Small Business HUBZone Program and Government Contracting Programs, 65222-65251 [2019-24915]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 84, Number 228 (Tuesday, November 26, 2019)]
[Rules and Regulations]
[Pages 65222-65251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24915]



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Vol. 84

Tuesday,

No. 228

November 26, 2019

Part II





Small Business Administration





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13 CFR Parts 115, 121, et al.





 Small Business HUBZone Program and Government Contracting Programs; 
Final Rule

Federal Register / Vol. 84 , No. 228 / Tuesday, November 26, 2019 / 
Rules and Regulations

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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 115, 121, 125, 126, and 127

RIN 3245-AG38


Small Business HUBZone Program and Government Contracting 
Programs

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
amending its regulations for the Historically Underutilized Business 
Zone (HUBZone) Program to reduce the regulatory burdens imposed on 
HUBZone small business concerns and government agencies, implement new 
statutory provisions, and eliminate ambiguities in the regulations. 
This comprehensive revision to the HUBZone Program clarifies current 
HUBZone Program policies and procedures and makes changes that will 
benefit the small business community by making the HUBZone Program more 
efficient and effective. The rule is intended to make it easier for 
small business concerns to understand and comply with the program's 
requirements and to make the HUBZone program a more attractive avenue 
for procuring agencies.

DATES: This rule is effective on December 26, 2019.

FOR FURTHER INFORMATION CONTACT: Brenda Fernandez, Office of Government 
Contracting, 202-205-7337 or [email protected].

SUPPLEMENTARY INFORMATION:

Background

    On January 30, 2017, President Trump issued Executive Order 13771 
directing federal departments and agencies to reduce regulatory burdens 
and control regulatory costs. In response to this directive, SBA 
initiated a review of all of its regulations to determine which might 
be revised or eliminated. This final rule implements revisions to the 
HUBZone program. The HUBZone program was established pursuant to the 
HUBZone Act of 1997 (HUBZone Act), Title VI of the Small Business 
Reauthorization Act of 1997, Public Law 105-135, enacted December 2, 
1997. The stated purpose of the HUBZone program is to provide for 
Federal contracting assistance to HUBZone small business concerns. 15 
U.S.C. 657a(a).
    On October 31, 2018, SBA published in the Federal Register a 
comprehensive proposal to amend the HUBZone program. 83 FR 54812. SBA 
had not issued a comprehensive regulatory amendment to the HUBZone 
program since the program's initial implementation over twenty years 
ago. SBA's review of the HUBZone program in response to President 
Trump's directive highlighted several areas that needed revision. In 
order to address these deficiencies, SBA proposed to clarify and modify 
a number of the regulations implementing the program to reflect current 
policies, eliminate ambiguities in the regulations, and reduce burdens 
on small businesses and procuring agencies.
    The proposed rule initially called for a 60-day comment period, 
with comments due by December 31, 2018. Due to the scope and 
significance of the proposed changes, SBA subsequently published a 
notice in the Federal Register on December 31, 2018 that extended the 
comment period to February 14, 2019. 83 FR 67701.
    In addition, SBA proposed to implement section 1701(i) of the 
National Defense Authorization Act for Fiscal Year 2018 (NDAA 2018), 
Public Law 115-91, 131 Stat. 1283 (December 12, 2017), which by 
amending the definition of ``HUBZone small business concern,'' allows 
certain certified HUBZone small business concerns to maintain their 
HUBZone status until 2021. In addition, based on comments received, SBA 
is implementing sections 1701(b), 1701(c), and parts of section 1701(h) 
of the NDAA 2018 that are effective January 1, 2020, as discussed 
further below.
    A challenge HUBZone participants have faced over the last two 
decades is understanding the definitions of key components of the 
program requirements. HUBZones change based on economic data. Once 
certified, it is unrealistic to expect a business concern or its 
employees to relocate in order to attempt to maintain the concern's 
HUBZone status if the area where the business is located or employees 
reside loses its HUBZone status. The proposed rule detailed changes to 
help the HUBZone program achieve its intended results: Investment and 
continued employment in distressed communities. First, the rule 
proposed to treat an individual as a HUBZone resident if that 
individual worked for the firm and resided in a HUBZone at the time the 
concern was certified or recertified as a HUBZone small business 
concern and he or she continues to work for that same firm, even if the 
area where the individual lives no longer qualifies as a HUBZone or the 
individual has moved to a non-HUBZone area. Second, the rule proposed 
to eliminate the burden on HUBZone small businesses to continually 
demonstrate that they meet all eligibility requirements at the time of 
each offer and award for any HUBZone contract opportunity.
    SBA recognizes the challenge many firms face in attempting to meet 
the requirement that at least 35% of the firm's employees live in a 
HUBZone. Firms with a significant number of employees may have a hard 
time meeting this requirement because it is often difficult to find a 
large number of individuals living in a HUBZone who possess the 
necessary qualifications. Smaller firms also have a hard time meeting 
this requirement because the loss of one employee could adversely 
affect their HUBZone eligibility. If a certified HUBZone small business 
receives a Federal contract (HUBZone or otherwise), it often must hire 
additional employees to perform the contract, thus jeopardizing its 
status as a certified HUBZone small business if it no longer meets the 
requirement that at least 35% of its employees reside in a HUBZone. 
This would make it ineligible for any future HUBZone contracts. The 35% 
HUBZone residency requirement can also make it hard for service 
contractors to perform contracts in other locations. For example, if a 
firm wins a contract in another state, it would most likely need to 
hire additional employees from that state. If there is no HUBZone near 
that location, the firm would have to hire non-HUBZone residents to 
perform the contract, which would most likely make it ineligible for 
future HUBZone contracts.
    To alleviate these problems, Sec.  126.500(a) of the final rule 
requires only annual recertification rather than immediate 
recertification at the time of every offer for a HUBZone contract 
award. This reduced burden on certified HUBZone small businesses will 
allow a firm to remain eligible for future HUBZone contracts for an 
entire year, without requiring it to demonstrate that it continues to 
meet all HUBZone eligibility requirements at the time it submits an 
offer for each additional HUBZone opportunity. A concern would 
represent that it is a certified HUBZone small business concern at the 
time of each offer, but its eligibility would relate back to the date 
of its certification or recertification, not to the date of the offer. 
The concern would be required to come into compliance with the 35% 
HUBZone residency requirement again at the time of its annual 
recertification in order to continue to be eligible for additional 
HUBZone contracts after the one-year certification period. SBA also 
requested comments on whether seasonal

[[Page 65223]]

employees can or should be counted and still maintain the integrity of 
the HUBZone eligibility requirements.
    SBA received extensive responses to the proposed rule from 98 
commenters, which comprised about 370 specific comments. SBA addresses 
each proposed amendment below, including the disposition of any 
comments.

II. Section-by-Section Analysis and Comments Received

1. Definitions

    The proposed rule revised, added, or eliminated several definitions 
set forth in 13 CFR 126.103 in order to remove ambiguities and make the 
HUBZone program easier for firms to use.
    SBA proposed to delete the definitions of ``Alaska Native Village'' 
and ``ANCSA'' (i.e., Alaska Native Claims Settlement Act) and 
incorporate those terms in an amended definition of ``Alaska Native 
Corporation (ANC)'' to make the regulations more readable. SBA received 
several comments that did not oppose the proposed change but asked SBA 
to be careful about conflating or confusing terms such as ANCSA, Alaska 
Native Village, and Alaskan Native Corporation. SBA does not believe it 
has incorrectly merged or eliminated any terms in the revised 
definition, but SBA will continue to be careful when defining these 
terms and other related terms.
    SBA proposed to amend the definition of ``attempt to maintain'' to 
clarify what happens if a HUBZone small business concern's HUBZone 
residency percentage drops significantly below the 35% employee HUBZone 
residency requirement. The Small Business Act provides that a HUBZone 
small business concern must ``attempt to maintain'' compliance with the 
35% residency requirement during the performance of a HUBZone contract. 
15 U.S.C. 632(p)(5)(A)(i)(II). As noted in the proposed rule, this 
statutory requirement seeks to ensure that funds from HUBZone contracts 
flow to HUBZone areas and the residents of those areas, while at the 
same time recognizing that a HUBZone small business may need to hire 
additional employees in order to meet the terms of a contract. Under 
the ``attempt to maintain'' requirement, when hiring additional 
employees to perform on a HUBZone contract, the HUBZone small business 
must make efforts to hire HUBZone residents in order to try to maintain 
compliance with the 35% HUBZone residency requirement. The current 
regulation provides that ``attempt to maintain'' means ``making 
substantive and documented efforts such as written offers of 
employment, published advertisements seeking employees, and attendance 
at job fairs.'' 13 CFR 126.103.
    SBA believes that it would be helpful to have clearer guidelines 
that would allow firms to adequately plan and ensure that they are in 
fact maintaining compliance and continued eligibility. SBA proposed to 
amend this definition by adding that falling below 20% HUBZone 
residency during the performance of a HUBZone contract would be deemed 
a failure to attempt to maintain compliance with the statutory 35% 
HUBZone residency requirement. In such a case, SBA would propose that 
the concern be decertified from the HUBZone program. SBA requested 
comments on how best to look at this 20% minimum requirement, 
specifically as to whether a different percentage is also reasonable 
and would accomplish the objectives of the HUBZone program while not 
unduly burdening firms performing HUBZone contracts.
    SBA received 20 comments on the proposed change. Several commenters 
opposed the changes and preferred the current language because of the 
flexibility of the current standard. One commenter said the current 
flexible standard was better for firms with a very low total number of 
employees. The remaining commenters supported SBA's change. One 
commenter supported the change to a fixed percentage but thought 15% 
would be better. Another commenter supported the change to a fixed 
percentage but thought 25% would be better. SBA received five comments 
that supported the change to a fixed percentage but expressed concerns 
about the inflexibility this would create and the consequence of 
decertification. These commenters recommended several alternatives, 
including establishing a rebuttable presumption and not decertifying 
firms that do not meet the requirements. One commenter effectively 
recommended changing the 35% residency requirement to a 20% requirement 
where participants would only need to show demonstrable efforts if they 
fell below 20%.
    After considering the comments, SBA is adopting the change 
implementing a 20% floor within the definition of ``attempt to 
maintain''. SBA believes that it is important to remember the goals of 
the HUBZone program: To provide capital infusion into and hire 
individuals living in distressed areas. SBA believes that allowing any 
number below 20% would not properly capture the intent of the program. 
In addition, most commenters agreed that 20% was a reasonable standard. 
The final rule also maintains the proposed consequences for firms that 
do not meet the standard. SBA believes that it is important that firms 
adhere to the requirements. The attempt to maintain standard is already 
an exception to the general 35% residency requirement, and SBA believes 
that a situation in which a firm that does not meet this relaxed 
standard and faces little or no consequence would not further SBA's 
goal of ensuring firms meet the requirements of the program.
    Two comments supported the change but requested clarity as to what 
it means to attempt to maintain in relation to recertification, 
continued eligibility, and the change made in Sec.  126.501 providing 
that certification lasts for one year. These commenters raised concerns 
about firms merely hiring several employees immediately before an 
upcoming recertification date, employing those individuals for a short 
time to meet the 20% threshold, but only for a small window of time 
right before recertification. SBA agrees with this commenter and has 
provided clarity on this issue in other sections of this final rule. 
Specifically, SBA makes clear that the 20% threshold is the floor only 
for firms performing HUBZone contracts, and if a concern falls below 
that threshold during the year, it will be decertified according to the 
standards in Sec.  126.602(d). SBA also made clear that firms have an 
affirmative duty to notify SBA if they fall below the 20% attempt to 
maintain standard in Sec.  126.501(a)(2).
    SBA proposed eliminating the definition of ``county unemployment 
rate'' as a separate definition and incorporating it into the 
definition of ``qualified non-metropolitan county (QNMC)'' and amending 
the definition of ``D/HUB'' to make clear that this term refers to the 
Director of SBA's Office of HUBZone. SBA received no comments on these 
changes to the proposed rule.
    SBA proposed to amend the definition of ``decertify'' to clarify 
that the decertification procedures described in part 126 also apply to 
firms that voluntarily withdraw from the HUBZone program, and not 
solely to situations where SBA initiates a decertification action. SBA 
received three comments on the proposed changes to the definition of 
``decertify.'' All three comments supported the change. As such, SBA is 
adopting the definition as proposed.
    The proposed rule also sought to amend the definition of the term 
``employee.'' This term is crucial to the HUBZone program since the 
HUBZone eligibility requirements for a small business are to have at 
least 35% of its employees residing in a HUBZone and

[[Page 65224]]

to have a principal office located in a HUBZone. The proposed rule 
intended to clarify how SBA determines whether an individual worked ``a 
minimum of 40 hours per month.'' The proposed rule explained that an 
individual is considered an employee for HUBZone program purposes if he 
or she works at least 40 hours during the four-week period immediately 
prior to the relevant date of consideration, which is either the date 
the concern submits its HUBZone application to SBA or the date of 
recertification. Per the proposed rule, SBA will review a firm's 
payroll records for the most recently completed pay periods that 
account for the four-week period immediately prior to the date of 
application or date of recertification in order to determine which 
individuals meet this definition. If the firm has weekly pay periods, 
then SBA will review the payroll records for the most recently 
completed last four pay periods. If the firm has two-week pay periods, 
then SBA will review the payroll records for the last two most recently 
completed pay periods. If the payroll records demonstrate that an 
individual worked forty or more hours during that four-week period, he 
or she would be considered an employee of the concern. Most commenters 
favored this proposed clarification, and SBA has finalized it in this 
rule.
    SBA also sought comments on whether it should revise the 
requirement from 40 hours per month to 20 hours per week, due to 
concerns that the 40 hours per month standard may be insufficient to 
stimulate employment in HUBZones. SBA received 35 comments opposing 
this possible change to the definition of ``employee.'' Of these, 20 
commenters cited concerns about the administrative and financial 
burdens on HUBZone firms and the restrictions it would place on firms' 
ability to hire certain groups of potential employees such as students, 
working parents, interns, individuals with more than one job, or 
individuals who are otherwise unable to work for a firm 20 hours or 
more per week. One of the purposes of the HUBZone program is to provide 
meaningful employment opportunities for residents of HUBZone areas. 
After reviewing the comments, SBA agrees that changing the requirement 
to 20 hours per week would hinder, rather than encourage, firms' 
efforts to hire and retain HUBZone-resident employees. Therefore, SBA 
will retain the existing requirement that an ``employee'' is an 
individual who works at least 40 hours per month.
    SBA also sought comments on whether the definition of ``employee'' 
should continue to include temporary and leased employees, individuals 
obtained through a union agreement, and those co-employed through a 
professional employer organization (PEO) agreement, or if SBA should 
count only full-time employees or full-time equivalents. SBA received 
30 comments on this issue, with 18 commenters in favor of continuing to 
use a broad definition of ``employee'' and 12 in favor of a narrower 
approach that would count only full-time employees or full-time 
equivalents. After reviewing the comments, SBA will retain the 
definition of ``employees'' that includes temporary and leased 
employees, individuals obtained through a union agreement, and those 
employed through a PEO agreement. As discussed above, the purpose of 
the program is to increase employment opportunities for individuals 
residing in HUBZones. A more inclusive definition of ``employee'' 
allows a wider group of people to apply for positions at HUBZone firms 
and thus gives the firms more opportunities to find employees who fit 
their needs.
    The proposed definition of ``employee'' also clarified that all 
owners of a HUBZone applicant or HUBZone small business who work at 
least 40 hours per month will be considered employees, regardless of 
whether they receive compensation. This is SBA's current policy, and it 
is intended to prevent a firm owner from being able to circumvent the 
HUBZone rules by not paying himself a salary to remove himself from the 
employee count. SBA believes that any time an owner works at least 40 
hours per month for the concern, he or she should be counted as an 
employee. The proposed rule also included a provision that if the sole 
owner of a firm works less than 40 hours during the four-week period 
immediately prior to the relevant date of review but has not hired 
another individual to direct the actions of the concern's employees, 
then that owner will be considered an employee. All five comments 
received on this issue favored this change. The proposed change is 
adopted as final.
    The proposed definition of ``employee'' also clarified SBA's 
existing rule that individuals who do not receive compensation and 
those who receive deferred compensation are not considered employees 
(other than owners who work at least 40 hours per month, as described 
above). As SBA's current rules provide, such individuals are considered 
volunteers, and volunteers are not considered employees. Deferred 
compensation means compensation that is not received at the time it is 
earned but is received sometime in the future. SBA does not treat 
individuals receiving deferred compensation as employees for HUBZone 
purposes because such individuals are not receiving a present economic 
benefit from working for the firm, which is not consistent with the 
purpose of the HUBZone program. The Court of Federal Claims has found 
this policy to be reasonable. In Aeolus Systems, LLC v. United States, 
79 Fed. Cl. 1, 9 (2007), the Court held that: ``(1) the concept of 
deferred compensation is contrary to the program's goal of increasing 
gainful employment in HUBZones, and (2) the identification of non-owner 
individuals who work for deferred compensation as `employees' would 
open up the HUBZone program to potential abuse.'' SBA received three 
comments in support of continuing to exclude individuals who receive 
deferred compensation from the definition of ``employee.'' Thus, the 
final rule will continue to exclude individuals who receive deferred 
compensation from the definition of ``employee.''
    In addition, the proposed definition clarified that individuals who 
receive in-kind compensation are not considered volunteers and will be 
considered employees, as long as such in-kind compensation is 
commensurate with the work performed by the individual. This means that 
an individual who works 40 hours per month but receives in-kind 
compensation equaling the value of only 10 hours would generally not be 
considered an employee. These clarifications were intended to address 
confusion about what SBA considers in-kind compensation and whether 
someone who receives in-kind compensation should be considered an 
employee. In general, in-kind compensation is non-monetary 
compensation, or anything other than cash, wages, salary or other 
monetary benefit received in exchange for work performed. An example of 
in-kind compensation is housing received in exchange for work 
performed. SBA generally treats individuals receiving in-kind 
compensation as employees because they are receiving an economic 
benefit from working for the firm, which is consistent with the 
purposes of the HUBZone program. In a previous proposed rule amending 
the definition of ``employee'' to provide that volunteers are not 
considered employees, SBA explained: ``SBA intends the term 
compensation to be read broadly and to be more than wages. Thus, a 
person who receives food, housing, or other non-monetary

[[Page 65225]]

compensation in exchange for work performed would not be considered a 
volunteer under this regulation. SBA believes that allowing volunteers 
to be counted as employees would not fulfill the purpose of the HUBZone 
Act--job creation and economic growth in underutilized communities.'' 
67 FR 3826 (January 28, 2002).
    SBA requested comments on whether it is reasonable to continue 
treating in-kind compensation this way, and on how to measure whether 
in-kind compensation is commensurate with work performed. Of the eight 
comments received on this issue, half supported a definition of 
``employee'' that includes commensurate in-kind compensation and half 
opposed this definition. The former noted that they supported this 
element of the definition, as long as the in-kind compensation offered 
financial value to the employee because that would in turn benefit the 
HUBZone area. For example, one commenter supported in-kind compensation 
in the form of housing for the employee. Another supported in-kind 
compensation as long as it was equivalent to the minimum wage. The 
commenters who opposed the proposed regulation expressed concern about 
the difficulty of ensuring in-kind compensation complies with all 
relevant labor and tax laws and were concerned that it would be too 
subjective. In response to these concerns, SBA has revised the 
definition to provide that ``in-kind compensation commensurate with the 
work performed'' means compensation that is of demonstrable financial 
value to the individual and compliant with relevant laws. In general, a 
firm would be able to meet this standard by providing documentation 
such as: Employment agreements for any individuals receiving in-kind 
compensation, showing the employment relationship between the 
individuals and the firm, including the terms of employment, work 
requirements, and form of compensation for work performed; records 
showing that the individuals worked the required minimum of 40 hours 
per month at the time of evaluation (e.g., signed timesheets, job logs, 
etc.); documentation showing the value of the in-kind compensation; and 
documentation showing that the firm is reporting and withholding 
appropriate taxes from the compensation provided. SBA notes that this 
is not a change in policy, but a clarification of what SBA currently 
requires. SBA believes this fulfills the public policy aim of 
facilitating the advantages that accrue to communities where 
individuals have increased employment opportunities, while also 
allowing firms flexibility to offer benefits such as housing that could 
make them more competitive to qualified individuals.
    The proposed definition of ``employee'' clarified that independent 
contractors who receive compensation through Internal Revenue Service 
(IRS) Form 1099 generally are not considered employees, where such 
individuals would not be considered employees for size purposes under 
SBA's Size Policy Statement No. 1. 51 FR 6099 (February 20, 1986). SBA 
believes that it does not make sense to find an individual who receives 
a Form 1099 to be an employee of a firm when determining the concern's 
size, but to then not consider that same individual to be an employee 
when determining compliance with HUBZone eligibility rules. If an 
independent contractor meets the employee test under SBA Size Policy 
Statement No. 1, then that individual should also be considered an 
employee for HUBZone eligibility purposes. If an individual is truly 
acting as an independent contractor, that individual is acting as a 
subcontractor, not an employee. Such an individual does not receive the 
same benefits as an employee and is also not under the same control as 
an employee.
    SBA received four comments in favor of counting independent 
contractors as employees for HUBZone purposes if they are considered 
employees for size purposes, and three comments opposed to counting 
them as employees under any circumstances (including for size 
purposes). It is beyond the scope of this rulemaking to consider 
whether independent contractors should be treated as employees for size 
purposes. Thus, SBA did not consider those comments in finalizing this 
rule. SBA proposed including similar treatment for HUBZone eligibility 
because there is value in ensuring uniformity and consistency among its 
programs where possible. More importantly, SBA believes having one 
definition for size standards and another for HUBZone eligibility will 
lead to confusion and ultimately make it more difficult for firms to 
comply with SBA's regulations. As noted above, SBA intends for these 
revisions to clarify participants' and applicants' understanding of the 
program requirements. As such, the final rule adopts the language 
noting that an independent contractor considered an ``employee'' for 
size regulations is also an employee for HUBZone purposes.
    SBA requested comments on how SBA should treat individuals who are 
employed through an agreement with a third-party business that 
specializes in providing HUBZone resident employees to prospective 
HUBZone small business concerns for the specific purpose of achieving 
and maintaining HUBZone eligibility. Under such an arrangement, one 
individual could work 10 hours per month for four separate businesses 
and be counted as a HUBZone resident employee for each of those 
businesses. SBA requested public input on whether such an arrangement 
is consistent with the purposes of the HUBZone program and how such 
arrangements could be structured in order to be consistent with the 
goals of the program. SBA received two comments in favor of allowing 
firms to count individuals employed through third-party businesses as 
employees and one comment opposed. One commenter noted that these 
arrangements help HUBZone firms connect with potential employees who 
may not otherwise be familiar with the program or its benefits. By 
connecting HUBZone firms with eligible employees, third-party 
businesses serve the program goal of increasing employment 
opportunities for individuals in HUBZones. Another commenter noted that 
an applicant seeking HUBZone status (or one already in the program) may 
not need a full-time employee, and that concern should not be burdened 
with employing someone beyond its needs. Thus, arrangements allowing 
one individual to be counted as a HUBZone employee for more than one 
concern provides flexibility to firms to meet their needs and provides 
the opportunity for an individual to be fully employed where they 
otherwise might not be. SBA has considered all the comments received 
and is not changing the current policy allowing these arrangements 
where the arrangement appears legitimate and the HUBZone applicant (or 
participant) shows that the individuals being hired through the third-
party business are doing legitimate work.
    SBA proposed to revise the definition of ``HUBZone small business 
concern'' to remove ambiguities in the regulation. Currently, the 
definition of this term is copied directly from the Small Business Act 
and addresses only the ownership and control requirements. SBA proposed 
to revise the definition to state that ``HUBZone small business concern 
or certified HUBZone small business concern'' means a small business 
concern that meets the requirements described in Sec.  [thinsp]126.200 
and that SBA has certified as eligible for federal contracting 
assistance under the HUBZone program. In addition, SBA proposed to 
replace the term ``qualified

[[Page 65226]]

HUBZone SBC'' through the regulations with the term ``certified HUBZone 
small business concern'' (or ``HUBZone small business concern'') to 
make the regulations more clear, since firms must apply to SBA and be 
certified as HUBZone small business concerns before they are can 
qualify to receive the benefits of the HUBZone program.
    In addition, SBA proposed to implement section 1701(i) of the NDAA 
2018 in the amended definition of ``HUBZone small business concern.'' 
In enacting section 1701(i), Congress intended for small businesses 
located in expiring redesignated areas to retain their HUBZone 
eligibility until the date on which SBA updates the HUBZone maps in 
accordance with the broader changes described in section 1701. In other 
words, firms that were certified HUBZone small business concerns as of 
the date of enactment of the NDAA 2018 (December 12, 2017), and that 
had principal offices located in redesignated areas set to expire prior 
to January 1, 2020, shall remain certified HUBZone small business 
concerns until SBA updates the HUBZone maps after the 2020 decennial 
census, so long as all other HUBZone eligibility requirements described 
in Sec.  [thinsp]126.200 are met. This means that in order to continue 
to be considered a certified HUBZone small business concern, the firm 
must: Continue to meet the HUBZone ownership and control requirements; 
continue to meet the 35% HUBZone residency requirement; and maintain 
its principal office in the redesignated area or another qualified 
HUBZone. SBA notes that to implement this change, SBA will ``freeze'' 
the HUBZone maps with respect to qualified census tracts, qualified 
non-metropolitan counties, and redesignated areas. As a result, for all 
redesignated areas in existence on December 12, 2017, the expiration of 
their HUBZone treatment has been extended until December 31, 2021. SBA 
selected this date because SBA estimates that the HUBZone maps will 
have been updated to incorporate the results of the 2020 census and to 
reflect the broad changes mandated by section 1701 by that time, and 
selecting a specific date provides stability to program participants. 
SBA did not receive any comments on the proposed definition of 
``HUBZone small business concern'' and is implementing the changes as 
proposed.
    SBA proposed to amend the definition of ``principal office'' to 
eliminate ambiguities in the regulation. Specifically, SBA proposed to 
make more clear that when determining whether a concern's principal 
office is located in a HUBZone, SBA counts all employees of the concern 
other than those employees who work at job-sites. In addition, SBA 
proposed to clarify that a concern must demonstrate that it conducts 
business at a location in order for that location to be considered its 
principal office. SBA believes HUBZone firms should provide evidence 
that business is being conducted at the location to ensure the purposes 
of the HUBZone Program are being fulfilled. A firm that simply owns or 
leases a building but conducts no business there is not fulfilling the 
purposes of the program. Finally, SBA proposed to add clarifying 
language and examples to the definition of principal office, to 
illustrate how the agency treats situations in which employees work at 
multiple locations. SBA received three comments supporting these 
proposed changes. SBA also received two comments asking if SBA intended 
for ``job-site'' to refer only to firms whose primary industry 
classification is construction. The final rule clarifies that ``job-
site'' refers to locations where work is performed for all service or 
construction contracts.
    SBA proposed to amend the definition of ``qualified base closure 
area'' to remove ambiguities in the regulation and to be consistent 
with SBA's interpretation of the statutory text. SBA received a comment 
noting that section 1701 of the 2018 NDAA amends this definition 
effective January 1, 2020, and suggesting that SBA amend this 
definition to reflect this change. The statutory amendment does not 
make a substantive change but clarifies that ``qualified base closure 
areas'' are base closure areas that are treated as HUBZones for at 
least eight years. SBA agrees with this comment and has revised this 
definition accordingly.
    SBA proposed to amend the definition of ``qualified census tract'' 
to make the regulation more readable. The proposed definition described 
the criteria used to define this term in the Internal Revenue Code, 
rather than simply cross-referencing it as the regulation currently 
does. SBA received a comment noting that section 1701 of the 2018 NDAA 
amends this definition effective January 1, 2020, and suggesting that 
SBA amend this definition to reflect this change. The statutory 
amendment does not make a substantive change but simply adds a 
reference to the HUBZone maps. SBA agrees with this comment and has 
amended this definition accordingly.
    SBA proposed to amend the definition of ``qualified non-
metropolitan county'' to include Difficult Development Areas (DDAs) and 
to reflect SBA's current policy of utilizing the most recent data from 
the Local Area Unemployment Statistics report, which is annually 
produced by the Department of Labor's Bureau of Labor Statistics. The 
proposed definition explains that a DDA is an area defined by the 
Department of Housing and Urban Development that is within Alaska, 
Hawaii, or any territory or possession of the United States outside the 
48 contiguous states. DDAs may be HUBZones if they are also 
nonmetropolitan counties. The proposed rule noted that it has been 
including qualified non-metropolitan counties that are DDAs in its 
program since the statutory authority was enacted, but had not yet 
amended the term qualified non-metropolitan county to include DDAs. SBA 
received a comment noting that section 1701 of the 2018 NDAA amends 
this definition effective January 1, 2020, and suggesting that SBA 
amend this definition to reflect this change. The statutory amendment 
does not make a substantive change but adds a reference to the HUBZone 
maps, corrects a reference to the Internal Revenue Code, and clarifies 
that qualified nonmetropolitan counties are designated based on a 5-
year average of the available data. SBA agrees with this comment and 
has amended this definition accordingly.
    The proposed rule also amended the definition of ``reside.'' This 
term is used when analyzing whether an employee should be considered a 
HUBZone resident for purposes of determining a firm's compliance with 
the 35% HUBZone residency requirement. SBA proposed to remove the 
reference to primary residence, to eliminate the requirement that an 
individual demonstrate the intent to live somewhere indefinitely, and 
to provide clarifying examples. SBA proposed to remove the reference to 
primary residence because many individuals do not have primary 
residences as the term is traditionally defined. SBA proposed to remove 
the requirement to prove intent to live somewhere indefinitely because 
SBA does not have a reasonably reliable method of enforcing this 
requirement. In the alternative, SBA proposed that ``reside'' means to 
live at a location full-time and for at least 180 days immediately 
prior to the date of application or date of recertification, as 
applicable. The definition also makes clear that to determine an 
individual's residence, SBA will first look to an individual's address 
as identified on his or her driver's license or voter's registration 
card, which is SBA's current and long-standing policy. Where such 
documentation is not available, SBA

[[Page 65227]]

will require other specific proof of residency, such as deeds or 
leases, or utility bills. Additionally, this rule also proposed 
examples to add clarity to these revisions. SBA specifically requested 
comments on these proposed changes.
    SBA received 36 comments on the proposal that ``reside'' requires 
that an individual live in a place for at least 180 days before 
certification. Of these comments, 24 opposed the proposed changes, 9 
supported them as proposed, and 3 supported SBA's intent behind the 
proposed changes but suggested alternate language to convey that 
intent. Of the comments opposed, most expressed concern that the 180-
day requirement would further limit the pool of eligible employees for 
HUBZone firms. Several commenters suggested shorter timeframes, 
including 90 days or 30 days. SBA understands these concerns but 
believes that a shorter timeframe, or no timeframe at all, would allow 
firms seeking HUBZone status to circumvent the intent of the program by 
encouraging individuals to move into a HUBZone designated area shortly 
before the concern applies for certification and then move out of that 
area immediately after the concern is certified, yet still be counted 
as a HUBZone employee. That clearly would not serve the purpose of the 
HUBZone program, which is to promote capital infusion into HUBZone 
areas and to employ individuals living in HUBZones. This aim is best 
achieved by counting as employees individuals who have long-term 
connections in an area. However, SBA agrees with comments noting that a 
residency requirement that is defined too narrowly may constrain firms' 
ability to attract and hire qualified employees, such as students. SBA 
notes that this rule does not intend to prohibit students from counting 
as HUBZone employees if they reside in a HUBZone area for at least 180 
days.
    Several commenters raised concerns that the proposed rule did not 
require any specified period of HUBZone residency after certification 
and believed some period of residence after certification should be 
required in order to reduce the likelihood of firms trying to 
circumvent the residency requirements. SBA believes that the regulation 
requiring an individual to demonstrate an intent to continue to reside 
in a HUBZone indefinitely has been hard to enforce. As such, SBA does 
not believe it would be helpful to keep that requirement. SBA does 
agree, however, that some post-certification residency requirement 
should be imposed. As discussed further below, SBA has revised proposed 
Sec.  126.200(d)(3) to require that an individual must live in a 
HUBZone for at least 180 days after certification in order for that 
individual to be counted as a resident of a HUBZone beyond the first 
year after certification. The same rule will apply to new HUBZone 
resident employees at the time of recertification--meaning that an 
individual who is being considered a HUBZone resident employee for the 
first time at the time of recertification must have lived in a HUBZone 
for at least 180 days prior to the date of recertification to be 
counted towards the 35% requirement, and then must continue to live in 
a HUBZone at least 180 days after recertification in order to count as 
a HUBZone resident employee thereafter. Consequently, as long as an 
individual lived in a HUBZone for at least 180 days prior to 
certification (or recertification, as applicable), he or she will count 
as a HUBZone employee for that entire HUBZone program year, even if the 
individual moves out of a HUBZone within 180 days of certification or 
recertification. However, if an individual moves out of a HUBZone 
within 180 days of certification (or recertification, as applicable), 
that person will not be considered a HUBZone employee in subsequent 
years.
    In addition, the proposed rule acknowledged that more small 
businesses are performing contracts overseas and are faced with the 
problem of how to treat those employees who reside in a HUBZone when in 
the United States or its territories, but are temporarily residing 
overseas to perform a contract. SBA proposed that it will consider the 
residence located in the United States as an employee's residence, if 
the employee is working overseas for the period of a contract. SBA 
believes that as long as that employee can provide documents showing he 
or she is paying rent or owns a home in a HUBZone, then the employee 
should be counted as a HUBZone resident in determining whether the 
small business meets the 35% HUBZone residency requirement. Because of 
the change in Sec.  126.200(d)(3), discussed below--which treats an 
individual as a HUBZone resident if that individual resided in a 
HUBZone at the time his or her employer was certified into the HUBZone 
program or at the time he or she first worked for the certified HUBZone 
small business concern (i.e., the individual was hired after the firm 
was certified into the HUBZone program), so long as he or she continues 
to work for that same firm, even if the area where the individual lives 
no longer qualifies as a HUBZone or the individual has moved to a non-
HUBZone area--this provision would have meaning only with respect to 
firms that have employees performing overseas contracts and are 
applying to the HUBZone program for the first time. An individual who 
already qualified as a HUBZone resident for a certified HUBZone small 
business would continue to be treated as a resident of a HUBZone for 
HUBZone program eligibility purposes as long as he or she continued to 
work for the same certified HUBZone small business.
    SBA received six comments in favor of considering the U.S. address 
of individuals working on overseas contracts as their addresses for 
HUBZone residency purposes and one comment opposed to this change. SBA 
also received three comments suggesting that SBA not consider the 
address of employees working on overseas contracts at all as long as 
they resided in HUBZones at the time of certification. As discussed 
below, that is exactly what the change at Sec.  126.200(d)(3) will 
accomplish. As such, SBA is adopting the rule as proposed.
    SBA also proposed changes to or the elimination of the following 
definitions: Non-metropolitan county, redesignated area, median 
household income, metropolitan statistical area, primary industry 
classification, small disadvantaged business (SDB), and statewide 
average unemployment rate. SBA did not receive any comments regarding 
these definitions and is adopting the changes as proposed.

2. Eligibility Requirements

Section 126.200
    SBA proposed to reorganize Sec.  126.200 to make the section more 
readable and to make the HUBZone eligibility requirements clearer. SBA 
received one comment on proposed Sec.  126.200(a), which addressed the 
ownership requirements for HUBZone small business concerns. The 
commenter requested that SBA make clear that firms owned by tribes and 
Native Hawaiian Organizations (NHOs) need not be structured as 
corporations to be eligible for the HUBZone program but can take any 
legal form. SBA believes this is clear in the regulations. Proposed 
Sec. Sec.  126.200(a)(3) and 126.200(a)(6) provided that in order to be 
eligible for HUBZone certification, a ``concern must be . . . [a]t 
least 51% owned by one or more Indian Tribal Governments or by a 
corporation that is wholly owned by one or more Indian Tribal 
Governments'' or ``[a]t least 51% owned

[[Page 65228]]

by one or more NHO[s], or by a corporation that is wholly owned by one 
or more NHO[s].'' The current HUBZone regulations define ``concern'' to 
mean ``a firm which satisfies the requirements in Sec. Sec.  121.105(a) 
and (b) of this title.'' Section 121.105(b) provides: ``A business 
concern may be in the legal form of an individual proprietorship, 
partnership, limited liability company, corporation, joint venture, 
association, trust or cooperative.'' SBA has implemented this paragraph 
as proposed.
    In proposed Sec.  126.200(b), which addresses the size requirements 
for HUBZone small business concerns, SBA clarified that in order to 
remain eligible as a certified HUBZone small business concern, a firm 
must qualify as small under the size standard corresponding to one or 
more NAICS codes in which it does business. This clarification was 
meant to prevent firms that have grown to be other than small in all 
industries from remaining in the HUBZone program. SBA did not receive 
any comments on this paragraph and it has been adopted as proposed.
    In proposed Sec.  126.200(c), which addresses the principal office 
requirement, SBA proposed to replace the word ``adjoining'' with the 
word ``adjacent'' as it was used to describe HUBZones neighboring 
Indian reservations, because SBA believes this term is more accurate. 
SBA did not receive any comments on this change and will adopt the 
provision as proposed. SBA did, however, receive several comments 
recommending changes to the principal office requirement that would 
take into account long-term investment in a qualified HUBZone area. Two 
commenters recommended that SBA adopt a provision similar to that 
proposed for HUBZone residency, meaning that if a concern makes a 
substantial investment to establish a principal office in a qualified 
HUBZone area and that area loses its HUBZone status, the concern should 
be deemed to continue to have its principal office located in a HUBZone 
for some extended period of time. One of the commenters suggested that 
such period of time should be for at least ten years or for the length 
of a long-term lease. They argue that with such a change, firms would 
make more permanent investments and more substantial leasehold 
improvements in a HUBZone, which would benefit the community at large. 
Another commenter suggested that any firm that has moved its principal 
office into a qualified HUBZone area should be able to have that 
principal office location be considered to be in a HUBZone for at least 
a known, specified amount of time. The commenter believes that firms 
would otherwise be hesitant to expend the substantial resources 
necessary to move into a HUBZone if there is uncertainty as to how long 
such status would last. The commenter points to the possibility that a 
firm could move into a qualified HUBZone area one year, have the area 
lose its HUBZone status the next year, and then get an additional three 
years of HUBZone eligibility through the area's redesignated status. 
The commenter argues that that is not enough time for a firm to recoup 
its moving costs, and, thus, firms would choose not to relocate into a 
HUBZone area. Another commenter noted that even if a small business 
concern located in an area that lost its HUBZone status were willing to 
relocate its principal office to another qualified HUBZone, its 
existing employees might be unable or unwilling to relocate with the 
business. SBA agrees with the commenters that establishing a principal 
office in a HUBZone can be a significant investment for any business, 
especially small businesses, and that by providing more certainty 
regarding a firm's eligibility for the program will further the 
programmatic purpose of encouraging firms to invest in these areas for 
the long term. In response to the comments, the final rule provides 
that a concern that owns or makes a long-term investment (i.e., a lease 
of at least 10 years) in a principal office in an area that qualifies 
as a HUBZone at the time of its initial certification will be deemed to 
have its principal office located in a HUBZone for at least 10 years 
from the date of that certification as long as the firm maintains the 
long-term lease or continues to own the property upon which the 
principal office designation was made. This means that in the example 
cited by the commenter above, the firm's principal office would be 
deemed to be located in a HUBZone for 10 years from the date of its 
certification even though the area's redesignated status would have 
ended after five years. In order to be eligible for a HUBZone contract, 
the firm would still have to meet the 35% HUBZone residency requirement 
and continue to qualify as a small business concern under the size 
standard corresponding to the NAICS code assigned to the contract. The 
final rule also provides that this change would not apply to leases of 
office space that are shared with one or more other concerns or 
individuals, or to other co-working arrangements. SBA does not believe 
that ``virtual offices'' or co-working arrangements rise to the level 
of a significant investment in a HUBZone area that would warrant this 
exception. Similarly, SBA does not believe that the exception should 
apply to subleases, which also do not create a significant investment 
in a HUBZone area.
    Proposed Sec.  126.200(d) addressed the 35% HUBZone residency 
requirement, and SBA received numerous comments in response to this 
paragraph. In proposed Sec.  126.200(d)(1), SBA proposed to change how 
SBA requires a firm to meet the 35% residency requirement when the 
calculation results in a fraction. Previously, when the calculation of 
35% of a concern's total employees resulted in a fraction, SBA would 
round up to the nearest whole number. For example, under the current 
rule, if a firm has 6 total employees, since 35% of 6 is 2.1, then SBA 
would round 2.1 up to 3 and require the firm to employ 3 HUBZone 
residents to meet the 35% HUBZone residency requirement. Under the 
proposed rule, SBA would round to the nearest whole number, rather than 
rounding up in every instance. This means that if 35% of a firm's 
employees equates to X plus .49 or less, SBA would round down to X and 
not up to the next whole number. Thus, in the example above, SBA would 
round 2.1 down to 2 and would require the firm to employ only 2 HUBZone 
residents. SBA received 11 comments in support of the proposed change 
and one opposed. The commenter who opposed the change argued that firms 
should be allowed to round up to meet the requirement. SBA believes 
that this commenter misinterpreted SBA's intent because the new rule 
will provide more flexibility and allow an even greater number of firms 
to meet the 35% residency requirement. Moreover, a rule that mirrors 
the common usage of rounding will reduce confusion for participants and 
applicants. This final rule adopts this change as proposed.
    In order to provide stability and certainty for program 
participants, in proposed Sec.  126.200(d)(3), SBA proposed that an 
employee that resides in a HUBZone at the time of a HUBZone small 
business concern's certification or recertification shall continue to 
count as a HUBZone employee as long as the individual remains an 
employee of the firm, even if the employee moves to a location that is 
not in a qualified HUBZone area or the area where the employee's 
residence is located ceases to be qualified as a HUBZone. Under this 
change, a certified HUBZone small business concern would have to 
maintain records of the employee's original HUBZone address, as well as 
records of the individual's continued

[[Page 65229]]

and uninterrupted employment by the HUBZone small business concern, for 
the duration of the firm's participation in the HUBZone program.
    SBA received 21 comments in support of the proposed change, two 
partially supporting the proposed change, four opposed, and two 
requesting clarification. The comments in support of the proposed 
change agreed with SBA's intent, which is to avoid penalizing 
successful HUBZone firms with employees who, as a result of the firm's 
success, have increased flexibility in deciding where to live. The 
unsupportive comments noted that the change would enable firms to 
maintain their HUBZone status even if they are no longer benefiting the 
communities in which they are located by providing employment 
opportunities to residents. SBA recognizes this legitimate concern, but 
believes it would be more harmful to the public policy goals of the 
program for firms to be punished by their own success by requiring them 
to either fire employees who have moved out of a HUBZone, or to have to 
seek out and hire additional employees who currently live in HUBZones, 
regardless of their staffing needs. In addition, a HUBZone concern 
would always be required to maintain its principal office in a HUBZone, 
which would support increased economic activity in the HUBZone. In 
response to the change made to the term ``reside,'' the final rule also 
makes a change to Sec.  126.200(d) to require an employee to continue 
to live in a HUBZone for at least 180 days after certification (or 
recertification if that was the first time that the individual's 
HUBZone residency was used to qualify the concern). Then, as long as he 
or she continuously remains an employee of the concern, even if the 
employee subsequently moves to a location that is not in a HUBZone or 
the area in which the employee's residence is located no longer 
qualifies as a HUBZone, he or she will continue to count as a HUBZone 
employee for that concern. However, if an individual moves out of a 
HUBZone, or the area where he or she lives loses its status as a 
HUBZone within 180 days, the individual will not count as a HUBZone 
employee at the time the firm seeks recertification. Similarly, if an 
individual has a break in employment by the HUBZone firm, he or she 
will not count as a HUBZone employee upon reemployment unless the 
individual has resided in a HUBZone for at least 180 days prior to the 
date the firm seeks recertification.
    Finally, one commenter asked for clarification regarding an 
employee who lived in a HUBZone at the time he or she was employed by a 
certified HUBZone small business concern, but who moved out of the 
HUBZone prior to the change specified in this final rule. The commenter 
asked for clarification as to whether such an employee, who lost his or 
her status as a HUBZone employee when he or she moved out of a HUBZone 
but is still employed by the certified HUBZone small business concern, 
would once again count as a HUBZone employee under this final rule. The 
new regulatory language of Sec.  126.200(d)(3) specifies that an 
employee who resides in a HUBZone at the time of certification or 
recertification shall continue to count as a HUBZone resident employee 
as long as the individual continues to live in the HUBZone for at least 
180 days after certification. There are three requirements in this 
provision. First, the individual must live in a HUBZone at the time he 
or she is counted as a HUBZone resident in order to qualify a firm as a 
certified HUBZone small business concern. Second, the individual must 
continue to live in a HUBZone for at least 180 days after the 
certification. Third, the individual must continuously work for the 
certified HUBZone small business concern. In the case questioned in the 
comment, the individual lived in a HUBZone at the time he or she was 
counted as a HUBZone resident to qualify a firm as a certified HUBZone 
small business concern. That individual has continued to work for the 
certified HUBZone small business concern since its certification. Thus, 
as long as the individual continued to live in a HUBZone for at least 
180 days after the certification date, that individual would count 
today as a HUBZone employee. It would not matter that for some certain 
amount of time the individual did not count as a HUBZone employee.
    SBA proposed to clarify in Sec.  126.200(g) that the concern and 
its owners cannot have an active exclusion in the System for Award 
Management and be certified into the program. SBA believes that this 
logically follows from a debarred or suspended status, but amended the 
regulations for clarity nevertheless. Debarred and suspended entities 
are ineligible for Federal contracting assistance and would thus not 
receive any benefits from being certified as a HUBZone small business 
concern. SBA received one comment in support of this change and is 
adopting the rule as proposed.
Section 126.204
    SBA proposed changes to Sec.  126.204 in order to clarify that a 
HUBZone small business concern may have affiliates, but the affiliate's 
employees may be counted as employees of the HUBZone applicant/
participant when determining the concern's compliance with the 
principal office and 35% percent HUBZone residency requirements. The 
proposed changes to Sec.  126.204 clarified that where there is 
evidence that a HUBZone applicant/participant and its affiliate are 
intertwined and acting as one, SBA will count the employees of one as 
employees of the other. Further, the proposed rule stated the HUBZone 
applicant or concern must demonstrate to SBA a clear line of fracture 
between it and any affiliate in order for SBA to not count the 
affiliate's employees when determining the concern's principal office 
or compliance with the 35% residency requirement. This has always been 
SBA's policy and SBA merely sought to eliminate ambiguities in the 
regulation.
    When looking at the totality of circumstances to determine whether 
individuals are employees of a concern, SBA will review all 
information, including criteria used by the Internal Revenue Service 
(IRS) for Federal income tax purposes and those set forth in SBA's Size 
Policy Statement No. 1. This means that SBA will consider the employees 
of an affiliate firm as employees of the HUBZone small business if 
there is no clear line of fracture between the business concerns in 
question, the employees are in fact shared, or there is evidence of 
intentional subterfuge. When determining whether there is a clear line 
of fracture, SBA will review, among other criteria, whether the firms 
operate in the same or similar line of business; operate in the same 
geographic location; share office space or equipment; share any 
employees; share or have similar websites or email addresses; share 
telephone lines or facsimile machines; have entered into agreements 
together (e.g., subcontracting, teaming, joint venture, or leasing 
agreements) or otherwise use each other's services; share customers; 
have similar names; have key employees participating in each other's 
business decisions; or have hired each other's former employees. 
Conversely, SBA would not treat the employees of one company as 
employees of another for HUBZone program purposes if the two firms 
would not be considered affiliates for size purposes. SBA will look at 
the totality of circumstances to determine whether it would be 
reasonable to treat the employees of one concern as employees of 
another for HUBZone program purposes only where SBA first determines 
that the two firms should be considered affiliates for size purposes.

[[Page 65230]]

    SBA received seven comments on this proposed change. All seven 
comments supported SBA's proposed amendment clarifying that employees 
of affiliates are considered employees of a HUBZone participant or 
applicant if there is no clear line of fracture between the two. 
Several of the comments requested clarifying examples. One commenter 
was concerned that any contact between a parent company or one or more 
sister companies could cause SBA to aggregate the employees of those 
concerns in determining whether 35% of the concern's employees reside 
in a HUBZone. That was not SBA's intent. In response, SBA has clarified 
that minimal business activity between the concern and its affiliate 
and the use of common back office or administrative services between 
parent and/or sister concerns will not result in an affiliate's 
employees being counted as employees of the HUBZone applicant or 
HUBZone small business concern. Several commenters requested additional 
clarification on how SBA would treat the employees of sister companies 
for entity-owned companies. These comments recommended that SBA state 
that there would be a presumption that the employees of sister-owned 
companies of entities should not be counted. SBA does not believe that 
such a presumption is needed. This section clarifies when employees 
``of an affiliate'' should be counted as employees of the applicant or 
HUBZone small business concern. Under Sec.  121.103(b)(2)(ii) of SBA's 
size regulations, business concerns owned and controlled by Indian 
Tribes, ANCs, NHOs, or CDCs are not considered to be affiliated with 
other concerns owned by these entities because of their common 
ownership, common management, or common administrative services. 
Affiliation may be found for other reasons. Thus, if the 
interconnections between sister companies of a tribe, ANC, NHO or CDC 
are merely based on common ownership, management or performance of 
administrative services, the firms would not be considered affiliates 
and would not be aggregated for HUBZone eligibility purposes. It is 
only where affiliation exists between entity-owned sister companies 
that SBA might count employees of a sister company as employees of the 
HUBZone applicant/participant when determining the concern's compliance 
with the principal office and 35% percent HUBZone residency 
requirements, and then only if there is not a clear line of fracture 
between the business concerns.
    SBA has also added an example to Sec.  126.204, which refers to the 
definition of ``employee'' laid out in Sec.  126.103.
Section 126.205, Section 126.206, Section 126.207
    In Sec.  126.205, SBA proposed to delete the statement that 
``Participation in other SBA Programs is not a requirement for 
participation in the HUBZone Program.'' SBA believes that this language 
is unnecessary and may merely confuse prospective HUBZone small 
businesses.
    In Sec.  126.206, SBA proposed to replace the term ``non-
manufacturers'' with ``nonmanufacturers'' to be consistent with SBA's 
regulations at Sec.  121.406(b).
    SBA proposed to amend the title and text of Sec.  126.207 to 
clarify that a HUBZone small business concern may have multiple 
offices, as long as the firm's principal office is located in a 
HUBZone, and to clarify that a different rule applies to concerns owned 
by Indian Tribal Governments.
    SBA did not receive any comments in response to the proposed 
changes to Sec. Sec.  126.205, 126.206, and 126.207. Therefore, SBA is 
adopting the proposed changes as final.

3. Certification

    The HUBZone program is a certification program. In other words, a 
small business concern must submit an application and supporting 
documents to SBA in order for SBA to determine eligibility and certify 
the company into the program. SBA proposed several clarifications to 
its certification process.
Section 126.300
    SBA proposed to divide Sec.  126.300 into several paragraphs to 
make it clearer and more readable, to move the discussion of th