[Federal Register Volume 80, Number 191 (Friday, October 2, 2015)]
[Proposed Rules]
[Pages 59667-59672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25204]

Proposed Rules
                                                Federal Register

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.


Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / 
Proposed Rules

[[Page 59667]]


13 CFR Parts 115, 120, and 121

RIN 3245-AG73

Affiliation for Business Loan Programs and Surety Bond Guarantee 

AGENCY: Small Business Administration.

ACTION: Proposed rule.


SUMMARY: The U.S. Small Business Administration (SBA) has determined 
that changing conditions in the American economy and a constantly 
evolving small business community compel it to seek ways to improve 
program efficiency for its Surety Bond Guarantee (``SBG'') Program, and 
the business loan programs consisting of the 7(a) Loan Program, the 
Business Disaster Loan Programs (collectively, the Economic Injury 
Disaster Loans, Reservist Injury Disaster Loans, Physical Disaster 
Business Loans, Immediate Disaster Assistance Program loans), the 
Microloan Program, and the Development Company Program (the ``504 Loan 
Program''). As a result, SBA proposes to simplify guidelines for 
determining affiliation for eligibility based on size as it relates to 
these programs. This proposed rule would redefine affiliation for all 
five Programs, thereby simplifying eligibility determinations.

DATES: SBA must receive comments to the proposed rule on or before 
December 1, 2015.

ADDRESSES: You may submit comments, identified by RIN: 3245-AG73 by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include RIN 3245-AG73 in the 
subject line of the message.
     Mail: Linda Reilly, Chief, 504 Loan Program, Office of 
Financial Assistance, Office of Capital Access, Small Business 
Administration, 409 Third Street SW., Washington, DC 20416.
     Hand Delivery/Courier: Linda Reilly, Chief, 504 Loan 
Program, Office of Financial Assistance, Office of Capital Access, 
Small Business Administration, 409 Third Street SW., Washington, DC 
    SBA will post all comments on www.regulations.gov. If you wish to 
submit confidential business information (CBI) as defined in the User 
Notice at www.regulations.gov, please submit the information to Linda 
Reilly, Chief, 504 Loan Program, Office of Financial Assistance, Office 
of Capital Access, 409 Third Street SW., Washington, DC 20416, or send 
an email to [email protected]. Highlight the information that you 
consider to be CBI and explain why you believe SBA should hold this 
information as confidential. SBA will review the information and make 
the final determination whether it will publish the information.

FOR FURTHER INFORMATION CONTACT: Linda Reilly, Chief, 504 Loan Program, 
Office of Financial Assistance, Office of Capital Access, Small 
Business Administration, 409 Third Street SW., Washington, DC 20416; 
telephone 202-205-9949.


I. Background

    Executive Order 13563, ``Improving Regulation and Regulatory 
Review,'' provides that agencies ``must identify and use the best, most 
innovative, and least burdensome tools for achieving regulatory ends.'' 
(Emphasis added). Executive Order 13563 further provides that ``[t]o 
facilitate the periodic review of existing significant regulations, 
agencies shall consider how best to promote retrospective analysis of 
rules that may be outmoded, ineffective, insufficient, or excessively 
burdensome, and to modify, streamline, expand, or repeal them in 
accordance with what has been learned.'' (Emphasis added). SBA has 
reviewed its regulations with regard to the business loan programs and 
SBG program and is proposing a number of amendments and revisions to 
accomplish this goal.
    The business loan programs authorized by the Small Business Act 
(Act), 15 U.S.C. 631 et seq., that are affected by this proposed rule 
are: (1) The 7(a) Loan Program authorized by Section 7(a) of the Act; 
(2) the Business Disaster Loan Program (``BDLP'') Program authorized by 
Section 7(b) of the Act; and (3) the Microloan Program authorized by 
Section 7(m) of the Act. The 504 Loan Program, which is authorized by 
Title V of the Small Business Investment Act of 1958 (the ``SBIA''), as 
amended, 15 U.S.C. 695 et seq., is also affected. These programs (7(a), 
BDLP, Microloan, and 504) are referred to collectively as the Business 
Loan Programs in this rule. Finally, this rule also proposes revisions 
to the Surety Bond Guarantee (``SBG'') Program, authorized by section 
411 of the SBIA. A description of each program is set forth below.

A. 7(a) Loan Program

    The 7(a) Loan Program's main purpose is to help eligible small 
businesses obtain credit when they cannot obtain credit elsewhere. The 
Agency recognizes that the 7(a) Loan Program is an important engine for 
job creation. The 7(a) Loan Program provides financing for general 
business purposes through the guaranty of loans made by participating 
private sector lenders. Currently, there are approximately 4,500 
lenders participating in the 7(a) Loan Program with approximately $66 
billion in total SBA guarantees outstanding.

B. Business Disaster Loan Programs

    Through its Business Disaster Loan Programs, SBA provides low-
interest disaster loans to businesses of all sizes and private non-
profit organizations. These loans can be used to restore, repair or 
replace disaster damaged assets and working capital as a result of a 
declared disaster. The loans are made directly by SBA and repayment 
terms are determined on a case-by-case basis, based upon each 
borrower's satisfactory credit and ability to repay.

C. Microloan Program

    The Microloan Program provides loans up to $50,000 to help small 
businesses and certain nonprofit childcare centers. The average 
microloan is about $13,000. SBA lends funds to specially-designated 
intermediary lenders, which are primarily nonprofit community-based 
organizations with experience in lending as well as management and 
technical assistance. These intermediaries administer the Microloan 
Program for eligible borrowers lending directly to them. Each 

[[Page 59668]]

lender has its own lending and credit requirements. Intermediaries 
generally require some type of collateral as well as the personal 
guarantee of the business owner. Depending on their prior experience, 
applicants to the Microloan Program may be required to fulfill training 
or planning requirements before a loan application will be considered.

D. 504 Loan Program

    The core mission of the 504 Loan Program is to provide long-term 
fixed asset financing to small businesses for the purchase or 
improvement of land, buildings, and major equipment purchases, to 
facilitate the creation of jobs and to stimulate local economic 
development. A Certified Development Company (``CDC'') is a nonprofit 
corporation, with the exception of selected for-profit CDCs 
grandfathered into the 504 Loan Program that promotes economic 
development within its community through 504 loans. Under the 504 Loan 
Program, loans are made to small business applicants by CDCs, which are 
funded through sales of debentures, which are guaranteed 100% by the 
SBA. There are over 260 CDCs nationwide, each with a defined Area of 
Operations covering a specific geographic area.

E. SBG Program

    Pursuant to the SBG Program, SBA guarantees bid, payment and 
performance bonds for small and emerging contractors who cannot obtain 
surety bonds through regular commercial channels. SBA's guarantee is an 
agreement between a Surety and SBA that SBA will cover a certain 
percentage of the Surety's loss should a contractor default on the 
underlying contract. Specifically, SBA guarantees Sureties 
participating in the program against a portion of their losses incurred 
and paid as a result of a breach of the terms of a bid bond, final bond 
or ancillary bond, on any eligible contract. 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 which require these bonds as a condition for 
obtaining the contract.

II. Summary of Proposed Program Changes

    The Agency, in compliance with Executive Order 13132, previously 
requested and received public comments on the Rules of Affiliation as 
part of a Notice of Proposed Rule Change (February 25,2013) to update 
the business loan program . SBA received and reviewed comments and met 
with industry participants to identify best practices based on the 
feedback. SBA received 54 comments regarding Affiliation Rules in 
general support of the proposed change. Ten comments further suggested 
modification and clarification of the proposal. The most consistent 
concern expressed was the need in that proposal to require a borrower 
to prepare a document that qualified each potential affiliation under 
SBA rules. SBA has determined that the modifications proposed herein 
fully incorporate previous input.
    Below is a summary of the proposed changes regarding determining 
size and affiliation of applicants to Business Loan Programs and SBG 
Programs. The Agency requests comments on all of the proposed 
regulatory revisions in this rule and on any related issues affecting 
the programs.

A. Business Loan Programs and Affiliation

    The Act defines a small business concern as ``one which is 
independently owned and operated and which is not dominant in its field 
of operation . . .'' 15 U.S.C. 632(a)(1). In order to be eligible for 
an SBA guaranteed loan, an applicant must be a small business pursuant 
to size standards established by SBA through regulation. 13 CFR 
120.100. In general, to be considered small, concerns must meet the 
particular size standard that corresponds to a six-digit North American 
Industrial Classification System (NAICS) code. Each size standard is 
stated in terms of either gross revenue receipts or number of 
employees, and in limited cases a basis other than receipts or 
employees (e.g., megawatt hours). SBA considers the receipts or 
employees (or other measure) of an applicant, and all of its domestic 
and foreign affiliates, when determining a business concern's 
eligibility as a small business. 13 CFR 121.103(a)(6).
    SBA's regulations in 13 CFR 121.103 set forth the Agency's 
principles of affiliation and explain when an individual or an entity 
is an affiliate of another individual or entity. SBA's affiliation 
rules generally apply to all SBA programs for which a business must 
qualify as small, including SBA's government contracting and business 
development programs, small business loan programs and grant programs. 
Generally, affiliation exists when one business controls or has the 
power to control another or when a third party (or parties) controls or 
has the power to control both businesses. Control may arise through 
ownership, management, or other relationships or interactions between 
parties. SBA may also find affiliation based on ``negative control,'' 
which includes instances where a minority shareholder has the ability, 
under the concern's charter, by-laws, or shareholder's agreement, to 
prevent a quorum or otherwise block action by the board of directors or 
    Upon review of the statutory provisions for the Business Loan 
Programs, the purpose behind these programs, and the overall goals of 
simplification and maximization of benefits for small businesses, SBA 
is proposing amendments to the current affiliation rules with respect 
to these programs. SBA believes that, in general, a majority of the 
principles of affiliation set forth in Sec.  121.103 apply to the 
Business Loan Programs. However, SBA believes that certain affiliation 
principles in their current form are more applicable to determining 
size with respect to federal contracting and subcontracting (where SBA 
is trying to ensure only eligible small businesses win federal 
contracts expressly intended for small businesses) and are not 
necessarily applicable to business loan applicants. SBA seeks to create 
simple, bright-line tests for Business Loan Program applicants when 
determining eligibility with respect to size and affiliation, and 
streamline requirements for determining whether a business is small for 
purposes of receiving SBA loan assistance. In addition to 
clarification, this will reduce costs of an application for the loan 
applicant and its participating lender.
    SBA previously amended the affiliation rules for the Small Business 
Innovation Research (SBIR) and Small Business Technology Transfer 
(STTR) programs. Small Business Size Regulations, Small Business 
Innovation Research (SBIR) Program and Small Business Technology 
Transfer (STTR) Program, Proposed Rule 77 FR 28520 (May 15, 2012) and 
Final Rule 77 FR 76215 (December 27, 2012). SBA determined that the 
general affiliation rules did not apply to the SBIR and STTR programs 
due to the specialized nature of the program (research and development) 
and the type of small business that applies for the program (innovative 
start-ups and research businesses). The amended affiliation rules for 
the SBIR and STTR programs have helped increase opportunities for small 
businesses within these programs, reduced burdens for SBIR/STTR 
eligibility, and streamlined the programs' processes.
    SBA is proposing similar changes for the Business Loan Programs. In 
the SBIR revision R&D costs were cited, as an impediment to program 

[[Page 59669]]

Many start-ups and undercapitalized firms face the same, if not 
greater, economic challenges. SBA proposes to add a new Sec.  
121.103(a)(8) that would explain that the bases for affiliation 
applicable to SBA's Business Loan Programs will be found at a new Sec.  
121.301(f). SBA proposes to address size and affiliation for the 
Business Loan Programs separately in this new Sec.  121.301(f), to 
avoid any confusion with SBA's treatment of affiliation for government 
contracting programs, business development programs, and other 
    In the new Sec.  121.301(f), SBA proposes to refine the principles 
of ``affiliation'' for the purpose of the Business Loan Programs. 
Proposed new paragraph (f)(1) sets forth the affiliation principles 
based on percentage of ownership. With respect to affiliation based on 
control through ownership, SBA's current affiliation rule (see 13 CFR 
121.103(c)) sets forth a minority shareholder standard stating that 
when no one person owns more than 50% of a company, SBA will find that 
the person(s) that own(s) directly or indirectly an interest in the 
business no less than the ownership of the next largest owner(s) is 
deemed to have control of the small business. In addition, if the 
ownership of a business concern is widely held and no ownership 
interest is a large single block of stock as compared to any other, 
then the Board of Directors and President or Chief Executive Officer 
are deemed to control the business concern, unless they can present 
evidence showing otherwise.
    SBA's current affiliation rule states that if two or more persons 
own, control or have the power to control less than 50% of the 
concern's voting interests, and the interests are equal, or 
approximately equal in size, and the aggregate of these minority 
holdings is large as compared with any other holding, SBA presumes 
these owners have control of the business concern.
    For purposes of the Business Loan Programs, however, SBA considers 
that in all of these instances, the holdings are so diffused that 
control would always rest with the small business concern's Board of 
Directors or management since it is that unit of the organization that 
is truly running the business.
    Therefore, in Sec.  121.301(f)(1), SBA proposes that for the 
business loan programs, SBA will determine control exists based on 
ownership when:
    (1) A person owns or has the power to control more than 50% of the 
voting equity of a concern; or
    (2) if no one person owns or has the power to control more than 50% 
of the voting equity of the concern, SBA would deem the small business 
to be controlled by either the President, Chairman of the Board, or 
Chief Executive Officer (CEO) of the concern (or other officers, 
managing members, partners, or directors who control the management of 
the concern).
    SBA refers to ownership or equity without designating that it is 
``stock'' ownership because not all business loan applicants are 
corporations with ownership determined through stock issuance.
    In paragraph (f)(2) of Sec.  121.301 SBA proposes no changes to the 
existing principles regarding affiliation arising under stock options, 
convertible securities, and agreements to merge currently found in 
Sec.  121.103(d).
    In Sec.  121.301(f)(3), SBA proposes to utilize the same principles 
of affiliation for common management that are set forth in Sec.  
121.103. However, SBA has amended the language here to clarify the 
different types of managers or management.
    In Sec.  121.301(f)(4), SBA is proposing to use a different 
affiliation rule concerning ``identity of interest,'' 13 CFR 
121.103(f), for the purposes of the Business Loan Programs and Surety 
Bond Program. Currently under identity of interest, SBA determines 
affiliation between individuals or firms when these individuals or 
firms have identical (or substantially identical) business or economic 
interests, unless they can demonstrate to SBA otherwise. Family 
members, persons with common investments, or firms that are 
economically dependent through contractual (or other) relationships, 
are among those treated this way. For the Business Loan Programs and 
the Surety Bond Guarantee Program, SBA proposes to presume that there 
is an identity of interest only between close relatives as defined in 
Sec.  120.10. SBA proposes to retain this affiliation principle based 
on the customary understanding that close relatives have an overarching 
and close alignment of interests and a strong financial incentive to 
participate in and support family businesses. In the proposed rule, SBA 
states that it may determine affiliation based on an identity of 
interest for other reasons. Upon such a determination, the applicant 
may make a case to rebut the SBA decision.
    In Sec.  121.301(f)(5), SBA proposes to make one change to the 
existing language affecting affiliation based on franchise and license 
agreements currently found in Sec.  121.103(i). Under current Sec.  
121.103(i), SBA must review franchise agreements as they pertain to 
both the applicant and any affiliates of the applicant. If the 
applicant has an affiliate that operates under a franchise or license 
agreement, SBA would be required to review the franchise agreements as 
it pertains to the affiliate to determine the size of the applicant. 
Therefore, if the affiliate entity was operating under a franchise 
agreement that gave the franchisor control over the affiliate 
franchisee, SBA would determine that the affiliate entity is affiliated 
with the franchisor. Based on this analysis, when the size of the 
affiliate entity and the franchisor are combined with the size of the 
applicant, the applicant may be considered other than small. The 
proposed regulation would limit franchise or license agreement reviews 
to the immediate loan applicant, and not consider other agreements in 
place with affiliated entities.
    The proposed change would revise the first sentence of current 
Sec.  121.103(i) to read as follows: ``The restraints imposed on a 
franchisee or licensee by its franchise or license agreement related to 
standardized quality, advertising, accounting format and other similar 
provisions, generally will not be considered in determining whether the 
franchisor or licensor is affiliated with an applicant franchisee or 
licensee, provided the applicant franchisee or licensee has the right 
to profit from its efforts and bears the risk of loss commensurate with 
ownership.'' The revised language would ensure that a review of the 
applicant only takes into consideration the size of the applicant and 
its direct affiliate and not the relationship of the affiliate to any 
franchisor or licensor. With this change, SBA will still have to 
consider the size of any affiliate entities, but will not be required 
to examine any franchisor/franchisee relationship of the affiliated 
entity. The remaining language will stay the same and still require a 
review of a franchise/license agreement as it pertains to the 
    SBA proposes to retain in Sec.  121.301(f)(6) a finding of 
affiliation based on the totality of circumstances currently found in 
Sec.  121.103(a)(5). This provides SBA with the ability to consider all 
contributing factors that could potentially impact the determination 
that the applicant business is small. Therefore, notwithstanding the 
Agency's goal to provide bright line eligibility criteria regarding 
affiliation determinations for loan eligibility, the Agency recognizes 
that it must prevent instances where large entities participate in a 
small business loan program, and application

[[Page 59670]]

of the totality of circumstances standard will reinforce that program 
    SBA proposes to incorporate the exceptions to affiliation set forth 
in section Sec.  121.103(b) in new Sec.  121.301(f)(8). SBA does not 
propose any changes to these exceptions to affiliation.
    Finally, SBA proposes to eliminate from the Business Loan Programs 
several current bases of affiliation that apply in federal contracting. 
Specifically, SBA proposes to eliminate applying affiliation based on a 
newly organized concern (see Sec.  121.103(g)) and joint ventures (see 
Sec.  121.103(h)). One purpose of the newly organized concern rule is 
to prevent former small businesses from creating spin-off companies in 
order to continue to perform on small business contracts or receive 
other contracting benefits. While this affiliation principle applies in 
federal contracting, it is generally not applicable to the Business 
Loan Programs because the responsible party or parties for any loan are 
the immediate business owners, not any former entity from which they 
may have been employed previously.
    With respect to joint ventures, these partnerships are formed when 
two or more businesses combine their efforts in order to perform on a 
federal contract or receive other contract assistance. SBA does not 
consider this affiliation based on joint venture to be of significant 
concern to the Business Loan Programs because a loan to any joint 
venture will require all members of the joint venture to accept full 
responsibility for loan guarantee liability. Also, agency records 
indicate that applicants for assistance under SBA Business Loan 
Programs are rarely, if ever, joint ventures, and, therefore, this 
provision is unnecessary. For the Surety Bond Guarantee Program, the 
guarantee is on the bond, not a contract. Any joint venture project 
where the applicant small business requests a guarantee would also be 
subject to guaranteeing the obligation.
    SBA also proposes to omit the discussion of ``negative control'' as 
a stand-alone factor in determining affiliation for the purpose of loan 
eligibility. As noted above, pursuant to 13 CFR 121.103(a)(3), negative 
control may exist where a minority shareholder can block certain 
actions by the board of directors. Under this proposal for loan 
eligibility, SBA will consider all factors when making an affiliation 
determination based on the totality of the circumstances.
    SBA considers that this proposed definition of affiliation used in 
determining the applicant's loan eligibility, while continuing SBA's 
ability to review totality of circumstances, adequately ensures that 
the loan programs are provided appropriately to small businesses.

B. Surety Bond Guarantee Program and Affiliation

    Under this program, SBA provides surety bond guarantees for 
qualified small and emerging businesses, in direct partnership with 
surety companies. SBA helps small contractors by guaranteeing bid, 
performance, and payment bonds issued by participating surety companies 
for contracts up to $6.5 million so as to allow the qualified small 
contractor to obtain a contract.
    SBA's SBG Program is most commonly used for non-federal contracts. 
SBA regularly guarantees bonds for eligible small business on state, 
local and private entity contracts. State and local jurisdictions may 
not have the same size and affiliation rules as SBA. SBA has proposed 
to amend the definition of ``Affiliate'' in 13 CFR 115.10 to explain 
that the term is defined in the proposed 13 CFR 121.301 (the loan 
programs definition of affiliation).

C. Request for Comments

    SBA requests comments on these proposed amendments to its current 
regulations. Although SBA seeks comments on all aspects of this 
proposed rule, it specifically requests comments on the following:
    1. What impact will this rule have on Small Business Loan and SBG 
    2. Are there alternatives to the proposed rule relating to control, 
negative control, common ownership, identity of interest, common 
management, and franchise agreements?
    3. Would the elimination of the newly-organized concern and joint 
venture affiliation rules from the Business Loan and SBG Programs 
affect those programs, and if so, how?

Compliance With Executive Orders 13563, 12866, 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 
proposed rule is a ``significant'' regulatory action for the purposes 
of Executive Order 12866. Accordingly, the next section contains SBA's 
Regulatory Impact Analysis. However, this is not a major rule under the 
Congressional Review Act, 5 U.S.C. 800.

Regulatory Impact Analysis

1. Is there a need for this regulatory action?
    The Agency believes it needs to reduce regulatory burdens and 
expand its Business Loan Programs and SBG Program by streamlining 
delivery, lowering costs, and facilitating job creation. As noted 
above, responses received from the Federal Register proposed rule 
notice regarding SBA rules on affiliation were in favor of simplified 
rules that enhanced understanding and aligned with normal commercial 
industry practices. Small business applicants will be assisted by this 
proposed streamlining of requirements because it will be easier and 
more cost effective for a lender to research whether the applicant 
small business controls other large companies which would jeopardize 
their eligibility. Higher lender costs potentially results in greater 
costs to the applicant small business.
What are the potential benefits and costs of this regulatory action?
    As stated above, the potential benefits of this proposed rule are 
based on its elimination of unnecessary cost burdens on loan 
applicants' and lenders' participation in SBA-guaranteed loans.
    These proposed changes would exempt the Business Loan Programs and 
SBG Program from certain government contracting rules that determine 
whether an entity is deemed affiliated with an applicant. These general 
affiliation rules apply to federal contracting to ensure that small 
businesses (and not another entity) receive and perform a federal 
contract when a preference for small businesses is provided. Many of 
these general principles of affiliation (e.g., newly organized concern) 
are not applicable to the Business Loan Program or SBG Program.
What alternatives have been considered?
    As indicated above, on February 25, 2013, the Agency issued a 
proposed rule for comment in the Federal Register to implement several 
changes intended to reinvigorate the Business Loan Programs and SBG 
Program by eliminating unnecessary compliance burdens and loan 
eligibility restrictions. Proposed Rule: 504 and 7(a) Loan Programs 
Updates, 78 FR 12633 (February 25, 2013). Included in these proposals 
was an alternate affiliation definition. After a full comment period 
ending April 26, 2013, and careful consideration of all comments, SBA 
decided to further consider issues of redefining affiliation

[[Page 59671]]

for the Business Loan Programs and SBG Program. Final Rule: 504 and 
7(a) Loan Programs Updates, 78 FR 15641 (March 21, 2014). This proposal 
presents a set of requirements to determine affiliation based on the 
precedent separating the Small Business Innovation Research (SBIR) and 
Small Business Technology Transfer (STTR) programs from the government 
contracting standards. SBA will review public comment and suggestions 
to the proposed rule and consider changes needed to mitigate identified 
economic risk to the taxpayers and reduce waste, fraud, and abuse.

Executive Order 13563

    A description of the need for this regulatory action and benefits 
and costs associated with this action, including possible 
distributional impacts that relate to Executive Order 13563, are 
included above in the Regulatory Impact Analysis under Executive Order 
    With the exception of the Economic Injury Disaster Loan (EIDL) 
which is a direct loan from SBA to the Borrower, the Business Loan 
Programs operate through the Agency's lending partners, which are 7(a) 
Lenders for the 7(a) Loan Program, Intermediaries for the Microloan 
Program, and CDCs for the 504 Loan Program. The Agency has held public 
forums and meetings which allowed it to reach hundreds of its lending 
partners and gain valuable insight, guidance, and suggestions from many 
of them and the trade associations which represent many of them. The 
Agency's outreach efforts to engage stakeholders before proposing this 
rule was extensive, and will continue throughout the comment period.

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 proposed 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 the purposes of Executive Order 13132, SBA has determined that this 
proposed rule has no federalism implications warranting preparation of 
a federalism assessment.

Paperwork Reduction Act, 44 U.S.C. Ch. 35

    The SBA has determined that this proposed rule would not impose 
significant additional reporting and recordkeeping requirements under 
the Paperwork Reduction Act (PRA). Specifically, participants in SBA's 
7(a) Loan Program will continue to report any affiliates of their 
business on SBA Form 1919 (OMB Control No. 3245-0348), and participants 
in SBA's 504 Loan Program will continue to report affiliates on SBA 
Form 1244 (OMB Control No. 3245-0071). EIDL Program participants will 
continue to report affiliates on SBA Form 5 (OMB Control No. 3245-
0017), and SBG Program participants will continue to report affiliates 
on SBA Form 994 (OMB Control No. 3245-0007).

Regulatory Flexibility Act, 5 U.S.C. 601-612

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (RFA) requires the agency to ``prepare and make 
available for public comment an initial regulatory analysis'' which 
will ``describe the impact of the proposed rule on small entities.'' 
Section 605 of the RFA allows an agency to certify a rule, in lieu of 
preparing an analysis, if the proposed rulemaking is not expected to 
have a significant economic impact on a substantial number of small 
entities. The rulemaking will positively impact all of the 
approximately 5,000 7(a) Lenders (some of which are small) and all of 
the approximately 260 CDCs (all of which are small). The proposed rule 
will reduce the burden on program participants as they independently 
choose on what level to participate, with cost to deliver being a 
significant influence. The proposed modifications of certain program 
process requirements through this proposed modification of eligibility 
based on affiliation is not projected to adversely impact or cost on 
the small business borrower, lender or CDC.
    This proposal presents a best practice rule that removes 
unnecessary regulatory burdens and increases access to capital for 
small businesses and facilitates American job preservation and 
creation. SBA has determined that there is no significant impact on a 
substantial number of small entities. SBA invites comment from members 
of the public who believe there will be a significant impact either on 
lenders, CDCs, or their borrowers.

List of Subjects

13 CFR Part 115

    Claims, Reporting and recordkeeping requirements, Small businesses, 
Surety bonds.

13 CFR Part 120

    Individuals with disabilities, Loan programs--business, Reporting 
and recordkeeping requirements, Small businesses.

13 CFR Part 121

    Grant programs--business, Individuals with disabilities, Loan 
programs--business, Reporting and recordkeeping requirements, Small 

    For the reasons stated in the preamble, SBA proposes to amend 13 
CFR parts 115, 120, and 121 as follows:


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.

2. Amend Sec.  115.10 to revise the definition of ``Affiliate'' to read 
as follows:

Sec.  115.10  Definitions.

    Affiliate is defined in Sec.  121.301(f) of this chapter.
* * * * *


3. The authority citation for part120 continues to read as follows:

    Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note, 
636(a), (h), and (m), 650, 687(f), 696(3), and 697(a) and (e); Pub. 
L. 111-5, 123 Stat. 115, Pub. L. 111-240, 124 Stat. 2504.

4. Amend Sec.  120.1700 to revise the definition of ``Affiliate'' to 
read as follows:

Sec.  120.1700  Definitions used in subpart J.

* * * * *
    Affiliate. A person or entity SBA determines to be an affiliate of 
a Program Participant pursuant to the application of the principles and 
guidelines set forth in Sec.  121.301 of this Chapter.
* * * * *


5. The authority citation for part 121 continues to read as follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 662, and 694a(9).

[[Page 59672]]

6. Amend Sec.  121.103 to add paragraph (a)(8) to read as follows:

Sec.  121.103  How does SBA determine affiliation?

    (a) * * *
    (8) For SBA's Business Loan and Surety Bond Guarantee programs, the 
size standards and bases for affiliation are set forth in Sec.  
* * * * *
7. Amend Sec.  121.301 to add paragraph (f) to read as follows:

Sec.  121.301  What size standards and affiliation principles are 
applicable to financial assistance programs?

* * * * *
    (f) Concerns and entities are affiliates of each other when one 
controls or has the power to control the other, or a third party or 
parties controls or has the power to control both. It does not matter 
whether control is exercised, so long as the power to control exists. 
For the purposes of SBA's Business Loan Programs, Disaster Loan 
Program, and Surety Bond Guarantee Program, the following principles of 
affiliation apply:
    (1) Affiliation based on ownership. For determining affiliation 
based on equity ownership, a concern is an affiliate of an individual, 
concern, or entity that owns or has the power to control more than 50 
percent of the concern's voting equity. If no individual, concern, or 
entity is found to control, SBA will deem the Board of Directors or 
President or Chief Executive Officer (CEO) (or other officers, managing 
members, or partners who control the management of the concern) to be 
in control of the concern.
    (2) Affiliation arising under stock options, convertible 
securities, and agreements to merge. (i) In determining size, SBA 
considers stock options, convertible securities, and agreements to 
merge (including agreements in principle) to have a present effect on 
the power to control a concern. SBA treats such options, convertible 
securities, and agreements as though the rights granted have been 
    (ii) Agreements to open or continue negotiations towards the 
possibility of a merger or a sale of stock at some later date are not 
considered ``agreements in principle'' and are thus not given present 
    (iii) Options, convertible securities, and agreements that are 
subject to conditions precedent which are incapable of fulfillment, 
speculative, conjectural, or unenforceable under state or Federal law, 
or where the probability of the transaction (or exercise of the rights) 
occurring is shown to be extremely remote, are not given present 
    (iv) An individual, concern or other entity that controls one or 
more other concerns cannot use options, convertible securities, or 
agreements to appear to terminate such control before actually doing 
so. SBA will not give present effect to individuals', concerns' or 
other entities' ability to divest all or part of their ownership 
interest in order to avoid a finding of affiliation.
    (3) Affiliation based on common management. Affiliation arises 
where the CEO or President of the applicant concern (or other officers, 
managing members, or partners who control the management of the 
concern) also controls the management of one or more other concerns. 
Affiliation also arises where a single individual, concern or entity 
that controls the Board of Directors or management of one concern also 
controls the Board of Directors or management of one of more other 
    (4) Affiliation based on identity of interest. (i) Affiliation may 
arise among two or more persons (including any individual, concern, or 
other entity) with an identity of interest. An individual, concern, or 
entity may rebut a determination of identity of interest with evidence 
showing that the interests deemed to be one are in fact separate.
    (ii) SBA may presume an identity of interest between close 
relatives, as defined in 13 CFR 120.10, with identical or substantially 
identical business or economic interests (such as where the family 
members operate concerns in the same or similar industry in the same 
geographic area).
    (5) Affiliation based on franchise and license agreements. The 
restraints imposed on a franchisee or licensee by its franchise or 
license agreement relating to standardized quality, advertising, 
accounting format and other similar provisions, generally will not be 
considered in determining whether the franchisor or licensor is 
affiliated with an applicant franchisee or licensee provided the 
applicant franchisee or licensee has the right to profit from its 
efforts and bears the risk of loss commensurate with ownership. 
Affiliation may arise however, through other means, such as common 
ownership, common management or excessive restrictions upon the sale of 
the franchise interest.
    (6) Affiliation based on SBA's determination of the totality of the 
circumstances. SBA may find affiliation after considering the totality 
of the circumstances, even when no single factor is sufficient to 
constitute affiliation.
    (7) Determining the concern's size. In determining the concern's 
size, SBA counts the receipts, employees, or the alternate size 
standard of the concern whose size is at issue and all of its domestic 
and foreign affiliates, regardless of whether the affiliates are 
organized for profit.
    (8) Exceptions to affiliation. For exceptions to affiliation, see 
13 CFR 121.103(b).

Maria Contreras-Sweet,
[FR Doc. 2015-25204 Filed 10-1-15; 8:45 am]