 115.16(f)(1). As proposed, this provision clarified that
all costs incurred by the Surety's salaried claims staff, whether or
not specifically allocable to an SBA guaranteed bond, are excluded from
the definition of Loss. Costs incurred by the Surety's salaried claims
staff, like all other overhead of the Surety, are the responsibility of
the Surety. Based on the comments, and for consistency with section
115.16(e)(1), an exception for the reasonable and necessary travel
expenses of the Surety's salaried claims staff is being added to this
provision.
Section 115.18(a)(2). As proposed, SBA is revising this paragraph
to provide that the Surety's failure to continue to comply with the
requirements set forth in section 13 CFR 115.11 are sufficient grounds
for refusal to issue further guarantees, or in the case of a PSB
Surety, termination of preferred status. There are no changes to this
provision as proposed.
Section 115.36. By including the conditions for reinstatement and
the standard for underwriting after reinstatement in 13 CFR 115.14(b)
and (c), the rule, as proposed, renamed the heading of this section to
``Sec. 115.36 Indemnity settlements'', deleted the paragraph heading
``(a) Indemnity settlements.'', removed paragraphs (b) and (c), and
renumbered paragraphs ``(1)'', ``(2)'', and ``(3)'', as ``(a)'',
``(b)'', and ``(c)'', respectively. There are no changes to this
provision as proposed.
Section 115.60(a)(1). As proposed, SBA conformed this provision to
the statutory increase in the maximum contract amount for which a bond
may be guaranteed by removing ``$2,000,000'' and inserting
``$6,500,000'' in its place. There are no changes to this provision as
proposed.
Section 115.60(a)(5). By including in 13 CFR 115.11 the requirement
that all Sureties vest final settlement authority for claims and
recovery only in their salaried claims staff, this rule removes 13 CFR
115.60(a)(5) and renumbers the existing paragraph 13 CFR 115.60(a)(6)
accordingly. There are no changes to this provision as proposed.
Compliance with Executive Orders 12866, 13563, 12988, and 13132,
the Paperwork Reduction Act (44 U.S.C. Ch. 35) and the Regulatory
Flexibility Act (5 U.S.C. 601-612).
Executive Order 12866
The Office of Management and Budget (OMB) has determined that this
rule does not constitute a significant regulatory action under
Executive Order 12866. This rule is also not a major rule under the
Congressional Review Act (5 U.S.C. 800).
Executive Order 13563
In accordance with Executive Order 13563, SBA discussed with
several surety companies issues regarding the SBG Program regulations.
In particular, SBA discussed the underwriting and claims staffing
requirements that Sureties must meet in order to participate in SBA's
SBG Program. SBA also discussed with these companies the conditions for
reimbursement of the costs incurred by their claims staffs. Generally,
the Sureties responded favorably to SBA's position that changes were
necessary to clarify or amend the regulations on these issues.
Executive Order 12988
This action meets applicable standards set forth in Sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have retroactive or preemptive effect.
Executive Order 13132
SBA has determined that this rule will not have substantial, direct
effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Therefore, for
purposes of Executive Order 13132, SBA has determined that this rule
has no federalism implications warranting preparation of a federalism
assessment.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
For the purpose of the Paperwork Reduction Act, 44 U.S.C., Chapter
35, SBA has determined that this rule will not impose any new reporting
or recordkeeping requirements.
Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (RFA) 5 U.S.C. 601, requires
administrative agencies to consider the effect of their actions on
small entities, small non-profit enterprises, and small local
governments. Pursuant to the RFA, when an agency issues a rulemaking,
the agency must prepare a regulatory flexibility analysis which
describes the impact of the rule on small entities. However, section
605 of the RFA allows an agency to certify a rule, in lieu of preparing
an analysis, if the rulemaking is not expected to have a significant
economic impact on a substantial number of small entities. There are 23
Sureties that participate in the SBA program, and no part of this rule
would impose any significant additional cost or burden on them.
Consequently, this rule does not meet the significant economic impact
on a substantial number of small businesses criterion anticipated by
the Regulatory Flexibility Act.
List of Subjects in 13 CFR Part 115
Claims, Reporting and recordkeeping requirements, Small businesses,
Surety bonds.
For the reasons stated in the preamble, SBA amends 13 CFR part 115
as follows:
PART 115--SURETY BOND GUARANTEE
0
1. The authority citation for part 115 continues to read as follows:
Authority: 5 U.S.C. app 3; 15 U.S.C. 687b, 687c, 694a, 694b
note; and Pub. L. 110-246, Sec. 12079, 122 Stat. 1651.
0
2. Amend Sec. 115.11 by adding three sentences at the end to read as
follows:
Sec. 115.11 Applying to participate in the Surety Bond Guarantee
Program.
* * * At a minimum, each applicant must have salaried staff that is
employed directly (not an agent or other individual or entity under
contract with the applicant) to oversee its underwriting function and
perform all claims and recovery functions other than specialized
services the costs of which may be reimbursable under 13 CFR
115.16(e)(1). Final settlement authority for claims and recovery must
be vested only in the applicant's salaried claims staff. The applicant
must continue to comply with SBA's standards and procedures for
underwriting, administration, claims, recovery, and staffing
requirements while participating in SBA's Surety Bond Guarantee
Programs.
0
3. Amend Sec. 115.13 by adding paragraph (a)(7) to read as follows:
Sec. 115.13 Eligibility of Principal.
(a) * * *
(7) No loss of eligibility. Neither the Principal nor any of its
Affiliates is ineligible for an SBA-guaranteed bond under Sec. 115.14.
* * * * *
0
4. Amend Sec. 115.14 as follows:
0
a. Revise the section heading, and paragraphs (a)(4) and (b);
0
b. Add paragraph (c).
Sec. 115.14 Loss of Principal's eligibility for future assistance and
reinstatement of Principal.
(a) * * *
(4) The Principal, or any of its Affiliates, has defaulted on an
SBA-
[[Page 23566]]
guaranteed bond resulting in a Loss that has not been fully reimbursed
to SBA, or SBA has not been fully reimbursed for any Imminent Breach
payments.
* * * * *
(b) Reinstatement of Principal's eligibility. At any time after a
Principal becomes ineligible for further bond guarantees under
paragraph (a) of this section:
(1) A Prior Approval Surety may recommend that such Principal's
eligibility be reinstated, and OSG may agree to reinstate the Principal
if:
(i) The Surety has settled its claim with the Principal, or any of
its Affiliates, for an amount that results in no Loss to SBA or in no
amount owed for Imminent Breach payments, or OSG finds good cause for
reinstating the Principal notwithstanding the Loss to SBA or amount
owed for Imminent Breach payments; or
(ii) OSG and the Surety determine that further bond guarantees are
appropriate after the Principal was deemed ineligible for further SBA
bond guarantees under paragraph (a)(1), (2), (3), (5) or (6) of this
section.
(2) A PSB Surety may:
(i) Recommend that such Principal's eligibility be reinstated, and
OSG may agree to reinstate the Principal, if the Surety has settled its
claim with the Principal, or any of its Affiliates, for an amount that
results in no Loss to SBA or in no amount owed for Imminent Breach
payments, or OSG finds good cause for reinstating the Principal
notwithstanding the Loss to SBA or amount owed for Imminent Breach
payments; or
(ii) Reinstate a Principal's eligibility upon the Surety's
determination that further bond guarantees are appropriate after the
Principal was deemed ineligible for further SBA bond guarantees under
paragraph (a)(1), (2), (3), (5) or (6) of this section.
(c) Underwriting after reinstatement. A guarantee application
submitted after reinstatement of the Principal's eligibility is subject
to a very stringent underwriting review.
0
5. Amend Sec. 115.16 by revising paragraphs (e)(1) and (f)(1) to read
as follows:
Sec. 115.16 Determination of Surety's Loss.
* * * * *
(e) * * *
(1) Amounts actually paid by the Surety for specialized services
that are provided under contract by an outside consultant, which is not
an Affiliate of the Surety, provided that such services are beyond the
capability of the Surety's salaried claims staff, and amounts actually
paid by the Surety for travel expenses of the Surety's claims staff.
The cost of the consultant's services and the travel expenses of the
Surety's claims staff must be reasonable and necessary and must
specifically concern 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. The cost
allocation method must be reasonable and must comply with generally
accepted accounting principles; and
* * * * *
(f) * * *
(1) Any unallocated expenses, all direct and indirect costs
incurred by the Surety's salaried claims staff (except for reasonable
and necessary travel expenses of such staff), or any clear mark-up on
expenses or any overhead of the Surety, its attorney, or any other
consultant hired by the Surety or the attorney;
* * * * *
0
6. Amend Sec. 115.18 by revising paragraph (a)(2) to read as follows:
Sec. 115.18 Refusal to issue further guarantees; suspension and
termination of PSB status.
(a) * * *
(2) Regulatory violations, fraud. Acts of wrongdoing such as fraud,
material misrepresentation, breach of the Prior Approval or PSB
Agreement, the Surety's failure to continue to comply with the
requirements set forth in Sec. 115.11, or regulatory violations (as
defined in Sec. 115.19(d) and (h)) also constitute sufficient grounds
for refusal to issue further guarantees, or in the case of a PSB
Surety, termination of preferred status.
* * * * *
0
7. Amend Sec. 115.36 as follows:
0
a. Revise the section heading;
0
b. Remove the paragraph designation and heading ``(a) Indemnity
settlements.'';
0
c. Remove paragraphs (b) and (c); and
0
d. Redesignate paragraphs (1), (2), and (3), as (a), (b), and (c).
Sec. 115.36 Indemnity settlements.
* * * * *
Sec. 115.60 [Amended]
0
8. Amend Sec. 115.60 as follows:
0
a. Amend paragraph (a)(1) by removing ``$2,000,000'' and adding
``$6,500,000'' in its place; and
0
b. Remove paragraph (a)(5) and redesignate paragraph (a)(6) as new
paragraph (a)(5).
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-09302 Filed 4-21-16; 8:45 am]
BILLING CODE 8025-01-P