Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business Status Determinations, 55694-55723 [E9-25416]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 74, Number 207 (Wednesday, October 28, 2009)]
[Proposed Rules]
[Pages 55694-55723]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-25416]



[[Page 55693]]

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

Part IV





Small Business Administration





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



13 CFR Parts 121 and 124



Small Business Size Regulations; 8(a) Business Development/Small 
Disadvantaged Business Status Determinations; Proposed Rule

Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / 
Proposed Rules

[[Page 55694]]


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

SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121 and 124

RIN 3245-AF53


Small Business Size Regulations; 8(a) Business Development/Small 
Disadvantaged Business Status Determinations

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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

SUMMARY: This rule proposes to make changes to the regulations 
governing the 8(a) Business Development (8(a) BD) and Small 
Disadvantaged Business (SDB) programs, and to the U.S. Small Business 
Administration's (SBA or Agency) size regulations. Some of the changes 
involve technical issues such as changing the term ``SIC code'' to 
``NAICS code'' to reflect the national conversion to the North American 
Industry Classification System. Other changes are more substantive and 
result from SBA's experience in implementing the current regulations. 
For example, SBA has learned through experience that certain of its 
rules governing the 8(a) BD program are too restrictive and serve to 
unfairly preclude firms from being admitted to the program. In other 
cases, SBA has determined that a rule is too expansive or indefinite 
and has sought to restrict or clarify that rule. In one case wording 
changes are being proposed to correct past public or agency 
misinterpretation. Also, new situations have arisen that were not 
anticipated when the current rules were drafted and the proposed rule 
seeks to cover those situations. Finally, one of the changes, involving 
Native Hawaiian Organizations (NHO's), implements a statutory change.

DATES: Comments must be received on or before December 28, 2009.

ADDRESSES: You may submit comments, identified by RIN: 3245-AF53, by 
any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail, for paper, disk, or CD/ROM submissions: Joseph 
Loddo, Associate Administrator, Office of Business Development, 409 
Third Street, SW., Mail Code, Washington, DC 20416.
     Hand Delivery/Courier: Joseph Loddo, Associate 
Administrator, Office of Business Development, 409 Third Street, SW., 
Washington, DC 20416.
    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 LeAnn 
Delaney, Deputy Associate Administrator, Office of Business 
Development, 409 Third Street, SW., Washington, DC 20416, or send an e-
mail to leann.delaney@sba.gov. 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 of whether it will publish the information or 
not.

FOR FURTHER INFORMATION CONTACT: LeAnn Delaney, Deputy Associate 
Administrator, Office of Business Development, at (202) 205-5852, or 
leann.delaney@sba.gov.

SUPPLEMENTARY INFORMATION:
     This rule proposes to make a number of changes to the regulations 
governing the 8(a) BD and SDB programs, and several changes to SBA's 
size regulations. Some of the changes involve technical issues. Other 
changes are more substantive and result from SBA's experience in 
implementing the current regulations.
    The following specific changes are being proposed to SBA's 
regulations. There are six proposed changes to SBA's size regulations, 
two dealing with mentor/prot[eacute]g[eacute] situations, one amending 
requirements for joint ventures, one clarifying how a procurement 
should be classified, one further explaining the nonmanufacturer rule, 
and one relating to who may request a formal size determination. The 
remaining proposed changes are to the regulations governing SBA's 8(a) 
BD and SDB programs. It is noted that all regulations governing the 
8(a) program apply to the SDB program, unless otherwise specified. 
While the SDB program no longer has an application and certification 
component, the provisions specifying what constitutes an SDB are still 
needed for self-certification and protest purposes.

Exception to Affiliation for Mentor/Prot[eacute]g[eacute] Programs

    The first proposed change would clarify when SBA would consider a 
prot[eacute]g[eacute] firm not to be affiliated with its mentor based 
on assistance received from the mentor through a mentor/
prot[eacute]g[eacute] agreement. The current regulation may be 
misconstrued to allow other Federal agencies to establish mentor/
prot[eacute]g[eacute] programs and exempt prot[eacute]g[eacute]s from 
SBA's size affiliation rules. That was never SBA's intent. The 
exception to affiliation contained in Sec.  121.103(b)(6) was meant to 
apply to SBA's 8(a) BD mentor/prot[eacute]g[eacute] program and other 
Federal mentor/prot[eacute]g[eacute] programs that specifically 
authorize an exception to affiliation in their authorizing statute. 
Because of the business development purposes of the 8(a) BD program, 
SBA administratively established an exception to affiliation for 
prot[eacute]g[eacute] firms. Specifically, prot[eacute]g[eacute] firms 
are not affiliated with their mentors based on assistance received from 
their mentors through an SBA-approved 8(a) BD mentor/
prot[eacute]g[eacute] agreement. That exception exists in the current 
rule and remains in this proposed rule. The proposed rule merely spells 
out more explicitly the affiliation exception for clarity purposes.
    In addition, the proposed rule makes clear that an exception to 
affiliation for prot[eacute]g[eacute]s in other Federal mentor/
prot[eacute]g[eacute] programs will be recognized by SBA only where 
specifically authorized by statute (e.g., the Department of Defense 
mentor/prot[eacute]g[eacute] program) or where SBA has authorized an 
exception to affiliation for a mentor/prot[eacute]g[eacute] program of 
another Federal agency under the procedures set forth in Sec.  121.903. 
By statute, SBA is the sole agency responsible for determining size for 
purposes of any Federal assistance. SBA does not believe that another 
agency should be able to exempt firms from SBA's affiliation rules (and 
in effect make program-specific size rules) by itself. There is a 
formal process spelled out in Sec.  121.903 that an agency must use if 
it would like to deviate from SBA's size rules, including those 
relating to affiliation. This process must be followed and SBA must 
specifically authorize an exception to affiliation for another Federal 
mentor/prot[eacute]g[eacute] program in order for SBA to recognize the 
exception. SBA does not anticipate approving exceptions to affiliation 
to agencies seeking to have such an exception for their mentor/
prot[eacute]g[eacute] programs except in limited circumstances. SBA 
believes that the 8(a) BD program is a unique business development 
program that is unlike other Federal programs. If a program of another 
agency is also intended to assist business development and an exclusion 
from affiliation for joint ventures conducted under that agency's 
mentor/prot[eacute]g[eacute] program would promote such business 
development, SBA would be inclined to grant an exclusion from 
affiliation because it would serve the same purpose as the exclusion 
from affiliation for 8(a) mentor/prot[eacute]g[eacute] relationships.

Joint Ventures

    The second proposed change to the size rules pertains to joint 
ventures.

[[Page 55695]]

Under current Sec.  121.103(h), a joint venture is an entity with 
limited duration. Specifically, the current regulation limits a 
specific joint venture to submitting no more than three offers over a 
two year period. Two firms (including an 8(a) prot[eacute]g[eacute] 
firm and its mentor) are limited to pursuing three contract 
opportunities under one joint venture, but there is nothing in the 
regulations prohibiting the same two firms from forming a second joint 
venture and pursuing three additional contract opportunities. The rule 
limiting the number of contract opportunities any single joint venture 
can pursue was actually intended to loosen the requirements of the 
prior regulations. SBA's previous regulations defined a joint venture 
to be an entity that was ``formed * * * to engage in and carry out a 
single, specific business venture for joint profit * * *'' The genesis 
for the change initially came from 8(a) firms, which complained that it 
was hard and costly for them to go out and form a new joint venture 
entity (usually in the form of a limited liability company (LLC)) for 
every contract opportunity that they sought. SBA agreed, and decided to 
provide more flexibility. SBA did so by changing the size regulations, 
the place in SBA's regulations where the term joint venture was 
defined. Because the provision appears in part 121 of SBA's 
regulations, it applies to all of SBA's programs, including the 8(a) BD 
program (as intended).
    This provision, however, has caused confusion. Some firms 
misunderstood that the limitation contained in the regulation was on 
the number of offers submitted by the joint venture instead of the 
number of contracts awarded to the joint venture. As such, some joint 
ventures continued to submit offers beyond the three permitted by the 
regulation and were determined not to be eligible for award where the 
joint venture was otherwise the apparent successful offeror, but the 
offer was a fourth (or more) offer. Firms have recommended to SBA that 
if there is such a limit, it should be on contracts, not offers. Upon 
further reflection, SBA agrees and proposes to change the limit of 
three offers to a limit of three contract awards under one joint 
venture agreement.
    The proposed rule would clarify that three contract awards is not 
an absolute limit for a specific joint venture agreement. A joint 
venture could choose to pursue and be awarded a fourth (or more) 
contract award, but in doing so would cause the partners to the joint 
venture to be deemed affiliated for all purposes. Again, the two (or 
more) firms could form a second joint venture and be awarded three 
additional contracts, and a third joint venture to be awarded three 
more. At some point, however, such a longstanding relationship or 
contractual dependence would lead to a finding of general affiliation, 
even in the 8(a) mentor/prot[eacute]g[eacute] joint venture context. As 
an alternative, SBA also considered revising this provision to limit 
the number of contract awards that the same partners to one or more 
joint ventures could receive without the partners being deemed 
affiliates for all purposes. SBA thought that three awards might be too 
restrictive and considered limiting the number of contracts that the 
same joint venture partners could be awarded to five. Under this 
approach, the identical partners could form one joint venture and 
receive five contracts or form several joint ventures and receive five 
contracts in total before SBA would find the partners to be affiliated 
for all purposes. SBA specifically requests comments on this approach, 
specifically addressing whether this approach is preferable to the one 
proposed.
    In drafting the current three offers over two years requirement, 
SBA did not intend to limit the number of contracting opportunities 
that two (or more) firms could seek or contracts that they could be 
awarded through a joint venture relationship. As noted above, SBA 
believes that a ``joint venture'' is an entity of limited duration. If 
SBA did not limit the number of contracting opportunities, or under 
this proposed rule the number of contract awards, that a specific joint 
venture could receive, then the joint venture could be an ongoing 
entity with unlimited duration. In determining the size of a joint 
venture, the receipts or employees of the joint venture partners are 
generally aggregated (unless an exclusion from affiliation applies). If 
the aggregated receipts or employees are less than the size standard 
assigned to the relevant procurement, the joint venture qualifies as a 
small business. If one of the joint venture partners seeks a different 
contract opportunity apart from the joint venture, its size is 
generally considered individually (unless there are other bases for 
finding affiliation). If a specific ``joint venture'' could seek 
unlimited contracting opportunities and be awarded unlimited contracts, 
then the parties to the joint venture would necessarily be deemed 
affiliates for all purposes because of their interdependent contractual 
relations. This is the case because in effect the ``joint venture'' 
would be a new ongoing business entity that is owned by two individual 
firms. Because of this affiliation, the revenues or employees would be 
aggregated even where one of the firms sought a contract opportunity 
individually.
    The proposed rule also clarifies the time at which SBA will 
determine whether this three in two years requirement has been met. SBA 
understands that any offeror, including a joint venture offeror, may 
seek more than one contract opportunity at the same time. Under SBA's 
regulations, size is determined as of the date a concern submits a 
written self-certification that it is small as part of its initial 
offer including price. See 13 CFR 121.404(a). As long as a concern is 
small as of that date, it may be awarded a contract as a small business 
even if it has grown to be other than small as of the date of award. In 
other words, even if a concern has received additional revenues which 
would render it other than small after it certifies itself to be small 
as part of its initial offer including price, it may be awarded a 
contract as a small business. Having one specific point in time to 
determine size gives certainty to the procurement process for both the 
concern and the procuring agency. SBA believes that compliance with the 
three awards in two years rule should be treated similarly. As such, 
SBA proposes to determine compliance with the three in two years rule 
as of the date of initial offer including price. An individual joint 
venture may have submitted offers to perform two, three or more 
procurements before it finds out that it has won any specific 
competition. If at the time of offer the joint venture had not yet 
received three contract awards, then the joint venture would be able to 
submit offers for several procurement opportunities and ultimately be 
awarded any contract for which it submitted an offer before receiving a 
third contract. For example, Joint Venture AB has received two 
contracts. On April 2, Joint Venture AB submits an offer for 
Solicitation 1. On June 6, Joint Venture AB submits an offer for 
Solicitation 2. On July 13, Joint Venture AB submits an offer for 
Solicitation 3. In September, Joint Venture AB is found to be the 
apparent successful offeror for all three solicitations. Even though 
the award of the three contracts would give Joint Venture AB a total of 
five contract awards, it could receive those awards without causing 
general affiliation between its joint venture partners because Joint 
Venture AB had not yet received three contract awards as of the dates 
of the offers for each of three solicitations at issue.

[[Page 55696]]

    The proposed rule also clarifies that while a joint venture may or 
may not be a separate legal entity (e.g., an LLC), it must exist 
through a written document. Thus, even an ``informal'' joint venture 
must have a written agreement between the partners. In addition, the 
rule clarifies SBA's current policy that a joint venture may or may not 
be populated (i.e., have its own separate employees). Whether a joint 
venture needs to be populated or have separate employees depends upon 
the legal structure of the joint venture. If a joint venture is a 
separate legal entity, then it must have its own employees. If a joint 
venture merely exists through a written agreement between two or more 
individual business entities, then it need not have its own separate 
employees and employees of each of the individual business entities may 
perform work for the joint venture.
    There has also been confusion as to whether this three in two year 
rule applies to the 8(a) BD program. Some individuals mistakenly 
believed that it did not apply to joint ventures between mentors and 
prot[eacute]g[eacute] firms in the 8(a) BD program. This is not the 
case. Because the rule appears in SBA's size regulations, it applies to 
all of SBA's programs. That is, it applies to all situations in which a 
joint venture seeks to qualify as a ``small business concern.'' Because 
this confusion is limited and SBA believes that the size regulations 
clearly apply the three in two year rule to all joint venture 
situations, SBA does not believe that a regulatory change is necessary 
to specifically apply the rule to the 8(a) BD program.
    This proposed rule would also amend Sec.  124.513(e) to clarify the 
requirement that SBA approve 8(a) joint ventures prior to award for a 
second or third 8(a) contract award to a specific joint venture. The 
current regulation states that SBA must approve a joint venture for an 
8(a) contract prior to contract award. There has been some confusion 
about how this requirement relates to the size provision which would 
now allow three contract awards over a two year period to a specific 
joint venture. Prior to the first contract award, SBA would have to 
approve the joint venture. SBA's review would examine the structure of 
the joint venture and the work each joint venture partner would perform 
on the proposed 8(a) contract. For the second (and third) 8(a) 
contract, SBA would not need to examine the structure of the joint 
venture again, but would need to determine that the work to be done by 
the joint venture partners on the proposed second (or third) 8(a) 
contract meets SBA's requirements. To this end, the 8(a) Participant to 
the joint venture must submit to SBA an addendum to the joint venture 
agreement explaining how the work will be performed on the contract, 
specifying what resources will be provided by each joint venture 
partner, and providing any other information necessary to fulfill the 
requirements set forth in 13 CFR 124.512(c). If the second (and/or 
third) contract to be awarded to a specific joint venture is not an 
8(a) contract, the joint venture entity would not be required to submit 
an addendum to SBA prior to award, but would, as explained in the 
following paragraph, be required to meet the general 8(a) joint venture 
requirements.

Exclusion from Affiliation for Mentor/Prot[eacute]g[eacute] Joint 
Ventures

    The third proposed change to the size regulations also pertains to 
exceptions to affiliation. Currently, SBA's regulations authorize an 
exception to affiliation where two firms approved by SBA to be a mentor 
and prot[eacute]g[eacute] under the 8(a) BD program seek to joint 
venture and perform a contract as a small business concern for any 
Federal Government procurement. For a procurement to be awarded through 
the 8(a) BD program, SBA's regulations at Sec.  124.513 require SBA to 
approve the joint venture agreement prior to award and specify what 
must be included in the joint venture agreement. There has been some 
confusion as to whether the requirements for 8(a) joint venture 
agreements apply to non-8(a) procurements. SBA believes that any joint 
venture seeking to use the 8(a) mentor/prot[eacute]g[eacute] status as 
a basis for an exception to affiliation requirements must follow the 
8(a) requirements (i.e., it must meet the content requirements set 
forth in Sec.  124.513(c) and the performance of work requirements set 
forth in Sec.  124.513(d)). Although SBA does not approve joint venture 
agreements for procurements outside the 8(a) program, if the size of a 
joint venture claiming an exception to affiliation is protested, the 
requirements of Sec.  124.513(c) and (d) must be met in order for the 
exception to affiliation to apply. The reason SBA's 8(a) regulations 
permit exceptions to affiliation on small business contracts outside 
the 8(a) program (e.g., small business set asides, HUBZone set asides, 
service disabled veteran owned small business set asides) is to further 
assist prot[eacute]g[eacute] 8(a) BD Participants in their business 
development. If the requirements ensuring control and performance of 
work by the 8(a) prot[eacute]g[eacute] firm are not enforced, a large 
business would be able to have unchecked and inappropriate access to 
Federal procurements intended for small business. While this is not a 
change to how SBA has interpreted this regulation, SBA believes that it 
should be spelled out in the regulation to avoid any further confusion 
and, thus, clarifying language has been added to Sec.  
121.103(h)(3)(iii). SBA is also considering whether to limit the 
exclusion to affiliation for a joint venture that is comprised of a 
prot[eacute]g[eacute] firm and its SBA-approved mentor only to 8(a) 
contracts. If this proposal were adopted, mentor/prot[eacute]g[eacute] 
joint ventures for small business set aside contracts (or other small 
business contracts) would not receive an exclusion from affiliation. As 
such, if the mentor were a large business, the joint venture would be 
large and, thus, ineligible for a small business set aside contract. 
Proponents of this view believe that benefits for 8(a) firms should be 
limited to contracts obtained through the 8(a) program, and not 
extended to other small business programs. They believe that it is 
unfair for non-8(a) small business concerns to have to compete against 
a joint venture involving a prot[eacute]g[eacute] firm and a large 
mentor for small business contracts outside the 8(a) program. SBA 
specifically requests comments on whether this policy should be changed 
in a subsequent final rule.

Classification of a Procurement for Supplies

    SBA's current regulations provide that acquisitions for supplies 
must be classified under the appropriate manufacturing NAICS code, not 
under a wholesale trade NAICS code. The fourth proposed change to the 
size regulations would clarify that a procurement for supplies also 
cannot be classified under a retail trade NAICS code.

Application of the Nonmanufacturer Rule

    The fifth proposed change to the size regulations would provide 
further guidance to the current nonmanufacturer rule (i.e., the rule 
that requires, in pertinent part, a firm that is not itself the 
manufacturer of the end item being procured to provide the product of a 
small business manufacturer). Several procuring agencies have 
misconstrued when to apply the nonmanufacturer rule. The proposed rule 
would explicitly state that the nonmanufacturer rule applies only where 
the procuring agency has classified a procurement as a manufacturing 
procurement by assigning the procurement a NAICS code under Sectors 31-
33. It would also clarify that the nonmanufacturer rule does not apply 
to supply contracts that

[[Page 55697]]

do not involve manufacturing. For example, the nonmanufacturer rule 
would not apply to situations where a procuring agency is acquiring 
agricultural commodities that are not processed or changed and the 
procuring agency classifies the contract as crop production under NAICS 
Subsector 111.
    In addition, the rule applies only to the manufacturing or supply 
component of a manufacturing procurement. The rule provides two 
examples to clarify SBA's position regarding the rule. Where a 
procuring agency has classified a procurement as a manufacturing 
procurement and is also acquiring services, the nonmanufacturer rule 
would apply to the supply component of that procurement only. In other 
words, a firm seeking to qualify as a small business nonmanufacturer 
must supply the product of a small business manufacturer (unless a 
nonmanufacturer waiver applies), but need not perform any specific 
portion of the accompanying services. Since the procurement is 
classified under a manufacturing NAICS code, it cannot also be 
considered a services procurement and, thus, the 50% performance of 
work requirement set forth in Sec.  125.6 for services does not apply 
to that procurement. In classifying the procurement as a manufacturing/
supply procurement, the procuring agency must have determined that the 
``principal nature'' of the procurement was supplies. As a result, any 
work done by a subcontractor on the services portion of the contract 
cannot rise to the level of being ``primary and vital'' requirements of 
the procurement, and therefore cannot be the basis or affiliation as an 
ostensible subcontractor. Conversely, if a procuring agency determines 
that the ``principal nature'' of the procurement is services, only the 
requirements relating to services contracts apply. The nonmanufacturer 
rule, which applies only to manufacturing/supply contracts, would not 
apply. Thus, although a firm seeking to qualify as a small business 
with respect to such a contract must certify that it will perform at 
least 50% of the cost of the contract incurred for personnel with its 
own employees, it need not supply the product of a small business 
manufacturer on the supply component of the contract. In order to 
qualify as a nonmanufacturer, a firm must be primarily engaged in the 
retail or wholesale trade and normally sell the type of item being 
supplied. We are proposing to further define this statutory requirement 
to mean that the firm takes ownership or possession of the item(s) with 
its personnel, equipment or facilities in a manner consistent with 
industry practice. This change is primarily in response to situations 
where SBA has waived the nonmanufacturer rule and the prime contractor 
essentially subcontracts all services, such as warehousing or delivery, 
to a large business. Such an arrangement, where the prime contractor 
can legally provide the product of a large business and then 
subcontract all tangential services to a large business, is contrary to 
the intent and purpose of the Small Business Act, i.e., providing small 
businesses with an opportunity to perform prime contracts. Such an 
arrangement inflates the cost to the Government of contract performance 
and inflates the statistics for prime contracting dollars awarded to 
small business, which is detrimental to other small businesses that are 
willing and able to perform Government contracts.

Request for Formal Size Determination

    The sixth proposed change to the size regulations would amend Sec.  
121.1001(b) to give the SBA's Office of Inspector General (OIG) the 
authority to ask for a formal size determination. Because the OIG is 
not currently listed in the regulations as an individual who can 
request a formal size determination, the OIG must currently seek a 
formal size determination through the relevant SBA program office. SBA 
believes that the Inspector General should be able to seek a formal 
size determination when questions about a concern's size arise in the 
context of an investigation or other review of SBA programs by the 
Office of Inspector General.

Completion of Program Term

    The first proposed change to SBA's 8(a) BD regulations is an 
amendment to the current rule to specify that a firm that merely 
completes its program term is not deemed to ``graduate'' from the 8(a) 
program. Pursuant to the Small Business Act, a Participant is 
considered to graduate only if it successfully completes the program by 
substantially achieving the targets, objectives, and goals contained in 
the concern's business plan, thereby demonstrating its ability to 
compete in the marketplace without 8(a) assistance. 15 U.S.C. 
636(j)(10)(H). Sections 124.2, 124.301 and 124.302 would be amended to 
effect this change. In addition, the proposed rule would add a new 
Sec.  124.112(f) to require SBA to determine if a firm should be deemed 
to graduate from the 8(a) BD program at the end of its nine-year 
program term. As part of the final annual review performed by SBA prior 
to the expiration of a Participant's nine-year program term, SBA would 
determine whether the firm has met the targets and objectives set forth 
in its business plan.

Definitional Changes

    This rule would amend Section 124.3, to add a definition of NAICS 
code. Additionally, the term ``SIC code'' would be changed to ``NAICS 
code'' everywhere it appears in part 124 to take into account the 
replacement of the Standard Industry Classification (SIC) code system 
with the North American Industry Classification System. The NAICS code 
system is used to classify businesses for size purposes. Specifically, 
the term ``NAICS code'' would replace the term ``SIC code'' in 
Sec. Sec.  124.110(c), 124.111(d), 124.502(c)(3), 124.503(b), 
124.503(b)(1), 124.503(b)(2), 124.503(c)(1)(iii), 124.503(g)(3), 
124.505(a)(3), 124.507(b)(2)(i), 124.513(b)(1), 124.513(b)(1)(i), 
124.513(b)(1)(ii)(A), 124.513(b)(2), 124.513(b)(3), 124.514(a)(1), 
124.515(d), 124.517(d)(1), 124.517(d)(2), 124.519(a)(1), 124.519(a)(2), 
124.1002(b)(1), 124.1002(b)(1)(i), 124.1002(b)(1)(ii), and 
124.1002(f)(3).
    The rule also proposes to amend the definition of primary industry 
classification to specifically recognize that a Participant may change 
its primary industry classification over time. The rule would allow a 
Participant to change its primary industry classification from one 
NAICS code to another where it can demonstrate that the majority of its 
revenues during a two-year period have evolved from its former primary 
NAICS code to another NAICS code. The proposed rule would also add a 
new Sec.  124.112(e) to permit a Participant to request a change in its 
primary industry classification with its servicing SBA district office 
where it can demonstrate that its revenues have in fact evolved from 
one NAICS code to another.
    The rule would also add a definition of the term ``regularly 
maintains an office.'' This definition is important in determining 
whether a participant has a bona fide place of business in a particular 
geographic location. While the definition proposed is not a change in 
current SBA policy, SBA believes that the definition should be added to 
the regulations for clarity purposes. Under the proposed rule, a 
Participant would be deemed to regularly maintain an office in a 
particular location if it conducts business activities as an on-going 
business concern from a fixed location on a daily basis. The rule would 
also provide that the best evidence of the regular maintenance of an 
office is documentation that shows that third parties routinely 
transact

[[Page 55698]]

business with a participant at that location. Such evidence includes 
advertisements, bills, correspondence, lease agreements, land records, 
and evidence that the participant has complied with all local 
requirements concerning registering, licensing, or filing with the 
State or County where the place of business is located. This means that 
a firm would generally be required to have a license to do business in 
a particular location in order to ``regularly maintain an office'' 
there. The firm would not, however, be required to have a construction 
license or other specific type of license in order to regularly 
maintain an office and thus have a bona fide place of business in a 
specific location. SBA's bona fide place of business requirement is met 
with a license to do business generally. Whether a firm is or is not 
able to get a specific type of contract because it does not possess an 
additional license is not a bona fide place of business issue.

Size for Primary NAICS Code

    This rule proposes to amend Sec.  124.102(a) to require that a firm 
remain small for its primary NAICS code during its term of 
participation in the 8(a) BD program, and correspondingly to revise 
Sec.  124.302 to permit SBA to graduate a Participant prior to the 
expiration of its program term where the firm exceeds the size standard 
corresponding to its primary NAICS code for two successive program 
years. SBA has historically permitted a firm to remain in the 8(a) 
program and receive 8(a) contracts in secondary NAICS codes as long as 
it remains small for such secondary codes. SBA has reexamined this 
policy and concluded that if a firm has grown to be other than small in 
its primary NAICS code, it can reasonably be said that the firm has 
achieved its goals and objectives. Understanding that the size of a 
firm can vary from year to year based on the receipts/number of 
employees in any given year, SBA is proposing that a firm be graduated 
early only where it exceeds the size standard for its primary NAICS 
code in two successive program years. SBA believes that it would be 
unfair to early graduate a firm from the 8(a) program where it has one 
very successful program year that may not again be repeated. This does 
not mean that a firm cannot change its primary NAICS code during its 
participation in the program. As noted in the Supplementary Information 
corresponding to the definition of primary industry classification in 
Sec.  124.3, the proposed rule would authorize a firm to change its 
primary NAICS code by demonstrating that the majority of its revenues 
during a two-year period have evolved from its former primary NAICS 
code to another NAICS code. As such, SBA may early graduate a firm from 
the 8(a) BD program if the firm exceeds the size standard corresponding 
to its primary NAICS code (whether its initial primary NAICS code or a 
revised primary NAICS code) for two successive program years.

Economic Disadvantage

    SBA proposes to amend Sec.  124.104 Who is Economically 
Disadvantaged? to incorporate into the regulations certain 
interpretations and policies that have been followed informally by SBA. 
Some of these policies and regulatory interpretations are currently set 
forth in SBA's Standard Operating Procedures (SOPs) or in decisions 
rendered by the SBA Office of Hearings and Appeals (OHA). A sentence 
would be added to paragraph (b)(2) to clarify that SBA does not take 
community property laws into account when determining economic 
disadvantage. This means that property that is legally in the name of 
one spouse would be considered wholly that spouse's property, whether 
or not the couple lived in a community property state. Since community 
property laws are usually applied when a couple separates and since 
spouses in community states generally have the freedom to keep their 
property separate while they are married, SBA has decided to treat 
property owned solely by one spouse as that spouse's property for 
economic disadvantage determinations. This policy also results in equal 
treatment for applicants in community and non-community property 
states. Community property laws will continue to be applied in Sec.  
124.105(k) for purposes of determining ownership of an applicant or 
Participant firm, but they will not be applied for any other purpose. 
Paragraph (b)(2) would also be amended to provide that SBA may consider 
a spouse's financial situation in determining an individual's access to 
capital and credit. This addition reflects current practice.
    Paragraph (c)(2) would be amended to exempt funds in Individual 
Retirement Accounts (IRAs) and other official retirement accounts from 
the calculation of net worth provided that the funds cannot currently 
be withdrawn from the account prior to retirement age without a 
significant penalty. Retirement accounts are not assets to be currently 
enjoyed, rather they are held for purposes of ensuring future income 
when an individual is no longer working. SBA believes it is unfair to 
count those assets as current assets. Through experience SBA has found 
that the inclusion of IRA's and other retirement accounts in the 
calculation of an individual's net worth does not serve to disqualify 
wealthy individuals from participation in the program; rather, it has 
worked to make middle and lower income individuals ineligible to the 
extent they have invested prudently in accounts to ensure income at a 
time in their lives that they are no longer working. SBA is cognizant 
of the potential for abuse of this proposed provision, with individuals 
attempting to hide current assets in funds labeled ``retirement 
accounts.'' Obviously, SBA does not believe such attempts to remove 
certain assets from an individual's economic disadvantage determination 
would be appropriate. Therefore, it has added the condition that in 
order for funds not to be counted in an economic disadvantage 
determination, the funds cannot be currently withdrawn from the account 
without a significant penalty. A significant penalty would be one equal 
or similar to the penalty assessed by the Internal Revenue Service for 
early withdrawal. In order for SBA to determine whether funds invested 
in a specific account labeled a ``retirement account'' may be excluded 
from an individual's net worth calculation, the individual must provide 
to SBA information about the terms and conditions of the account. SBA 
is interested in hearing from the public concerning this proposed 
revision, and specifically requests comments on how best to exclude 
legitimate retirement accounts without affording others a mechanism to 
circumvent the economic disadvantage criterion.
    SBA is also proposing to amend paragraph (c)(2) to exempt income 
from an S Corporation from the calculation of both income and net worth 
to the extent such income is reinvested in the firm or used to pay 
taxes arising from the normal course of operations of an S corporation. 
Therefore, while the income of an S corporation flows through and is 
taxed to individual shareholders in accordance with their interest in 
the S corporation for Federal tax purposes, SBA will take such income 
into account for economic disadvantage purposes only if it is actually 
distributed to the particular shareholder. This change would result in 
equal treatment of corporate income for C and S corporations. In cases 
where that income is reinvested in the firm or used to pay taxes 
arising from the normal course of operations of the S corporation and 
not retained by the individual, SBA believes it should be treated the 
same as C corporation

[[Page 55699]]

income for purposes of determining economic disadvantage. In order to 
be excluded, the owner of the S corporation would be required to 
clearly demonstrate that he or she paid taxes of the S corporation or 
reinvested certain funds into the S corporation within 12 months of the 
distribution of income. Conversely, the owner of an S corporation could 
not subtract S corporation losses from the income paid by the S 
corporation to him/her or from the individual's total income from 
whatever source. S corporation losses, like C corporation losses, are 
losses to the company only, not losses to the individual, and based 
upon the legal structure of the corporation and the protections 
affording the principals through this structure, the individual is not 
personally liable for the debts representing any of those liabilities. 
Thus, it is inappropriate to consider these personal losses and 
individuals should not be able to use them to reduce their personal 
incomes.
    A new paragraph (c)(3) would be added to provide that SBA would 
presume that an individual is not economically disadvantaged if his or 
her adjusted gross income averaged over the past two years exceeds 
$200,000. SBA considered incorporating into the regulation the present 
policy that an individual is not economically disadvantaged if his or 
her adjusted gross income exceeds that for the top two percent of all 
wage earners according to Internal Revenue Service (IRS) statistics. 
Under the current approach, SBA compares the income of the individual 
claiming disadvantage to the most currently available final IRS income 
tax return data. In some cases, SBA may be comparing IRS information 
relating to one tax year to an individual's income from a succeeding 
tax year because final IRS information is not available for that 
succeeding tax year. Although that policy has been upheld by SBA's OHA 
and the Federal courts (see SRS Technologies v. United States, 894 F. 
Supp. 8 (D.D.C. 1995); Matter of Pride Technologies, Inc., SBA No. 557 
(1996) SBA No. MSB-557), SBA believes that a straight line numerical 
figure is more understandable, easier to implement, and avoids any 
appearance of unfair treatment when statistics for one tax year are 
compared to an income level for another tax year. SBA is proposing an 
income level of $200,000 because that figure closely approximates the 
income level corresponding to the top two percent of all wage earners, 
which has been upheld as a reasonable indicator of a lack of economic 
disadvantage. Although a $200,000 income may seem unduly high as a 
benchmark, we note that this amount is being used only to presume, 
without more information, that the individual is not economically 
disadvantaged. We also note that average income for a small business 
owner is higher than average income for the population at large. SBA 
may consider incomes lower than $200,000 as indicative of lack of 
economic disadvantage. However, it would not presume lack of economic 
disadvantage in that case. It may also consider income in connection 
with other factors when determining an individual's access to capital. 
SBA specifically requests comments on both the straight line approach 
proposed and the current comparison of income levels to the IRS 
statistics. The rule also proposes to establish a two year average 
income level of $250,000 for continued 8(a) BD program eligibility. SBA 
believes that a higher income level may be more appropriate as a firm 
becomes more developed, but does not want to sanction too high a level. 
SBA requests comments on the $250,000 level, including whether the same 
$200,000 level should be used for both initial and continued 8(a) BD 
eligibility and whether some other level (e.g., $225,000) should be 
used for continued eligibility.
    The proposed regulation would permit applicants to rebut the 
presumption of lack of economic disadvantage upon a showing that the 
income is not indicative of lack of economic disadvantage. For example, 
the presumption could be rebutted by a showing that the income was 
unusual (inheritance) and is unlikely to occur again or that the 
earnings were offset by losses as in the case of winnings and losses 
from gambling resulting in a net gain far less than the actual income 
received. SBA may still consider any unusual earnings or windfalls as 
part of its review of total assets. Thus, although an inheritance of $5 
million, for example, may be unusual income and excluded from SBA's 
determination of economic disadvantage based on income, it would not be 
excluded from SBA's determination of economic disadvantage based on 
total assets. In such a case, a $5 million inheritance would render the 
individual not economically disadvantaged based on total assets. This 
paragraph would also provide that S corporation income will not be 
considered in determining an individual's average income if the S 
corporation owner submits evidence that such income was reinvested in 
the firm or used to pay corporate taxes within 12 months of the 
distribution of income. Again, while the income of an S corporation 
flows through and is taxed to individual shareholders in accordance 
with their interest in the S corporation, SBA will take such income 
into account only if it is actually distributed to the particular 
shareholder.
    This rule also proposes to amend Sec.  124.104(c) to establish an 
objective standard by which an individual can qualify as economically 
disadvantaged based on his or her total assets. The regulations have 
historically authorized SBA to use total assets as a basis for 
determining economic disadvantage, but did not identify a specific 
level below which an individual would be considered disadvantaged. The 
regulations also did not spell out a specific level of total assets 
above which an individual would not qualify as economically 
disadvantaged. Although SBA has used total assets as a basis for 
denying an individual participation in the 8(a) BD program based on a 
lack of economic disadvantage, the precise level at which an individual 
no longer qualifies as economically disadvantaged is not certain. SBA's 
findings that an individual was not economically disadvantaged with 
total asset levels of $4.1 million and $4.6 million have been upheld as 
reasonable. See Matter of Pride Technologies, SBA No. 557 (1996), and 
SRS Technologies v. U.S., 843 F. Supp. 740 (D.D.C. 1994). 
Alternatively, SBA's finding that an individual was not economically 
disadvantaged with total assets of $1.26 million was overturned. See 
Matter of Tower Communications, SBA No. 587 (1997). This rule proposes 
to eliminate any confusion as to what level of total assets qualifies 
as economic disadvantage for 8(a) BD purposes. Under the proposed rule, 
an individual would not be considered economically disadvantaged if the 
fair market value of all his or her assets exceeds $3 million at the 
time of 8(a) application and $4 million for purposes of continued 8(a) 
BD program participation. While the proposed rule would exclude 
retirement accounts from an individual's net worth in determining 
economic disadvantage, it would not exclude such amounts from the 
individual's total assets in determining economic disadvantage on that 
basis.

Changes to Ownership Requirements

    SBA is proposing to amend Sec.  124.105(g) governing ownership to 
provide more flexibility in determining whether to admit to the 8(a) 
program companies owned by individuals where such individuals have 
immediate family members who are owners of current or

[[Page 55700]]

former 8(a) concerns. The current rule provides that ``the individuals 
determined to be disadvantaged for purposes of one Participant, their 
immediate family members, and the Participant itself, may not hold, in 
the aggregate, more than a 20 percent equity ownership interest in any 
other single Participant.'' Because of the wording of that provision, 
SBA has been forced to deny 8(a) program admission to companies solely 
because the owners of those firms have family members who are 
disadvantaged owners of other 8(a) concerns. In some cases, the two 
firms are in different industries and are located in different parts of 
the country.
    SBA believes that it serves no purpose to automatically disqualify 
a firm simply because the individual seeking to qualify the firm has an 
immediate family member already participating in the program. Although 
there may be situations in which SBA would choose to deny admission to 
a firm based on a family member's program participation, such a 
decision must necessarily be made on a case-by-case basis. For example, 
SBA may wish to deny admission to the program to a construction firm 
owned by a woman whose father owns an 8(a) firm in the construction 
industry where the program term of the father's firm is about to end, 
if it appears that the daughter does not have sufficient management 
experience to manage the firm and there are indications that the 
applicant is simply a front for the current firm.
    In order to prevent disadvantaged individuals from using family 
members to extend their program terms and to prevent fronts, SBA 
proposes to amend Sec.  124.105(g) to provide that an individual may 
not use his or her disadvantaged status to qualify a firm if such 
individual has an immediate family member who has used his or her 
disadvantaged status to qualify another firm for participation in the 
8(a) BD program. However, the proposed rule will permit the SBA's 
Associate Administrator for Business Development (AA/BD) to waive this 
prohibition under certain circumstances. Those circumstances are 
similar to the clear line of fracture exception to the identity of 
interest rule in the size regulations.
    SBA would waive the prohibition where there are no or negligible 
connections between the two firms, either in the form of ownership, 
control or contractual relations, and where the individual seeking to 
use his or her disadvantaged status to qualify the firm can demonstrate 
he or she has sufficient management and technical experience to operate 
the firm. If a firm seeking a waiver is in the same or similar line of 
business as a current or former 8(a) Participant of a family member, 
there would be a presumption against granting a waiver. The applicant 
must provide clear and compelling evidence that no connection exists 
between the two firms.
    SBA believes that this narrow exception to the general prohibition 
against family members owning 8(a) concerns in the same or similar line 
of business will permit the Agency sufficient flexibility to admit 
firms where they are clearly operating separately and independently 
from the relative's firm. SBA also proposes to add a provision 
specifying that it may terminate an 8(a) concern for which it had 
granted a waiver if connections between the two firms become apparent 
(e.g., sharing of employees, contractual relationships between the two 
firms) or if that firm begins to operate in the same or a similar line 
of business as the current or former 8(a) concern owned by the 
disadvantaged immediate family member.
    SBA also proposes to amend Sec.  124.105 to add a phrase that was 
inadvertently omitted from the current rule. The words ``or a principal 
of such firm'' were inadvertently omitted from Sec.  124.105(h)(2) 
after the words ``A non-Participant concern.'' That provision prohibits 
concerns in the same or a similar line of business as an 8(a) concern 
from owning more than a 10 percent interest in an 8(a) concern in the 
developmental stage of program participation or more than a 20 percent 
interest in a Participant in the transitional stage of the program. The 
intent was to also prohibit principals of such concerns from owning 
these same percentages. However, the necessary language to effect this 
was inadvertently omitted. This omission is made particularly evident 
by the rule permitting former Participants and principals of former 
Participants to own up to 20 percent of a program Participant in the 
developmental stage of program participation and up to 30 percent of a 
Participant in the transitional stage. The anomalous result of the 
omission was to permit principals of non-8(a) concerns to own greater 
percentages of 8(a) firms in the same or similar line of business than 
principals of former 8(a) concerns even though the clear intent of the 
rule was to afford former 8(a) firms and their principals greater 
ownership rights. SBA has corrected that error in this proposed rule.

Changes to Control Requirements

    SBA also proposes to amend Sec.  124.106, which addresses control 
of an 8(a) applicant or Participant. SBA proposes to add an additional 
requirement to this section that the disadvantaged manager of an 8(a) 
applicant or Participant must reside in the United States and spend 
part of every month physically present at the primary offices of the 
applicant or Participant. This change is being proposed in response to 
a recent Small Disadvantaged Business (SDB) eligibility appeal before 
SBA's Office of Hearings and Appeals. In OHA's decision on that case, 
which was vacated on other grounds, the Administrative Judge held that 
a disadvantaged owner of a firm seeking SDB status controlled the firm 
from her residence in Paris, France. SBA believes that an individual 
seeking to qualify as eligible for the SBA's 8(a) BD program must 
reside in the United States. There is a presumption in the regulations 
for such residency, but it is not explicit. The regulations require an 
individual seeking 8(a) eligibility to be a citizen of the United 
States and individuals who are non-designated group members are 
required to establish their individual social disadvantage based on 
instances of bias or discrimination ``in American society, not in other 
countries.'' In addition, SBA believes that in order for an individual 
to exercise the requisite degree of control of an 8(a) firm, such 
individual must be physically present at the offices of the firm at 
least part of every month. In SBA's view, the potential for negative 
control is great when an individual on-site manager is relied on by an 
absent chief executive. The proposed rule would also add a conforming 
change to the general requirements for 8(a) BD eligibility contained in 
Sec.  124.104(a) to recognize the residency requirement.
    The Agency recognizes that the 21st century has created new 
opportunities for off-site management through the increased use of e-
mail and overnight express and decreasing interstate and international 
telephone costs, and that these new and improved technologies enable 
managers to maintain control over the operations of their businesses 
without the need for a constant or consistent physical presence. 
Nevertheless, SBA believes that in order to prevent negative control 
and to ensure that the disadvantaged majority owner(s) are the true 
managers of the 8(a) concern or applicant, the disadvantaged manager 
must generally be present in the firm's primary offices at least part 
of every month and must be

[[Page 55701]]

able to physically reach the firm in a matter of a few hours from his 
or her residence should the need arise. SBA considered requiring 
physical presence by the individual(s) claiming disadvantaged status in 
the headquarters of the applicant or participant firm for a minimum 
amount of time each month (e.g., 10 hours, 20 hours, or some other 
higher number of hours) and specifically asks for comments on whether 
such a requirement makes sense in today's world (and, if so, what 
should the minimum number of hours be) or whether control should be 
determined on a case-by-case basis. SBA also understands that any 
provision requiring presence in every month may be unworkable. With 
such a strict requirement, a disadvantaged owner who took a month-long 
vacation one year would be ineligible for continued 8(a) BD 
participation. As such, the proposed rule has the requirement that a 
disadvantaged owner must ``generally'' spend part of every month at the 
firm's principal office, imposing a monthly presence requirement while 
at the same time allowing for unusual circumstances in any given month.
    Section 124.106 would also be amended by deleting the word ``such'' 
from the second sentence in the preamble of paragraph (e) so as to make 
clear that paragraphs (e)(1) and (e)(2) apply to all non-disadvantaged 
individuals and not just to those non-disadvantaged individuals 
involved in the management of an applicant or Participant or who are 
stockholders, partners, limited liability members, officers, or 
directors of the applicant or Participant. This change is needed to 
correct a misinterpretation of this regulation by SBA's Office of 
Hearings and Appeals (OHA). That decision, In the Matter of Avasar 
Corporation, No. 209 (August 24, 2004), incorrectly held that 
paragraphs (a)(1), (a)(2), and (a)(3) as well as paragraph (g) of Sec.  
124.106 concerning non-disadvantaged control, applied only to non-
disadvantaged individuals involved in the management of an applicant or 
Participant, or stockholders, partners, limited liability members, 
officers, and/or directors of the applicant or Participant. The result 
of that decision was that under certain circumstances, non-
disadvantaged individuals would be permitted to control an 8(a) 
concern. This is an absurd result and contrary to statute. The proposed 
change makes it clear that the above paragraphs apply to all non-
disadvantaged individuals, regardless of their current or former 
relationship to the applicant or Participant.
    The proposed rule would also add a new Sec.  124.106(h) regarding 
control of an 8(a) BD Participant where a disadvantaged individual upon 
whom eligibility is based is a reserve component member in the United 
States military who has been called to active duty. Currently, there is 
no statutory or regulatory authority to permit such a firm to stay in 
the 8(a) BD program, whether on an active or inactive basis, while the 
individual upon whom eligibility is based is away from the firm for an 
extended period of time. Some have even questioned whether SBA should 
in fact terminate such a firm from the 8(a) BD program for failure to 
maintain control by one or more disadvantaged individuals. SBA believes 
that termination in these circumstances would be inappropriate. 
Specifically, the proposed rule would permit a Participant to designate 
one or more individuals to control its daily business operations during 
the time that a disadvantaged individual upon whom eligibility has been 
called to active duty in the United States military. The proposed rule 
would also amend Sec.  124.305 to authorize the Participant to suspend 
its 8(a) BD participation during the active duty call-up period. If the 
Participant elects to designate one or more individuals to control the 
concern on behalf of the disadvantaged individual during the active 
duty call-up period, the concern will continue to be treated as an 
eligible 8(a) Participant and no additional time will be added to its 
program term. If the Participant elects to suspend its status as an 
eligible 8(a) Participant, the Participant's program term would be 
extended by the length of the suspension when the individual returns 
from active duty.

Benchmarks

    The proposed rule would remove Sec.  124.108(f), as well as other 
references to the achievement of benchmarks contained in Sec. Sec.  
124.302(d), 124.403(d), and 124.504(d). When these regulations were 
first implemented, the Department of Commerce was supposed to update 
industry codes every few years to determine those industries which 
minority contractors were underrepresented in the Federal market. It is 
SBA's view that because these industry categories have never been 
revised since the initial publication, references to them are outdated 
and should be removed.

Changes Applying Specifically to Tribally-Owned Firms

    The Small Business Act permits 8(a) Participants to be owned by 
``an economically disadvantaged Indian tribe (or a wholly owned 
business entity of such tribe).'' 15 U.S.C. 637(a)(4)(A)(i)(II). The 
term Indian tribe includes any Alaska Native village or regional 
corporation. 15 U.S.C. 637(a)(13). Pursuant to the Alaska Native Claims 
Settlement Act, a concern which is majority owned by an Alaska Native 
Corporation (ANC) is deemed to be both owned and controlled by Alaska 
Natives and an economically disadvantaged business. As such, ANCs do 
not have to establish that they are ``economically disadvantaged.'' 
Conversely, Indian tribes are not afforded the same automatic statutory 
economic disadvantage designation. Current Sec.  124.109(b) requires 
tribes to demonstrate their economic disadvantage through the 
submission of data, including information relating to tribal 
unemployment rate, per capita income of tribal members, and the 
percentage of the tribal population below the poverty level. SBA 
requests comments on how best to determine whether a tribe should be 
considered ``economically disadvantaged.'' Some have advocated a bright 
line assets or net worth test for tribes. SBA is not convinced that 
such a test truly captures the economic disadvantage status of a tribe. 
SBA continues to believe that the factors set forth in current Sec.  
124.109(b)(2) paint a truer picture, but specifically requests comments 
from tribes on this issue. The current regulation also requires a tribe 
to demonstrate its economic disadvantage only once. SBA also requests 
comments regarding whether this one time demonstration of economic 
disadvantage makes sense.
    The proposed rule would also amend Sec.  124.109(c)(3)(ii) to more 
clearly define the type of work that a tribally-owned firm may perform 
in the 8(a) program. One of the goals of the 8(a) BD program is to 
develop businesses to the point where they can be independent, viable 
businesses when they graduate or otherwise leave the 8(a) BD program. 
In order to encourage a tribally-owned firm to continue to operate as 
an independent business after it leaves the 8(a) BD program, SBA has 
prohibited for many years a tribally-owned applicant from having the 
same primary NAICS code as another firm in the 8(a) BD program owned by 
the same tribe or one that has left the program within the last two 
years. It could perform secondary work in such a NAICS code, but it 
could not duplicate the primary NAICS code of another or recently 
former tribally-owned 8(a) Participant. SBA believed that this 
requirement would encourage tribes to expand their business activities

[[Page 55702]]

by having two or more viable businesses doing separate and distinct 
work. In some cases, however, SBA admitted a second tribally-owned firm 
into the 8(a) BD program under one primary NAICS code and it 
immediately began to perform all or most of its work in a NAICS code 
that was the primary NAICS code of a firm owned by the tribe that 
recently graduated from the 8(a) BD program. This is not what SBA 
envisioned. Again, the purpose of the 8(a) BD program is to promote 
business development. Having one business take over work previously 
performed by another does not advance the business development of two 
distinct firms. In order to further encourage the continued, long-term 
viability of two separate businesses, this rule proposes that a newly 
certified tribally-owned Participant cannot receive an 8(a) contract in 
a secondary NAICS code that is the primary NAICS code of another 
Participant (or former participant that has left the program within two 
years of the date of application) owned by the tribe for a period of 
two years from the date of admission to the program. SBA also 
considered allowing such secondary work on a limited basis (e.g., no 
more than 20% or 30% of its 8(a) work could be in a NAICS code that 
was/is the primary NAICS code of a former/other tribally-owned 
Participant). SBA seeks comments on both approaches.
    SBA also proposes to delete the word ``disadvantaged'' in Sec.  
124.109(c)(4) to make clear that any tribal member may participate in 
the management of a tribally-owned firm and need not individually 
qualify as economically disadvantaged. Under current rules, a tribal 
member would generally have to qualify as economically disadvantaged to 
run the daily business operations of a tribally-owned concern. Tribal 
representatives emphasized the need for this change to enable them to 
attract the most qualified tribal members to assist in running tribal 
businesses and further allow them to assist economic and community 
development through their tribally-owned concerns. SBA agrees that the 
current rule is overly restrictive and proposes this change. This 
change would also eliminate the requirement that directors and officers 
must submit copies of their individual tax returns to establish their 
economic disadvantage. If, however, there is a question as to whether 
an individual filed taxes, SBA could request proof of payment of taxes 
to satisfy the good character requirement. SBA also requests specific 
comments on whether the individuals involved in the management of a 
tribally-owned concern should be members of the tribe that owns the 
concern or, in the alternative, whether membership in any tribe should 
suffice. Currently, the regulations generally require management by 
individuals who are members of the tribe that owns the concern. SBA 
requests comments on whether that is too restrictive for the tribal 
community.
    This rule also proposes to clarify the potential for success 
requirement for tribally-owned applicants contained in Sec.  
124.109(c)(6). SBA believes that the current regulation does not 
adequately capture the realities of tribally-