Small Business Size Regulations; Rules of Procedure Governing Cases Before the Office of Hearings and Appeals

AGENCY:

Small Business Administration.

ACTION:

Proposed rule.

SUMMARY:

The Small Business Administration (SBA) proposes to amend its small business size regulations and the regulations applying to appeals of size determinations. The proposed rule would amend the definitions of affiliation, annual receipts, and employees. It would also make procedural and technical changes to cover new programs such as SBA's HUBZone program and the government-wide Small Disadvantaged Business program. The proposed rule would codify several long-standing precedents of SBA's Office of Hearings and Appeals and would clarify the jurisdiction of that office.

DATES:

Comments must be received on or before January 21, 2003.

ADDRESSES:

Written comments should be addressed to John W. Klein, Associate General Counsel for Procurement Law, Small Business Administration, 409 3rd Street, SW., Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT:

Laura M. Eyester, Office of General Counsel, (202) 619-1801.

SUPPLEMENTARY INFORMATION:

SBA's small business size regulations (13 CFR part 121) are used to determine eligibility for all SBA and Federal programs that require an entity to be a small business concern. In the past, to be considered small, concerns were required to qualify under a particular size standard that corresponded to a four-digit Standard Industrial Classification (SIC) code. Effective October 1, 2000, to be considered small, concerns are required to qualify under a particular size standard that corresponds to the six-digit North American Industrial Classification System (NAICS) code. SBA published its final rule setting forth the various NAICS codes and corresponding size standards at 65 FR 30836 (May 15, 2000). SBA published a technical correction to the final at 65 FR 53533 (September 5, 2000). That final rule changed all references to SIC codes in part 121 to NAICS codes. This proposed rule would not change any size standards currently corresponding to specific NAICS codes.

With a few exceptions, SBA size standards are based on either average annual receipts or number of employees, depending on the industry. When measuring a concern's size, the receipts or employees of affiliated concerns are included. The proposed rule would modify the definitions of affiliation, annual receipts, and number of employees. The proposed changes to part 134 would clarify the jurisdiction of SBA's Office of Hearings and Appeals (OHA) and make certain technical amendments.

Section-by-Section Analysis

SBA proposes to amend § 121.102 by adding a new paragraph (d) that would recognize that there currently exists an internal Size Policy Board at SBA that is responsible for making recommendations to the Administrator on size standards, other size eligibility requirements, and size protest procedures. In addition, SBA proposes to amend § 121.103 to specifically incorporate into the definition of “affiliation” certain provisions that were previously contained in the regulations. Because there may have been some confusion regarding the more generalized affiliation language when SBA amended its regulations in 1996, SBA believes it is necessary to again specifically state other bases of possible affiliation in the regulations. The section would be revised to state that control may be affirmative or negative, provide an example of negative control, state that control may be exercised indirectly through a third party, and state that affiliation may be found under the totality of the circumstances even though no single factor is sufficient to constitute affiliation. These three changes codify long-standing OHA rulings. See, e.g., Size Appeal of Jensco Marine, Inc., SBA No. SIZ-4330 (1998); Size Appeal of National Welders, SBA No. SIZ-4315 (1998); Size Appeal of First American Tax Valuation, Inc., SBA No. SIZ-4206 (1996); and Size Appeal of Field Support Services, Inc., SBA No. SIZ-4176 (1996). (OHA decisions cited in this preamble can be located at www.sba.gov/oha/searchpage.html or by contacting OHA by e-mail at oha@sba.gov or by phone at 202-401-8200.)

This proposed rule would change the title of § 121.103(b) from “Exclusion from affiliation coverage” to “Exceptions to affiliation coverage” for clarity. In addition, the proposed rule would amend § 121.103(b)(2) to clarify the exception to affiliation for Indian tribes (including Alaska Native Corporations), Community Development Corporations (CDCs) or Native Hawaiian Organizations (NHOs). Specifically, the proposed rule would specify that the exception applies whether the tribe, CDC or NHO owns the concern whose size is at issue directly, or through another entity, which is wholly-owned by the tribe, CDC or NHO. The proposed rule would also provide that affiliation could not be found among several tribally, ANC, CDC or NOH-owned concerns based on common management. This is an extension of the current regulation, which precludes affiliation based solely on common ownership. SBA believes that this change is particularly needed in the context of tribally-owned concerns where tribal board members often are also board members of tribally-owned concerns. SBA specifically asks for comments as to whether this exception from affiliation goes far enough, or whether SBA should provide the same exception to affiliation as that contained for the 8(a) program in § 124.109(c)(2)(iii). SBA notes, however, that the exception to affiliation for the 8(a) program is statutorily based, while the general exception contained in § 121.103(b)(2) is not.

The proposed rule would also add language to both § 121.103(b)(2) and (b)(6) to clarify that SBA may find affiliation other than through common ownership or common management, and with respect to approved mentor/protege relationships, other than on the basis of the mentor/protege agreement. This is not a change in policy, but a clarification of existing policy.

SBA proposes two changes to § 121.103(c). Section 121.103(c)(1) would be amended by adding the word “voting” to clarify that only voting stock is considered in determining affiliation. In addition, SBA proposes adding a sentence to § 121.103(c)(2) stating that the presumption of control may be rebutted by showing that control does not in fact exist. For example, in Size Appeal of Tri-Fuels, Inc., SBA No. SIZ-3563 (1992), OHA held that the presumption that minority shareholders owning substantially equal blocks of stock each control a firm was rebutted where a shareholder's agreement specified that each of the shareholders could appoint one of five directors. The proposed rule would also add a new § 121.103(c)(3), which would provide that where a concern's voting stock is widely held and no single block of stock is large as compared with all other stock holdings, SBA will deem the concern's Board of Directors and its Chief Executive Officer (CEO) or President to have the power to control the concern in the absence of evidence to the contrary. In the absence of evidence to the contrary, SBA will find control in such circumstances to rest with the Board of Directors and with the highest ranking officer of the concern (either its CEO or President) because control of the concern must rest somewhere.

Section 121.103(d) discusses affiliation, which arises under stock options, convertible debentures, and agreements to merge. SBA gives present effect to all such arrangements in determining affiliation. SBA proposes to amend the section by setting forth exceptions to this “present effect” rule that have been developed by OHA rulings. See, e.g., Size Appeal of Consolidated Industries, Inc., SBA No. SIZ-4235 (1997). One proposed exception would not give present effect to agreements to open or continue negotiations towards the possibility of a merger or a sale of stock at some later date. Another proposed exception would not give present effect to options, debentures, and agreements that are subject to conditions that are incapable of fulfillment, speculative, conjectural, remote, or unenforceable under state or Federal law.

Section 121.103(e) covers control through common management and would be amended to clarify that affiliation arises when an officer, director, managing member, or partner controls two concerns. Section 121.103(f) would expand the current regulation at § 121.103(a)(3) covering the concept of “identity of interest.” The concept is that two or more persons with an identity of interest, such as members of the same family or with common investments in more than one concern, may be treated as a single party for size determination purposes. See, Size Appeal of Golden Bear Arborists, SBA No. SIZ-1899 (1984). Although this provision was deleted as a separate basis for affiliation from part 121 in 1996, when SBA streamlined its regulations, see, 13 CFR 121.401(d) (1995), the concept remained under the “General Principles of Affiliation,” and OHA continues to use the identity of interest concept in ruling on affiliation issues. See, e.g., Size Appeal of Lyons Security Service, Inc., SBA No. SIZ-4264 (1997). SBA believes that for purposes of clarity this rule should be explicitly set forth as a separate basis for finding affiliation in the size regulations.

SBA also proposes to add § 121.103(g), “Affiliation based on the newly organized concern rule.” This proposed section provides that affiliation may arise where former officers, directors, stockholders, managing members (in a limited liability corporation) or key employees of one concern organize a new concern in the same or related industry and serve as its officers, directors, stockholders, managing members or key employees, and the first concern will provide contractual, financial, or other assistance to the new concern. This provision also previously appeared in SBA's size regulations, and SBA believes that it is appropriate to add it back to the regulations as a separate basis for finding affiliation. SBA notes that even after the regulatory change removing the newly organized concern concept as a separate basis for finding affiliation, OHA has continued to use it from the general principles of affiliation contained in the regulations to find affiliation. See, e.g., Size Appeal of Lyons Security Service, Inc., supra; Size Appeal of Frontier Applied Sciences, Inc., SBA No. SIZ-4316 (1998).

SBA proposes to redesignate the joint venture regulation currently at § 121.103(f) to § 121.103(h), clarify it, and define its key terms. SBA receives numerous inquiries concerning the definition of the terms “joint venture” and “teaming arrangement.” Therefore, SBA proposes to add definitions of these terms in its regulations. SBA is using the definitions of these terms as set forth in parts 9 and 19 of the Federal Acquisition Regulation (FAR), title 48 of the Code of Federal Regulations, for consistency in the government contracting field. In addition, in § 121.103(h)(5), SBA proposes to add language clarifying that for size purposes a concern must include in its revenues its proportionate share of joint venture receipts, or in its total number of employees its proportionate share of joint venture employees. A concern that was found to be affiliated through the “ostensible subcontractor” rule cannot, however, claim that because SBA found there to be a joint venture in effect for a particular contract it can exclude the receipts/employees of its subcontractor (i.e., the ostensible subcontractor), which SBA deemed to be a joint venturer. SBA will exclude the proportionate share of receipts/employees only of true joint venture partners.

SBA is considering another change to the joint venture regulation, as well. SBA's regulations allow joint ventures to be considered small for larger procurements when certain requirements are met. See § 121.103(f)(3). In general, SBA regards joint ventures as short term relationships, which enable two or more concerns to enter into a business relationship to perform a specific contract. SBA is considering adopting a rule that would allow two or more small businesses to form a joint venture relationship that would go beyond a specific contract and still afford them the exclusion from affilation (if the other requirements are met). In other words, the joint venture could be an ongoing relationship that would allow the concerns to seek out several different larger contract opportunities and still get an exclusion from affiliation without requiring the entities to form a separate joint venture for each contract opportunity. SBA is specifically requesting comments on this proposal.

SBA proposes several changes to § 121.104, which pertain to how the annual receipts of a concern are calculated. On January 31, 1996, SBA amended its size regulations to simplify the method by which it determines average annual receipts (aar). Under the current regulations, SBA bases its calculation of a concern's aar solely on information contained in the concern's Federal income tax returns over its last three completed fiscal years. 61 FR 3280 (January 31, 1996). Previously, SBA could rely either on a concern's regular books of account or Federal income tax returns to determine a concern's aar. That policy change was made by SBA in an effort to simplify its size regulations by using the information a business concern reports to the Internal Revenue Service (IRS) for tax purposes to determine the annual receipts of a concern. The 1996 revisions also deleted SBA's requirement that a concern whose small business size status had been protested had to restate its receipts based on the accrual method of accounting if its books of account or tax returns were prepared using a different method of accounting. Since 1996, a number of issues have arisen concerning that revision and SBA now believes the public would benefit from additional regulatory guidance on these matters. In addition, OHA has rendered several significant rulings relating to the calculation of annual receipts and SBA believes these rulings should be codified in SBA's size regulations so the public is aware of them.

Thus, SBA is proposing to modify its definition of receipts in § 121.104(a)(1). This modification would identify the items on a Federal tax return that are to be used to calculate receipts. Currently, the regulation states that receipts consist of “total income” and “gross income” plus the “cost of goods sold.” Although these terms as defined by the IRS include income from all sources, SBA has received comments from some businesses stating that certain types of income not explicitly specified in the regulations could be excluded in determining receipts. To eliminate any such misinterpretation, SBA is proposing to remove the words “total income” and “gross income” and add in their place “gross receipts,” “gross sales,” and “other income.” This change in terminology merely lists the items on a Federal tax return that comprise all or part of total or gross income. In addition, SBA is proposing a revision to the definition of receipts to include interest, dividends, rents and royalties received by partnerships, S corporations, and sole proprietorships. For corporations, income from these sources is included in total income as reported on IRS Form 1120. However, for partnerships and S corporations, these items are reported separately from total income on Schedule K of IRS Form 1165 and 1120S, respectively, and on Schedule C or S of IRS Form 1040 for sole proprietorships. Business entities such as limited liability corporations (LLCs) can elect the tax entity (partnership, corporation, or disregarded entity) that best suits their need. This is often referred to as “check the box.” See 26 CFR 301.7701-3 (located at http://www.access.gpo.gov/nara/cfr/cfr-retrieve.html#page1 ) and IRS Form 8832 (located at http://www.irs.gov/forms_pubs/forms.html ). To be consistent with the corporate tax return, and to continue SBA's long-standing policy of including income from all sources in its definition of receipts, SBA proposes to revise § 121.104(a)(1) to specifically include these sources of income in the definition of receipts.

SBA also proposes to expand its exclusion of receipts received by an agent for another. The existing regulation allows this exclusion only for agents specifically identified in the regulation, such as a travel agent. While the proposed regulation would continue to list those agency-type business entities for which amounts collected for another would be excluded, it would also permit SBA to find a similar agent-type situation to be equally excluded. SBA's concern is that this provision be applied consistently. Thus, SBA would exclude amounts collected for another only when a specific type of business (or industry) deomonstrates that that is the practice in the industry. SBA would not exclude amounts based on specific facts of one business entity. This revision will eliminate the need to conduct a separate study and rulemaking to expand the list of agents that can exclude amounts they receive for another and apply a general principle in the case of agents.

Finally, SBA would also clarify this section to state that the only exclusions from the definition are those specifically provided for in the section and that all other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, and employee-based costs such as payroll taxes, may not be excluded from receipts. See, e.g., Size Appeal of Uniband, Inc., SBA No. SIZ-4326 (1998); Size Appeal of Aliron International, Inc., SBA No. SIZ-4317 (1998).

Proposed § 121.104(a)(1) would provide that the Federal income tax return and any amendments filed with the IRS on or before the date of self-certification must be used to determine the size status of a concern, and that SBA will not consider tax returns or amendments filed with the IRS after the initiation of a size determination. This proposed change would preclude a concern that is the subject of a size protest from providing revised Federal tax returns to SBA while a size determination or appeal is pending. If SBA were to accept amended tax returns prepared after initiation of a size determination, SBA would constantly be re-evaluating cases that had already been completed or that were substantially prepared. This would invariably lead to delays in the size determination process and, in the case of pending procurements, delays in contract award. A business concern is expected to base its small business self-certification on information existing at that time. This rule is in accord with OHA rulings that size status must be based on documents in existence and available as of the date of self-certification. See, e.g., Size Appeal of MTB Investments, Inc., SBA No. SIZ-4239 (1997); Size Appeals of J.L. Associates, Inc. and HLJ Management Group, Inc., SBA No. SIZ-3102 (1988). Where a concern is determined to be other than small, but legitimately erred in reporting its income on its Federal tax returns, it could subsequently request recertification as a small business from SBA based on amendments filed with the IRS. SBA then would be able to conduct a review of the amended returns without delaying the size determination or the Federal procurement process.

Proposed § 121.104(a)(2) would cover situations where a concern has not filed a Federal income tax return for one or more of its most recently completed three fiscal years. This proposed regulation is intended to codify OHA's ruling in Size Appeal of Troy Systems, Inc., SBA No. SIZ-4296 (1998). In that appeal, a concern had not filed a Federal income tax return for its most recently completed fiscal year at the time it self-certified as small. The appellant argued that because the tax return was not available, it did not have to submit any information for that year. OHA rejected that argument. The proposed rule provides that in such a situation, SBA may use any other information that is available, such as an audited financial statement or affidavit from the concern's accountant or chief financial officer.

Section 121.104(b)(3) is the formula SBA uses to determine annual receipts when the concern has a “short year” (as defined by the IRS) as one of the years within the period of measurement. The proposed rule would not change the substance of the formula. It would merely clarify the language for ease of use.

Section 121.104(d) applies to the annual receipts of a concern's affiliates and requires the inclusion of an affiliate's receipts during the entire period of measurement, not just the period after affiliation arose. This rule has existed for many years and SBA proposes to simply clarify the language.

Section 121.106 addresses how SBA counts a concern's number of employees. SBA proposes to amend § 121.106(a) to clarify that SBA may utilize the same criteria used by the IRS for Federal income tax purposes in determining whether individuals are employees. See, e.g., IRS Publication 15A, “Employer's Supplemental Tax Guide” (located at http://www.irs.gov/forms_pubs/forms.html ), which provides guidance on whether a person is a common-law employee, a statutory employee, a statutory nonemployee, or an independent contractor. In addition, SBA's proposed amendment states that it considers “leased” employees to be employees of the concern. The proposed rule continues to direct SBA to consider the totality of the circumstances when determining whether certain individuals are to be considered employees of the concern in question. This “totality of the circumstances” language stems from SBA Size Policy Statement No. 1, published in the Federal Register on February 20, 1986, 51 FR 6099, and that Size Policy Statement continues to have effect.

Further, SBA proposes to amend § 121.106(b)(4) by explicitly describing how employees of affiliates and former affiliates are treated, rather than simply referring to the manner in which annual receipts of affiliates and former affiliates are treated in § 121.104.

SBA also proposes to revise Footnote 14 to the Table of Small Business Size Standards by NAICS Industry in § 121.201. Specifically, the proposed revisions to Footnote 14(b) adds language to clarify that a Federal procurement involving a range of environmental services to restore a contaminated environment does not need to include remedial action as one of three activities to be classified under this size standard. SBA has learned that some Federal agencies have interpreted this footnote to require remedial action to be part of the procurement before it will classify the procurement under “Environmental Remediation Services.” This was not the intention of SBA when it established the size standard. SBA intended this size standard to apply to large scale, multi-disciplined procurements involving environmental remediation. To be classified under Environmental Remediation Services, a procurement must satisfy two requirements. First, the general purpose of the procurement is to restore a contaminated environment. Second, the procurement requires tasks to be performed in a range of activities which can be classified in three or more NAICS industries, or sub-industries which have separate size standards, and that no industry or sub-industry accounts for 50 percent or more of the procurement. The statement “the general purpose of the procurement must be to restore a contaminated environment” was intended to mean that the procurement would be associated with environment remediation by performing a range of activities that would contribute to the eventual cleanup of a site. To clarify SBA's intent, the footnote is revised by stating “the general purpose of the procurement must be to restore or directly support the restoration of a contaminated environment * * *.” Also, added is a list of activities usually associated with environmental remediation and related activities. This language makes clear that a procurement involving several activities, all in separate NAICS codes, that directly contribute to the eventual cleanup of a contaminated environment can be classified under this size standard, even though another procurement would be awarded to perform the actual cleanup.

SBA proposes to eliminate the existing dual size standard that currently applies to applicants for SBA financial assistance (§ 121.301(a)), and replace it with a single size standard requirement. Under the current regulation, an applicant for financial or disaster assistance must be small under two size standards. An applicant, along with its affiliates, must be small for the size standard for the industry in which the applicant alone is primarily engaged, and for the industry in which the applicant along with its affiliates is primarily engaged. Since most applicants are small businesses well below SBA's size standards, they generally do not have extensive affiliation relationships with other business concerns. Thus, SBA believes a dual size standard requirement is not needed for these programs. SBA also believes that the wording of the dual size standard is not clear, and has caused confusion as to its proper application. For these reasons, SBA is proposing a single size standard requirement in which a business concern eligible for financial and disaster assistance is a concern that, combined with its affiliates, does not exceed the size standard of the primary industry of the applicant concern alone.

Section 121.301(d)(1), which contains the size standard for surety bond guarantee assistance, would be amended by adding the words “together with its affiliates” to make it clear that the receipts of all affiliates must be included. This change is for clarity purposes only, as SBA always includes the receipts or employees of a concern's affiliates when determining the concern's size. SBA also proposes to revise § 121.301(e) to state that an applicant for financial assistance must use all of the assistance within a labor surplus area (LSA) in order to obtain the benefit of the 25% size standard differential. The current regulation does not clearly provide what percentage of work must be performed in an LSA. It has always been SBA's intent to require 100% of the assistance be used in an LSA in order to get the size differential, but a recent case has raised the question as to whether the regulation could be read to permit less than 100% of the assistance to be used in an LSA. This proposed change would clarify SBA's position in this regard.

Section 121.302 addresses when SBA determines the size status of an applicant for SBA financial assistance. The section would be amended to include a provision for financial assistance from a Small Business Investment Company (SBIC) licensee and from a New Markets Venture Capital Company.

Section 121.401, covering what procurement programs are subject to size determinations, would be amended for plain language purposes.

The proposed rule would amend the section heading for § 121.402 to read “What size standards are applicable to Federal Government Contracting programs?” In addition, SBA proposes to amend § 121.402(a) to state that a contracting officer (CO) must use the size standard in effect at the time the solicitation is issued. If SBA amends a size standard and it becomes effective after the solicitation is issued, then the CO would not be required to amend the solicitation and use the new size standard. However, the proposed regulation does note that if the size standard is amended and becomes effective before the date initial offers are due, the CO may modify the solicitation and use the new size standard. This has been a long-standing policy of SBA's, and SBA believes it should be specifically set forth in the regulations for clarity purposes.

Section 121.404 would be amended to add additional exceptions to the general rule that the size status of a concern is determined as of the date the concern submits a written self-certification that it is small to the procuring agency as part of its initial offer including price. Proposed § 121.404(a)(1) would provide that a concern applying to be certified as a Participant in SBA's 8(a) Business Development (8(a) BD) program, as a small disadvantaged business (SDB), or as a HUBZone small business must qualify as small as of the date of certification by SBA. This is not a change in SBA policy. SBA currently requires a concern to be small at the date of certification for these programs, but those regulatory requirements are contained in the program specific regulations only. The proposed rule would simply add those requirements to the size regulations as well. When requiring an 8(a) BD, HUBZone, or SDB applicant to be small for “its primary industry classification,” the concern's primary industry classification is determined by looking solely at the applicant concern (i.e., by excluding its affiliates), but the size of the concern is determined by including the receipts or employees of all affiliates.

Another new exception would apply to the case where a solicitation is modified so that initial offers are no longer responsive to the solicitation. In such a case, proposed § 121.404(a)(4) would provide that a concern must recertify that it is small at the time it submits a responsive offer which includes price to the modified solicitation. SBA believes that this makes sense and flows from existing SBA policy. If a solicitation changes drastically so that a previous offer would no longer be responsive, it is in effect a new solicitation. As such, a firm must certify its status as a small business with respect to the new solicitation.

The proposed rule would also add an exception for the subcontracting program. Under proposed § 121.404(a)(5), for subcontracting purposes, a concern must qualify as small as of the date that it certifies that it is small for the subcontract. The date of offers for or the award of the prime contract are not relevant to whether a concern is small for a subcontract. In addition, the applicable size standard would be the size standard in effect at the time the concern self-certifies that it is small for the subcontract, not the size standard that may have been in effect when the prime contract was awarded or otherwise.

The proposed rule would add a final exception applying to two-step sealed bidding under subpart 14.5 of the FAR, 48 CFR. Under two-step sealed bidding, the proposed rule would require that a concern must qualify as small as of the date that it certifies that it is small as part of its step one proposal. SBA believes that it makes sense to establish size as of the date of the step one proposal in order to give certainty early on in the process who is and who is not eligible for such an award.

Proposed § 121.404(b) would specify that a concern that qualified as a small business at the time it receives a contract is considered to be a small business throughout the life of that contract. This is not a change in policy, but merely puts into the regulations SBA's long-standing position on this issue. Proposed § 121.404(c) covers the case where an existing contract is “renewed” by a procuring activity. SBA believes that the renewal of an existing contract is a term that is imprecisely used. Renewal should refer to a follow-on contract. In that case, the date at which size is determined is set by the general rule specified in § 121.404(a) (i.e., the date that the concern submits a written self-certification that it is small to the procuring agency for the renewal contract). Sometimes the term “renewal” is incorrectly used where a procuring agency exercises an option. In that case, there is no new contracting action. The authority for the option relates back to the original contract. As set forth in proposed § 121.404(b), mentioned above, as long as a concern qualified as a small business at the time it receives a contract, it is considered to be a small business throughout the life of that contract. Therefore, a concern that was small at the time of award would always be considered a small business for purposes of any options relating to that contract. Proposed § 121.404(b) would specifically provide that where a concern grows to be other than small, the procuring agency may exercise options and still count the award as an award to a small business. SBA is, however, considering a rule which would place a limit on the amount of time a concern would be deemed a small business. Specifically, SBA is considering a separate rule making that would permit a procuring agency to treat a concern as a small business for no more than 5 years from the date of award.

Section 121.406(b)(1)(ii) would be amended to delete the requirement that a nonmanufacturer must normally sell the items being supplied to the general public. This rule was based on provisions of the Walsh-Healey Public Contracts Act, which permitted Federal acquisitions of supplies only from manufacturers or “regular dealers.” One of the requirements for being a regular dealer was to sell items to the general public. These provisions of the Walsh-Healey Act were repealed by the Federal Acquisition and Streamlining Act of 1994. SBA believes that requiring a firm to sell to the general public is overly restrictive. A firm may be a legitimate, viable business selling exclusively to government entities. SBA does not believe that a firm that sells only to the government should be excluded from being considered a small business just because it does not generally sell items to the general public. Therefore, so long as a firm normally sells the type of item either to public or private entities, it may qualify as a small business nonmanufacturer under SBA's size regulations. The proposed rule would also change the provision to require the concern to normally sell the same “type of item.” The current regulation simply states that a concern must sell “the items” being supplied. SBA believes that the current provision could be read to be overly restrictive. Under the proposed rule, a firm would not need to have a track record of selling the exact item, but only items of the same type.

The proposed rule would also add clarifying language to § 121.406(b)(2) to explain what a firm that makes changes to an item and then resells it must do in order to qualify as an eligible small business manufacturer. The current regulation states that firms that perform only minimal operations upon the item being procured do not qualify as manufacturers. The proposed rule adds language, which states that “[f]irms that add substances, parts, or components to an existing end-item to modify its performance will not be considered the end-item manufacturer where those identical modifications can be performed by and are available from the manufacturer of the existing end item.” If a firm adds something to an item that the manufacturer of that existing item does not provide, the firm will be considered the manufacturer of the ultimate end item (i.e., the item plus the addition). For example, if firm A manufactures a saw, the Government wants to purchase a saw with a safety switch, and firm B adds a safety switch to the saw, firm B, and not firm A, will be considered the manufacturer of the end item (i.e., saw with safety switch) provided firm A does not itself make or provide a saw with safety switch. Similarly, a firm that merely installs a video card that the manufacturer of a computer could have installed will not be considered the manufacturer of computer.

Currently, under § 121.410, a business concern is small for purposes of a subcontract awarded by a Federal prime contractor if: (a) For subcontracts of $10,000 or less, the concern bidding on the subcontract has 500 or fewer employees averaged over each pay period of the previous year, or, (b) for subcontracts of more than $10,000, the concern bidding on the subcontract is no larger than the size standard corresponding to the NAICS industry that best represents the scope of work of the subcontract.

This rule proposes to eliminate the 500-employee size standard provision for subcontracts of less than $10,000 and require that the size standard of the NAICS industry that best matches the purpose of the subcontract be used. This change merely adopts the size standard policy now in effect for subcontracts of $10,000 or greater.

SBA is proposing this change for two reasons. First, this proposed change makes the size standards requirements consistent for all prime Federal contracts and for subcontracts awarded by prime contractors. Under this policy, the small business status would not change depending on the size of a subcontract or whether the contract was awarded as a Federal prime contract or as a subcontract of a Federal prime contract. SBA is also concerned about inconsistencies of two-tiered subcontracting size standards. A prime contractor awarding a subcontract classified in a NAICS industry with a receipt-based size standard (primarily in the construction and service industries) will have a higher size standard associated with subcontracts of less than $10,000 than the size standard for the same type of subcontract but valued over $10,000. For example, a subcontract for analytical testing services falls under NAICS code 541620, Environmental Consulting Services, and SBA has established a size standard for this industry of $6 million in average annual receipts. If the value of the subcontract is more than $10,000, a small business is defined as one with $6 million or less in average annual receipts. A firm of this size has about 60 to 70 employees. Yet, under the current regulations, a subcontract of less than $10,000 allows firms of up to 500 employees to qualify as small businesses. SBA believes that one size standard should apply to the same type of subcontracts, regardless of their value.

Second, the two-tiered size standard based on the size of the subcontract is not widely known or followed by prime contractors and small businesses. SBA believes establishing a policy of having a consistent size standard requirement at the prime and subcontracting level is more desirable than retaining and educating the prime contractors and subcontractors about two-tiered size standards. Most prime contractors verify the status of their small business subcontractors based on the size standard of the subcontractor's primary NAICS industry or based on the size standard of the prime contract. These methods for ascertaining the small business status of a subcontractor lead to an incorrect small business determination in many cases, since the subcontractor must be small based on the industry of the subcontract, which is not necessarily the same as the primary industry of the subcontractor or the industry of the prime contract. SBA believes that the proposed change reflects how most prime contractors have been administratively determining the small business status of their subcontractors. Enforcing the current two-tiered size standard regulation would in essence subject prime contractors to a different size standard requirement than generally being followed. Thus, change should have little if any impact.

SBA invites comments to the elimination of the two-tiered subcontracting size standards requirement. SBA also welcomes suggestions on other approaches to size standards for the Subcontracting Program. Alternative size standards should address how they would be an improvement over the current and proposed subcontracting size standards and how they best protect the interests of small business.

Section 121.411 would be amended by deleting the words “Procurement Automated Source System (PASS)” and substituting the words “Procurement Marketing & Access Network (PRO-Net).” PASS no longer exists and has been replaced by PRO-Net. PRO-Net is an online database of information on thousands of small businesses. PRO-Net serves as a search engine for contracting officers, a marketing tool for small companies, and a “link” to procuring opportunities and other important information.

Sections 121.601 through 121.604 would be changed by removing all references to “Minority Enterprise Development” and “MED” and substituting “8(a) Business Development” and “8(a) BD.” SBA no longer uses the former terms.

The proposed rule would amend § 121.702(a) to recognize that for purposes of the SBIR program a joint venture is permitted where each entity to the venture is at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States. The current requirement does not contain such an exception for joint ventures, and requires 51 percent direct ownership by individuals who are U.S. citizens or permanent resident aliens in every case. This change is being made to make the size regulations consistent with a recent change made to the SBIR Policy Directive.

SBA proposes to amend § 121.1001 entitled “Who may initiate a size protest or request a formal size determination?” Section 121.1001(a)(1)(i) presently allows “any offeror” to file a size protest in connection with a particular procurement or sale. The purpose of the proposed regulation is to give standing to those concerns whose successful challenge would enable them to compete for award. This section would be changed to provide that “any offeror whom the contracting officer has not eliminated for reasons unrelated to size” may file a protest. An offeror that has been eliminated for reasons unrelated to size would not be able to compete for award if the protest were successful, and, thus, should not have standing to question another firm's size status. This change would codify long-standing OHA precedent on this issue. See, e.g., Size Appeal of Arcata Associates, Inc., SBA No. SIZ-3377 (1990).

The proposed rule would amend § 121.1001(a)(5)(iii) applying to protests under the SDB program to delete the reference to the Associate Administrator (AA) for MED, and substitute the SBA Associate Administrator for 8(a) Business Development. Section 121.1001(a)(6)(iv), applying to protests under the HUBZone program, would be changed to delete the reference to the AA for Government Contracting and substitute SBA's AA for the HUBZone program. Section 121.1001(a)(7)(3), applying to any unrestricted Government procurement in which status as a small business may be beneficial, would be changed by deleting the reference to the AA for MED and substituting the SBA AA for 8(a) BD.

The proposed rule would add new paragraphs (b)(7), (b)(8) and (b)(9) to § 121.1001 to authorize SBA program personnel to request formal size determinations regarding a firm's status as small for SDB certification, HUBZone certification, and being listed as a small business on PRO-Net, respectively.

SBA proposes to add a new § 121.1004(a)(4) to cover instances where notification of contract award is posted on the Internet, as authorized under Simplified Acquisition Procedures (SAP). In such cases, SBA proposes that a size protest must be made to the contracting officer within five business days after the electronic posting. SBA also proposes to add a new § 121.1004(a)(5) that would provide that where no written notification is required, either prior to or at the time of award, a protest will be considered timely if filed within five days after receipt of verbal notification from the contracting officer or other agency representative. Under SAP, there is no requirement for the contracting officer to provide either pre-award or award notification to unsuccessful offerors. Consequently, the date of verbal notification or date of posting on the internet will be considered the start of the 5-day period allotted for a timely size protest. There may be other instances where there is no notice provided (e.g., award of a task order under a schedule contract), and this provision would apply there as well.

SBA proposes to amend § 121.1007 containing the requirement that a size protest must allege specific facts by restoring the six examples that were formerly found at § 121.1604(a) (1995). SBA has received comments that these examples were helpful in determining whether or not a particular protest satisfies the specificity requirement.

The proposed rule would amend § 121.1008, describing what occurs after SBA receives a size protest or request for formal size determination. The proposed rule would require the SBA Government Contracting Area Director to notify SBA's AA/8(a) BD, if a protest involves the size status of a concern that SBA has certified as a small disadvantaged business, and notify the appropriate SBA district office, if a protest pertains to the apparent successful offeror on a requirement that has been reserved for competition among eligible 8(a) Participants. Section 121.1008(d) would be amended by adding a sentence requiring a concern whose size status is at issue to furnish information about its alleged affiliates to SBA, notwithstanding any third party claims of privacy or confidentiality, because SBA does not disclose information obtained in the course of a size determination except as permitted by Federal law. This is intended to codify several OHA rulings. See, e.g., Size Appeal of Donovan Travel, Inc., d/b/a Carlson Wagonlit Travel, SBA No. SIZ-4270 (1997); Size Appeal of Quantrad Sensor, Inc., SBA No. SIZ-4255 (1997).

The proposed rule would add clarifying language to § 121.1009(b), “Basis for determination.” Section 121.1009(g), “Results of an SBA Size Determination,” would be amended by making it clear that contract award may be made based on a formal size determination by a SBA Government Contracting Area Director. It would also be amended to provide that an OHA decision on appeal will apply to the pending acquisition or sale if the decision is received before award. OHA decisions received after contract award will not apply to that acquisition or sale unless the contracting officer agrees to apply the OHA decision to that acquisition or sale.

The proposed rule would amend § 121.1101 by adding a new second paragraph providing that OHA will not review a formal size determination where the contract has been awarded and the issues raised in a petition for review are contract specific, such as compliance with the nonmanufacturer rule or joint venture/ostensible subcontractor rule. This change would conform the size appeal regulation to the re-certification regulation at § 121.1010(b) and codify long-standing OHA rulings. See, e.g., Size Appeal of Lightcom International, Inc., SBA No. SIZ-4118 (1995).

Currently, § 121.1103 simply states that the procedures for NAICS code appeals are contained in section 19.303 of the Federal Acquisition Regulation (FAR), 48 CFR 19.303. SBA proposes to amend this section by setting forth in detail the specific procedures for NAICS code appeals rather than referring the reader to the FAR. The procedures set forth do not differ from those currently in the FAR.

Section 121.1205 would be amended by stating that a list of classes of products for which waivers of the Nonmanufacturer Rule have been granted may be obtained on SBA's Web site at www.sba.gov/GC/approved.html.

13 CFR part 134 contains rules of procedure governing cases before OHA, including size appeals and former SIC (now NAICS) code appeals. SBA is proposing several amendments to part 134, mainly to conform to the changes being proposed for part 121.

13 CFR 134.102 sets forth OHA's jurisdiction. The proposed rule would amend paragraph (k) to authorize an affected party to appeal a determination by the SBA Government Contracting Area Office as to whether two or more concerns are affiliated for purposes of SBA's financial assistance programs, or other programs for which an affiliation determination was requested. SBA financial assistance personnel may seek assistance from a Government Contracting Area Office in determining whether a loan applicant is affiliated with one or more other business entities. This may not be a “formal size determination” in the normal sense because the concerns even if affiliated may still qualify as small. However, this determination is necessary in order to determine whether the borrower, including the borrower's affiliates, has exceeded the $750,000 loan limit amount set forth in § 120.151 of this chapter. If the Area Office finds affiliation such that the borrower is determined to be ineligible to receive additional loan amounts, the firm may not currently appeal that determination to OHA as it is not a “formal size determination.” This change would permit such an appeal.

Section 134.314 would be amended by adding a provision that the appellant has the burden of proof, by a preponderance of the evidence, in both size and NAICS code designations. This provision was formerly in the size regulations (see § 121.1707 (1995)), and since its deletion from the regulations, OHA has adopted this premise in its rulings. See, e.g., Size Appeal of Rebmar, Inc., SBA No. SIZ-4173 (1996); SIC Appeal of The Scientific Consulting Group, Inc., SBA No. SIZ-4186 (1996). SBA believes that it is appropriate to restore the provision to the regulations.

Finally, SBA proposes amending § 134.316(a) to state that an OHA judge will decline to decide substantive issues not properly raised on appeal, or which are abandoned, or have become moot. This would codify OHA precedent. See e.g., Size Appeal of Lightcom International Inc., SBA No. SIZ-4118 (1995), Size Appeal of Infotec Development, Inc., SBA No. SIZ-4197 (1996).

Compliance With Executive Orders 12612, 12988, and 12866, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork Reduction Act (44 U.S.C. Ch. 35)

OMB has determined that this proposed rule does not constitute a “significant regulatory action” under Executive Order 12866. This rule would clarify SBA's procedural and definitional size rules. As such, the rule would have no effect on the amount or dollar value of any Federal contract requirements or of any financial assistance provided through SBA. Therefore, the rule is not likely to have an annual economic effect of $100 million or more, result in a major increase in costs or prices, or have a significant adverse effect on competition or the United States economy. In addition, the proposed rule does not create a serious inconsistency or otherwise interfere with an action taken or planned by another agency, materially alter the budgetary impact of entitlements, grants, user fees, loan programs or the rights and obligations of such recipients, nor raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA certifies that this rule, if adopted in final form, would not impose new reporting or record keeping requirements.

For purposes of Executive Order 12988, SBA has drafted this proposed rule, to the extent practicable, in accordance with the standards set forth in section 3 of that Order.

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

SBA has determined that this proposed rule, if adopted in final form, will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612. Although the rule amends several definitions concerning the size of a business concern, the majority of these amendments are clarification of current policy.

List of Subjects

13 CFR Part 121

• Administrative practice and procedure
• Government procurement
• Government property
• Grant programs—business
• Loan programs—business
• Small businesses

13 CFR Part 134

• Administrative practice and procedure
• Organization and functions (Government agencies)

For the reasons set forth in the supplementary information, SBA proposes to amend parts 121 and 134 of Title 13, Code of Federal Regulations, as follows:

PART 121

1. The authority citation for 13 CFR part 121 continues to read as follows:

Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c) and 662(5) and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.

2. Amend § 121.102 by adding a new paragraph (e) to read as follows:

PART 134—RULES OF PROCEDURE GOVERNING CASES BEFORE THE OFFICE OF HEARINGS AND APPEALS

31. The authority citation for 13 CFR part 134 continues to read as follows:

Authority: 5 U.S.C. 504; 15 U.S.C. 632, 634(b)(6), and 637(a).

32. Revise § 134.102(k) to read as follows: