[Federal Register Volume 82, Number 83 (Tuesday, May 2, 2017)]
[Rules and Regulations]
[Pages 20433-20434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08810]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 

========================================================================


Federal Register / Vol. 82, No. 83 / Tuesday, May 2, 2017 / Rules and 
Regulations

[[Page 20433]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AG67


Small Business Investment Companies: Passive Business Expansion 
and Technical Clarifications

AGENCY: U.S. Small Business Administration.

ACTION: Final rule; delay of effective date and request for comment.

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

SUMMARY: On December 28, 2016, the Small Business Administration (SBA) 
published a final rule to expand permitted investments in passive 
businesses and provide further clarification with regard to investments 
in such businesses for the Small Business Investment Company (SBIC) 
Program, with an effective date of January 27, 2017. On January 26, 
2017, SBA published a notification delaying the effective date until 
March 21, 2017 and re-opened the rule for additional public comment. On 
March 21, 2017, SBA published another notification to delay the 
effective date of this rule until May 20, 2017, to give the new 
administration time to further consider the rule. After reviewing the 
final rule, SBA is considering removing the provision that would allow 
SBICs to use a blocker corporation under its regulations if an investor 
of an SBIC has elected to be taxed as a regulated investment company 
(RIC) and a direct investment into the operating company would cause 
the investor to receive or be deemed to receive income that would 
jeopardize its RIC status. SBA is seeking additional comments regarding 
the removal of this provision. In order to give the public time to 
provide comments and for SBA to review those comments, the effective 
date of the final rule is delayed until August 18, 2017.

DATES: The effective date of the SBA final rule published December 28, 
2016 (81 FR 95419), delayed until March 21, 2017 at 82 FR 8499 and then 
further delayed until May 20, 2017 at 82 FR 14428, is further delayed 
until August 18, 2017. Comments on this document must be submitted no 
later than June 1, 2017.

ADDRESSES: You may submit comments, identified by RIN 3245-AG67, by any 
of the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments.
    Mail, Hand Delivery/Courier: Theresa Jamerson, Office of Investment 
and Innovation, U.S. Small Business Administration, 409 Third Street 
SW., Washington, DC 20416.
    SBA will post comments on http://www.regulations.gov. If you wish 
to submit confidential business information (CBI) as defined in the 
User Notice at http://www.regulations.gov, please submit the 
information to Theresa Jamerson, Office of Investment and Innovation, 
409 Third Street SW., Washington, DC 20416. Highlight the information 
that you consider to be CBI, and explain why you believe this 
information should be held confidential. SBA will review the 
information and make the final determination of whether it will publish 
the information.

FOR FURTHER INFORMATION CONTACT: Theresa Jamerson, Office of Investment 
and Innovation, (202) 205-7563 or [email protected].

SUPPLEMENTARY INFORMATION: The U.S. Small Business Administration (SBA) 
Final Rule entitled Small Business Investment Companies: Passive 
Business Expansion and Technical Clarifications, 81 FR 95419 (December 
28, 2016), had an effective date of January 27, 2017. The Final Rule 
would expand permitted investments in passive businesses, provide 
further clarification with regard to investments in such businesses, 
and add certain requirements to improve SBA's ability to monitor such 
investments. The Final Rule would also make a conforming change to the 
regulations regarding the amount of leverage available to SBICs under 
common control to be consistent with the Consolidated Appropriations 
Act, 2016, which increased the maximum amount of such leverage from 
$225 million to $350 million.
    The January effective date was delayed to March 21, 2017, and the 
comment period was reopened until February 19, 2017. 82 FR 8499 
(January 26, 2017). The March effective date was further delayed to May 
20, 2017, for additional review. 82 FR 14428 (March 21, 2017).
    After completing its review, SBA is considering removing the 
provision that would allow SBICs to use a blocker entity under 13 CFR 
107.720(b)(3) if an investor in an SBIC, typically a business 
development company (BDC), has elected to be taxed as a regulated 
investment company (RIC) and a direct investment into the operating 
company would cause the investor to receive or be deemed to receive 
income that would jeopardize its RIC status. This provision was not 
included in the proposed rule published on October 5, 2016 (78 FR 
77377), but was added to the final rule published on December 28, 2016 
(81 FR 95419) based on comments SBA received. After further 
consideration, SBA is concerned that, in light of the increased 
complexities involved in monitoring and examining investments 
structured through blocker entities using this provision may increase 
risk to the SBIC program unless SBA were to increase examination 
resources to monitor these complex transactions. SBA notes that the 
final rule provides, among other things, two other exceptions to the 
passive business regulation--the blocker corporation exception for 
SBICs with tax exempt investors to avoid unrelated business taxable 
income (UBTI) and a similar exception for SBICs with foreign investors 
to avoid effectively connected income (ECI). SBA continues to believe 
the number of SBICs that would structure investments through passive 
entities utilizing these two exceptions is relatively low. Currently, 
SBA approves approximately five blocker corporation exceptions for UBTI 
each year and SBA expects that, after the rule is effective, only a few 
SBICs will use the ECI exception. On the other hand, there are 
currently 31 SBICs with BDC investors (BDC-SBICs) holding over 23% of 
SBA's outstanding guaranteed leverage. If the final rule were to become 
effective in the form published on December 28, 2016, SBA believes that 
many BDC-SBICs would structure a number of their investments through 
passive entities. Because BDC-SBICs represent such a large percentage 
of SBA's portfolio, significant numbers of investments structured 
through passive entities would pose a monitoring and examination 
challenge that could

[[Page 20434]]

expose the program to an unacceptable level of risk unless SBA 
increased significantly its examination and monitoring resources. 
Therefore, SBA is considering revising the final rule to remove this 
provision.
    SBA is seeking comments from the public to obtain additional input 
before making a final decision. To provide SBA with sufficient time to 
seek additional comments and make this determination, this notice 
further delays the effective date by 90 additional days to August 18, 
2017.

    Dated: April 25, 2017.
A. Joseph Shepard,
Associate Administrator, Office of Investment and Innovation.
[FR Doc. 2017-08810 Filed 5-1-17; 8:45 am]
BILLING CODE 8025-01-P