Proposed Rule

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For purposes of this review, the
Agencies have grouped our regulations
into 12 categories: Applications and
Reporting; Banking Operations; Capital;
Community Reinvestment Act;
Consumer Protection; Directors, Officers
and Employees; International
Operations; Money Laundering; Powers
and Activities; Rules of Procedure;
Safety and Soundness; and Securities.
On June 4, 2014, we published a
Federal Register notice announcing the
start of the EGRPRA review process and
also asking for public comment on three
of these categories—Applications and
Reporting; Powers and Activities; and
International Operations regulations.2 In
that notice we published a chart, listing
the Agencies’ regulations in the 12
categories included in the EGRPRA
review. On February 13, 2015, we
published a Federal Register notice
asking for public comment on three
additional categories—Banking
Operations; Capital; and the Community
Reinvestment Act.3 The comment
period for the second Federal Register
notice closed on May 14, 2015. On June
5, 2015, the Agencies published a third
Federal Register notice asking for
public comment on three additional
categories—Consumer Protection;
Directors, Officers and Employees; and
Money Laundering.4 The comment
period for the third notice closed on
September 3, 2015. As noted in the third
Federal Register notice, the Agencies’
will take comment on all of our
regulations issued in final form up to
the date that we publish the last
EGRPRA notice for public comment. In
the third notice, we published an
additional chart, listing the rules
included in the review that had not
been reflected in prior charts. Before the
end of the year, the Agencies intend to
issue the final Federal Register notice,
requesting comment on regulations in
the last three categories—Rules of
Procedure; Safety and Soundness; and
Securities, as well as on any other final
rules not covered by one of the prior
Federal Register notices.
Dated: September 25, 2015.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, September 28, 2015.
Robert deV. Frierson,
Secretary of the Board.
Dated: September 29, 2015.
2 79

FR 32172.
FR 7980.
4 80 FR 32046.
3 80

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Federal Deposit Insurance Corporation by
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2015–25258 Filed 10–2–15; 8:45 am]
BILLING CODE 4810–33P; 6210–01–P; 6714–01–P

SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
RIN 3245–AG67

Small Business Investment
Companies; Passive Business
Expansion & Technical Clarifications
U.S. Small Business
Administration.
ACTION: Proposed rule.
AGENCY:

The U.S. Small Business
Administration (SBA) proposes to revise
the regulations for the Small Business
Investment Company (SBIC) program to
expand the use of Passive Businesses
and provide further clarification with
regard to investments in such
businesses. SBICs are generally
prohibited from investing in passive
businesses under the Small Business
Investment Act of 1958, as amended
(Act). SBIC program regulations provide
for two exceptions that allow an SBIC to
structure an investment utilizing a
passive small business as a passthrough. The first exception provides
conditions under which an SBIC may
structure an investment through up to
two levels of passive entities to make an
investment in a non-passive business
that is a subsidiary of the passive
business directly financed by the SBIC.
The second exception enables a
partnership SBIC, with SBA’s prior
approval, to provide financing to a small
business through a passive, whollyowned C corporation, but only if a
direct financing would cause the SBIC’s
investors to incur Unrelated Business
Taxable Income (UBTI). A passive C
corporation formed under the second
exception is commonly known as a
blocker corporation. This proposed rule
would clarify the first exception, and
would expand the permitted use of
blocker corporations and eliminate the
prior approval requirement in the
second exception. The rule also
proposes to add new reporting and other
requirements for passive investments to
help protect SBA’s financial interests
and ensure adequate oversight and make
minor technical amendments.
DATES: Comments on the proposed rule
must be received on or before December
4, 2015.
SUMMARY:

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You may submit comments,
identified by RIN 3245–AG67, by any of
the following methods:
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail, Hand Delivery/Courier: Javier
Saade, Associate Administrator for
Investment and Innovation, U.S. Small
Business Administration, 409 Third
Street SW., Washington, DC 20416.
SBA will post comments on http://
www.regulations.gov. If you wish to
submit confidential business
information (CBI) as defined in the User
Notice at http://www.regulations.gov,
please submit the information to
Theresa Jamerson, Office of Investment
and Innovation, 409 Third Street SW.,
Washington, DC 20416. Highlight the
information that you consider to be CBI
and explain why you believe this
information should be held confidential.
SBA will review the information and
make the final determination of whether
it will publish the information or not.
FOR FURTHER INFORMATION CONTACT:
Theresa Jamerson, Office of Investment
and Innovation, (202) 205–7563 or sbic@
sba.gov.
SUPPLEMENTARY INFORMATION:
ADDRESSES:

A. Passive Businesses
Section 107.720 Small Businesses
That May Be Ineligible for Financing
The Small Business Investment Act of
1958, as amended, and the SBIC
program regulations prohibit an SBIC
from making passive investments. The
implementing regulation at 13 CFR
107.720(b) defines a business as passive
if: (1) It is not engaged in a regular and
continuous business operation; (2) its
employees do not carry on the majority
of day-to-day operations, and the
company does not exercise day-to-day
control and supervision over contract
workers; or (3) the business passes
through substantially all financing
proceeds to another entity.
The current regulation provides for
two exceptions that allow an SBIC to
structure an investment utilizing a
passive small business as a passthrough. The first exception, identified
in § 107.720(b)(2), permits an
investment utilizing up to two passive
entities, as long as substantially all of
the financing proceeds are passed
through to one or more active
‘‘subsidiary companies,’’ each of which
is an eligible small business. The
regulation defines a subsidiary company
as one in which the financed passive
business directly or indirectly owns at
least 50% of the outstanding voting
securities. As an example, this
exception allows an SBIC to finance

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ABC Holdings 1, a passive small
business, with the proceeds flowing
through ABC Holdings 2, another
passive small business, and then to ABC
Manufacturing, a non-passive small
business in which ABC Holdings 1
owns directly or indirectly at least 50%
of the outstanding voting securities.
SBA also interprets § 107.720(b)(2) to
permit a financing to ABC Holdings 1
that is used to acquire an ownership
interest in ABC Manufacturing (either
directly or indirectly through ABC
Holdings 2). In this case, ABC
Manufacturing would have to qualify as
a subsidiary of ABC Holdings 1 postacquisition.
The second exception, identified in
§ 107.720(b)(3), allows a partnership
SBIC, with SBA’s prior approval, to
form and finance a passive, whollyowned C corporation (commonly known
as a blocker corporation) that in turn
provides financing to an active,
unincorporated small business. This
structure is permitted only if a direct
financing of the unincorporated small
business would cause at least one of the
SBIC’s investors to incur Unrelated
Business Taxable Income (UBTI) under
section 511 of the Internal Revenue
Code, which may arise from an activity
engaged in by a tax-exempt organization
that is not related to the tax-exempt
purpose of that organization.
SBA published a final rule (79 FR
62819) on October 21, 2014 that
expanded the exception contained in
§ 107.720(b)(2) to allow two levels of
pass-through entities, as described
above. Prior to the rule change, the
regulation permitted only one passthrough entity. As part of that
rulemaking, SBA received one set of
comments suggesting further expansion
of the rule. In the preamble to the final
rule, SBA stated that it would consider
the following suggestions in future
rulemaking:
(1) Revise § 107.720(b)(2) to explicitly
state that an SBIC may ‘‘form and
finance’’ (rather than merely ‘‘finance’’)
a passive business;
(2) Eliminate the requirement for
SBA’s prior approval to form a blocker
corporation under § 107.720(b)(3); and
(3) Revise § 107.720(b)(3) to permit an
SBIC to form a blocker corporation to
enable its foreign investors to avoid
‘‘effectively connected income’’ under
the Internal Revenue Code.
This proposed rule addresses each of
these suggestions. With respect to the
suggestion to allow SBICs to not only
finance, but form and finance, a passive
business, SBA interprets the existing
regulation to implicitly permit
formation of a passive business. SBA
recognizes that many SBICs have relied

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on § 107.720(b)(2) to finance newlyformed passive holding companies that
in turn have used the proceeds to
acquire active small businesses.
Particularly since the regulatory
restrictions on control of a small
business were largely removed in 2002
in response to an amendment to the Act,
a number of SBICs have taken
controlling equity interests in many of
their portfolio companies, typically
through a holding company. In these
cases the SBIC first formed, and then
financed, the holding company. To
formalize SBA’s interpretation of the
regulation, the proposed rule would
revise § 107.720(b)(2) to explicitly allow
SBICs to form and then finance a
passive business as part of an otherwise
permitted transaction. As a further
clarification, and consistent with SBA’s
interpretation of current § 107.720(b)(2),
the proposed rule would explicitly
permit a financing of a passive business
that uses the proceeds to acquire all or
part of a non-passive business.
In considering the suggestion to
eliminate the requirement for SBA prior
approval to form a blocker corporation
under § 107.720(b)(3), SBA
acknowledges that these requests are
routinely approved as long as an SBIC
identifies one or more tax-exempt
investors that would incur UBTI absent
the blocker corporation. SBA believes
the prior approval requirement could be
replaced by a certification that would
provide the same assurance. The
proposed rule would remove the
approval requirement from
§ 107.720(b)(3) and revise § 107.610, a
regulation that requires SBICs to make
certain certifications upon financing a
small business, to require the SBIC to
certify as to the basis of the qualification
of a financing under § 107.720(b)(3), as
discussed below.
In considering the suggestion to
permit an SBIC to form a blocker
corporation to enable its foreign
investors to avoid ‘‘effectively
connected income’’ (ECI), SBA believes
that it is consistent with the goals of the
SBIC program to encourage foreign
investment that will benefit U.S. small
businesses. This proposed rule would
expand § 107.720(b)(3) to permit an
SBIC to form a blocker corporation if a
direct financing would cause its
investors to incur ECI.
SBA is proposing two additional
changes to § 107.720(b)(3). First, the rule
proposes to remove part of the last
sentence that provides that an SBIC’s
ownership of a blocker corporation
formed under § 107.720(b)(3) will not
constitute a violation of § 107.865(a).
This provision was necessary when
§ 107.865(a) generally prohibited an

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SBIC from assuming control over a
small business (in this case, the whollyowned blocker corporation). On October
22, 2002, SBA published a final rule (67
FR 64789) that revised § 107.865(a) to
permit an SBIC to exercise control over
a small business for up to seven years
without SBA approval. This rule made
the carve-out in § 107.720(b)(3)
unnecessary. An SBIC that needs to
hold an investment in a blocker
corporation longer than seven years can
seek SBA approval of an extension of
control in accordance with § 107.865(d).
Second, the proposed rule addresses
structuring an investment with a second
passive level when the first passive
level is a blocker corporation formed
under § 107.720(b)(3). The proposed
change would allow the blocker
corporation to either (1) directly finance
a non-passive small business, or (2)
provide financing to a second passive
small business that passes the proceeds
through to a non-passive small business
in which it owns at least 50 percent of
the outstanding voting securities. SBA’s
intention in proposing this change is to
provide SBICs with flexibility similar to
that provided in § 107.720(b)(2), while
still limiting investments to a maximum
of two passive levels to ensure effective
oversight of SBICs.
The proposed revisions of
§ 107.720(b)(2) and (3), particularly
when added to the changes promulgated
in the October 21, 2014 final rule,
would provide SBICs with considerably
more flexibility to invest through
passive holding companies and can be
expected to increase the prevalence of
permissible passive investments in the
SBIC program. As a result, SBA has also
reviewed certain credit concerns it has
related to passive investments. As noted
in the October 21, 2014 final rule, these
concerns relate specifically to SBA’s
ability to collect from SBICs that default
on their debt to SBA. Even under
§ 107.720(b) as it existed prior to the
final rule, SBA had encountered issues
that adversely affected its recoveries
from defaulting SBICs with assets that
were held indirectly through a passive
company: These concerns included the
effect of fees and expenses charged at
each level, potentially diverting money
from the actual investment and returns,
as well as SBA’s potential lack of access
to the books and records of the passive
business(es). To address these concerns,
proposed § 107.720(b)(4) would add or
clarify the following requirements with
respect to any passive investment made
under § 107.720(b)(2) or (b)(3):
(1) Clarifying the meaning of
‘‘substantially all.’’ Current
§ 107.720(b)(2) requires ‘‘substantially
all’’ financing proceeds to be passed

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Federal Register / Vol. 80, No. 192 / Monday, October 5, 2015 / Proposed Rules
through to an eligible non-passive small
business, but does not define what
constitutes ‘‘substantially all.’’ SBA
believes that a specific definition would
help ensure that eligible small
businesses benefit from the financing
dollars, as intended, and would provide
SBICs and SBA with more certainty that
a transaction complies with the
regulations. SBA proposes to define
‘‘substantially all’’ for purposes of this
regulation to mean 99 percent of the
financing proceeds after deduction of
actual application fees, closing fees, and
expense reimbursements, which may
not exceed those permitted under
§ 107.860. SBA recognizes that SBICs
engage in many different types of
financing transactions, and does not
seek to impose a definition that
interferes with an SBIC’s ability to
structure a transaction appropriately;
however, SBA believes the amount of
the proceeds received by the nonpassive business should not be reduced
merely because of the SBIC’s use of one
or more passive vehicles.
(2) Requiring fees charged by an SBIC
or its Associate to not exceed those
permitted if the SBIC had directly
financed the eligible Small Business.
Among SBICs that have defaulted on
SBA leverage, SBA has observed that
passive investments are often associated
with higher overall fees than direct
investments in active small businesses.
As noted in the preamble to the October
2014 final rule, SBA is concerned that
excessive fees may reduce the funding
provided to the active small business
investment and adversely affect returns
to the SBIC. To limit the potential for
excessive fees in financings permitted
under § 107.720(b)(2) and (b)(3), SBA is
proposing to add a provision to clarify
that fees collected by SBICs and their
Associates under §§ 107.860 and
107.900 may not exceed the fees that
would be permitted under the same two
sections if the SBIC directly financed a
non-passive small business. The
proposed rule also provides that such
fees be remitted to the SBIC within 30
days of receipt. This requirement will
help SBA regulate whether the fees meet
regulatory requirements, ensure that the
SBIC benefits from those fees in a timely
manner, and help in the identification
and recovery of fees in the case of an
SBIC default.
(3) Clarifying that both passive and
non-passive businesses included in a
financing are ‘‘Portfolio Concerns.’’ The
SBIC program regulations provide SBA
with certain information rights with
respect to any ‘‘Portfolio Concern,’’
defined in § 107.50 as ‘‘a Small Business
Assisted by a Licensee.’’ SBA believes
that in a permitted passive investment,

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both the passive business(es) and the
non-passive business are Portfolio
Concerns. Nevertheless, particularly in
attempting to make recoveries from
SBICs that have defaulted on SBA
leverage, SBA has sometimes been
hindered by a lack of access to the books
and records of the passive business.
Therefore, the proposed rule would add
a provision under § 107.720(b)(4) to
clarify that both passive and nonpassive businesses included in a
financing are Portfolio Concerns subject
to all informational rights under 13 CFR
part 107, including without limitation
§ 107.600, ‘‘General requirements for
Licensee to maintain and preserve
records,’’ and § 107.620, ‘‘Requirements
to obtain information from Portfolio
Concerns.’’
In the October 2014 final rule, SBA
also noted that it has credit concerns
regarding the increased opportunity for
disproportionate distributions to entities
other than the SBIC as a result of an
SBIC structuring investments through a
passive entity. In evaluating this
concern, SBA recognized that
disproportionate distributions can occur
due to different securities and
preferences even if the SBIC directly
financed the non-passive business. SBA
believes as long as an SBIC has no
conflicts of interest with respect to a
particular financing (other than a
conflict for which SBA has provided a
regulatory exemption under § 107.730),
the SBIC will make a permitted passive
investment with the same
considerations as a direct investment.
Therefore, SBA believes that a specific
regulatory provision to address this
issue is not needed.
Section 107.610 Required
Certifications for Loans and Investments
The proposed rule would add a
certification requirement to § 107.610 to
require an SBIC that finances a business
under § 107.720(b)(3) to certify as to the
basis of the qualification of the
financing. The permissible basis would
be the participation of one or more
investors who would be subject to either
UBTI or ECI in the event of a direct
financing. As part of this certification,
SBICs must identify those investor(s)
subject to either UBTI or ECI as part of
a direct financing. As discussed
previously, the certification would
replace the requirement for SBA prior
approval of the formation and financing
of a blocker corporation.
B. Technical Changes to Regulations
Section 107.50

Definition of Terms

The proposed rule would correct the
typographical error of ‘‘Associates’s’’ to

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‘‘Associate’s’’ in the last sentence under
the ‘‘Lending Institution’’ definition.
Section 107.210 Minimum Capital
Requirements for Licensees
SBICs typically have an investment
period in which they draw capital and
provide financings to small businesses,
followed by a harvest and wind-up
period in which they realize
investments and repay capital to their
private investors. SBA approves SBIC
wind-up plans in accordance with
§ 107.590(c) and capital distributions
above 2% in accordance with § 107.585.
To conform with SBA’s current
oversight practices, the proposed rule
would modify paragraph (a) of § 107.210
to allow both Leverageable Capital and
Regulatory Capital to fall below the
stated minimums if the reductions are
performed in accordance with an SBAapproved wind-up plan per
§ 107.590(c).
Section 107.503 Licensee’s Adoption
of an Approved Valuation Policy
The proposed rule would change the
last sentence of § 107.503(a) to indicate
that valuation guidelines for SBICs may
be obtained from the SBIC program’s
public Web site, www.sba.gov/inv. SBA
maintains SBIC-related guidelines and
policies on this Web site as a
convenience to the public.
Section 107.630 Requirement for
Licensees To File Financial Statements
With SBA (Form 468)
Current § 107.630(d) provides a
mailing address for submission of SBA
Form 468. These instructions are no
longer necessary because SBICs submit
this information electronically using the
SBA’s web-based application. The
proposed rule would remove this
paragraph and redesignate paragraph (e)
as paragraph (d).
Section 107.1100 Types of Leverage
and Application Procedures
The proposed rule would correct the
misspelling of ‘‘Yu’’ to ‘‘You’’ in the
second to the last sentence in paragraph
(b). The proposed rule would also
remove paragraph (c) which identifies
where to send Leverage applications.
This paragraph is unnecessary because
the application forms provide these
instructions.
Compliance With Executive Orders
12866, 12988, 13132, and 13563, the
Paperwork Reduction Act (44 U.S.C. Ch.
35) and the Regulatory Flexibility Act (5
U.S.C. 601–612)
Executive Order 12866
The Office of Management and Budget
has determined that this rule is not a

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‘‘significant’’ regulatory action under
Executive Order 12866. This is also not
a ‘‘major’’ rule under the Congressional
Review Act, 5 U.S.C. 801, et seq.
Executive Order 12988
This action meets applicable
standards set forth in section 3(a) and
3(b)(2) of Executive Order 12988, Civil
Justice Reform, to minimize litigation,
eliminate ambiguity, and reduce
burden. The action does not have
retroactive or presumptive effect.
Executive Order 13132
The proposed rule would not have
substantial direct effects on the States,
or the distribution of power and
responsibilities among the various
levels of government. Therefore, for the
purposes of Executive Order 13132,
Federalism, SBA determines that this
proposed rule has no federalism
implications warranting the preparation
of a federalism assessment.

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Executive Order 13563
This proposed rule was developed in
response to the comments received on
previous amendments to the regulations
concerning investments in passive
businesses. As part of that rulemaking,
published on October 21, 2014 at 79 FR
62819, SBA received one set of
comments suggesting further expansion
of the rule. The commenter suggested
that SBA consider: (1) Revising
§ 107.720(b)(2) to explicitly state that an
SBIC may ‘‘form and finance’’ (rather
than merely ‘‘finance’’) a passive
business; (2) eliminating the
requirement for SBA’s prior approval to
form a blocker corporation under
§ 107.720(b)(3) and requiring a
certification instead; and (3) revising
§ 107.720(b)(3) to permit an SBIC to
form a blocker corporation to enable its
foreign investors to avoid ‘‘effectively
connected income’’ under the Internal
Revenue Code. SBA discussed these
concerns and informational
requirements with industry
representatives as part of its evaluation
of these comments and development of
this proposed rule.
Paperwork Reduction Act, 44 U.S.C. Ch.
35
SBA has determined that this rule
would impose additional reporting and
recordkeeping requirements under the
Paperwork Reduction Act. In particular
this rule proposes changes to the
Portfolio Financing Report, SBA Form
1031 (OMB Control Number 3245–
0078), to clarify information to be
reported in Parts A, B, and C of the
form. The proposed changes, described
in detail below, also include designating

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current Part D as Part F and adding new
Parts D and E.
The title, description of respondents,
description of the information collection
and the proposed changes to it are
discussed below with an estimate of the
revised annual burden. Included in the
estimate is the time for reviewing
instructions, searching existing data
sources, gathering and maintaining the
data needed, and completing and
reviewing each collection of
information.
SBA invites comments on: (1)
Whether the proposed changes to Form
1031 are necessary for the proper
performance of SBA’s functions,
including whether the information will
have a practical utility; (2) the accuracy
of SBA’s estimate of the burden of the
proposed collections of information,
including the validity of the
methodology and assumptions used; (3)
ways to enhance the quality, utility, and
clarity of the information to be
collected; and (4) ways to minimize the
burden of the collection of information
on respondents, including through the
use of automated collection techniques,
when appropriate, and other forms of
information technology.
Please send comments by the closing
date for comment for this proposed rule
to the address set forth above in the
ADDRESSES section and to SBA Desk
Officer, Office of Management and
Budget, Office of Information and
Regulatory Affairs, 725 17th Street NW.,
Washington, DC 20503.
Title: Portfolio Financing Report, SBA
Form 1031 (OMB Control Number
3245–0078).
Summary: SBA Form 1031 is a
currently approved information
collection. SBA regulations, specifically,
§ 107.640, require all SBICs to submit a
Portfolio Financing Report using SBA
Form 1031 for each financing that an
SBIC provides to a Small Business
Concern within 30 days after closing an
investment. SBA uses the information
provided on Form 1031 to evaluate SBIC
compliance with regulatory
requirements. The form is also SBA’s
primary source of information for
compiling statistics on the SBIC
program as a provider of capital to small
businesses.
SBA proposes to revise the form as
follows:
(1) Clarifying the SBIC should report
the non-passive Small Business Concern
information in the Form 1031. SBA has
noted that SBICs sometimes report data
on the passive Small Business Concern
rather than the non-passive Small
Business Concern when reporting
financing information. SBA intends to
clarify that the SBIC should report data

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on the non-passive Small Business
Concern when reporting information on
financings using passive businesses in
the Form 1031 Part A—the Small
Business Concern; Part B—the prefinancing data; and Part C—the
financing information, with the
exception of the financing dollars in
Question 29. The amount of financing
dollars provided by the SBIC should be
the total amount of such financing,
regardless of whether the dollars were
provided directly or indirectly to the
non-passive business concern. Example:
The SBIC provides $5 million in equity
to ABC Holding Corporation, which
passes $4.98 million to the non-passive
business, Acme Manufacturing LLC. In
addition, the SBIC provides $5 million
in debt directly to Acme Manufacturing
LLC. The SBIC would report
information on Acme Manufacturing
LLC in Parts A, B, and C. However, the
total financing dollars would be
reported as $5 million in equity and $5
million in debt for a total of $10 million
in total financing dollars.
(2) Identifying financings using one or
more passive businesses. SBA is
proposing to add a question as to
whether the financing utilizes one or
more passive businesses as part of the
financing, to help SBA identify these
financings.
(3) Adding information on passive
business financings to aid in regulatory
compliance monitoring. SBA is
proposing to have SBICs upload a file in
Portable Document Format (PDF) that
contains information needed to help
SBA assess whether the financing meets
regulatory compliance. The proposed
file would contain the following
information on the passive business
financing:
(a) Qualifying exception: The SBIC
would identify under which passive
business exception the financing is
made (§ 107.720(b)(2) Exception for
pass-through of proceeds to subsidiary,
or § 107.720(b)(3) Exception for certain
Partnership Licensees). If the SBIC
indicates that the financing is made
under § 107.720(b)(3), it would also
indicate the qualifying basis for the
financing (i.e., financing would cause an
investor in the fund to incur either
unrelated business taxable income or
effectively connected income).
(b) Passive Business Entities: The
SBIC would be required to clearly
identify the name and employer ID for
each passive business entity used
within the financing. This is needed so
that SBA can identify all Portfolio
Concerns involved in the financing.
(c) Financing Structure Description:
SBA is also proposing that the SBIC
describe the financing structure,

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Federal Register / Vol. 80, No. 192 / Monday, October 5, 2015 / Proposed Rules
including the flow of the money
between the SBIC and the non-passive
Small Business Concern that receives
the proceeds (including amounts and
types of securities between each entity),
and the ownership from the SBIC
through each entity to the non-passive
Small Business Concern. This
information will help SBA assess that
the Small Business Concern receives
‘‘substantially all’’ the financing dollars
and the ownership percentages are in
compliance with the regulations. This
will also help SBA if an SBIC is
transferred to the Office of Liquidation
to identify the structure of the financing
and aid in recovery of SBA leverage.
4. Impact Fund Policy Initiative
Although not resulting from this rule,
the new proposed Part D would provide
a vehicle for SBICs licensed to
participate in SBA’s Impact Investment
Fund (Impact Fund) to identify whether
they are reporting on an SBA-identified
impact investment or a Fund-identified
impact investment. The Impact Fund
was launched in April 2011 as part of
President Obama’s Start-Up America
Initiative. See, [https://www.sba.gov/
about-sba/sba-initiatives/startupamerica/about-startup-america.] The
initiative was amended in September
2014 to allow Impact SBICs to invest in
self-identified impact investments.
[https://www.sba.gov/sites/default/files/
articles/SBA%20Impact%20Investment
%20Fund%20Policy%20-%20
September%202014_1.pdf or https://
www.sba.gov/content/new-2014expanding-sbas-impact-fund] While
Impact SBICs, like all SBICS have been
using Form 1031 to report on their
financings, SBA has determined that it
would be beneficial to Impact SBICs, if
SBA Form 1031 were to include
questions specifically targeted towards
impact investments. As a result the
agency is proposing to add two
questions regarding whether the
investment is a fund-identified impact
investment or SBA-identified impact
investment.
Description of Respondents and
Burden: There are currently 299
licensed SBICs. All of these SBICs are
required to submit SBA Form 1031 for
each financing. The current estimated
number of responses (i.e., number of
financings) is 2,021 based on the past
three years (FY 2012 through 2014). The
current estimate indicates that it takes
approximately 12 minutes to complete
the form, for a total annual burden of
404 hours. Neither the number of
respondents nor the number of
responses per year is expected to be
affected by this proposed rule. However,
SBA estimates a slight increase in the
burden hour as a result of the additional

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reporting in new Parts D (Impact
Investments) and Part E (Passive
Business).
Impact Fund Reporting. This
reporting is expected to have minimal
impact. The estimated eight SBICs
making impact investments would
complete new proposed Part D an
estimated total 56 times annually. At an
estimated 2 minutes per response, this
additional reporting would add 2 hours
to the annual burden for Form 1031.
Passive Business Reporting. SBA
believes that the SBIC should be able to
provide the proposed passive business
information since it should be readily
available as part of the financing. SBA
estimates that providing the proposed
information will take on average an
additional 30 minutes for those
financings utilizing passive businesses,
with no incremental burden for those
financings that do not use a passive
business. SBA estimates that about 12%
of the annual responses relate to passive
businesses financings (based on
financing data in 2014). Based on the
number of SBICS reporting such
financings the total estimated annual
hour burden resulting from new Part E
reporting would be 122.
Therefore the total estimated annual
hour burden for all SBICs submitting
SBA Form 1031s in a year would be 528
hours.
The current cost estimate for
completing SBA Form 1031 uses a rate
of $35 per hour for an accounting
manager to fill out the form. Using that
same rate, the cost per form would
change from $7 per form to $9.14 per
form. However, SBA has increased its
estimate of an hourly rate for an
accounting manager to $43 per hour
(estimated using www1.salary.com/
Accounting-Manager-hourly-wages.html
in July 2015), which rate results in a
new cost per form of $11.23 for an
aggregate cost of $22,704 for the 2,021
estimated responses.
The recordkeeping requirements
under the proposed rule also identify
information that an SBIC must maintain
in its files to support the required
changes. SBA believes that the SBICs
should already be maintaining this
information since a passive business by
definition is a Portfolio Concern and the
SBIC should be maintaining all
documents needed to support each
financing. The proposed rule makes this
expectation explicit. Furthermore,
currently, an SBIC must maintain this
information for it to effectively monitor
and evaluate an investment that uses a
passive business to finance a nonpassive business. Therefore, SBA does
not believe this recordkeeping
requirement should increase the burden.

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The proposed rule also requires a
certification under § 107.610 when the
SBIC makes a financing using the
proposed exemption § 107.720(b)(3).
This includes maintaining records
supporting the certification. Since this
regulation effectively replaces the
current requirement for SBICs to seek
prior SBA approval and maintain these
records, SBA does not believe this
change will increase the burden.
Regulatory Flexibility Act, 5 U.S.C. 601–
612
The Regulatory Flexibility Act (RFA),
5 U.S.C. 601, requires administrative
agencies to consider the effect of their
actions on small entities, small nonprofit businesses, and small local
governments. Pursuant to the RFA,
when an agency issues a rule, the
agency must prepare an Initial
Regulatory Flexibility Act (IRFA)
analysis which describes whether the
impact of the rule will have a significant
economic impact on a substantial
number of small entities. However,
Section 605 of the RFA allows an
agency to certify a rule, in lieu of
preparing an IRFA, if the rulemaking is
not expected to have a significant
economic impact on a substantial
number of small entities. This proposed
rule would affect all SBICs, of which
there are currently close to 300. SBA
estimates that approximately 75 percent
of these SBICs are small entities.
Therefore, SBA has determined that this
proposed rule would have an impact on
a substantial number of small entities.
However, SBA has determined that the
impact on entities affected by the rule
would not be significant. The proposed
changes in the passive business
regulation would provide SBICs with
additional flexibility to employ
transaction structures commonly used
by private equity or venture capital
funds that are not SBICs.
SBA asserts that the economic impact
of the rule, if any, would be minimal
and beneficial to small SBICs.
Accordingly, the Administrator of the
SBA certifies that this rule would not
have a significant impact on a
substantial number of small entities.
List of Subjects in 13 CFR Part 107
Investment companies, Loan
programs-business, Reporting and
recordkeeping requirements, Small
businesses.
For the reasons stated in the
preamble, the Small Business
Administration proposes to amend 13
CFR part 107 as follows:

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Federal Register / Vol. 80, No. 192 / Monday, October 5, 2015 / Proposed Rules
§ 107.720 Small Businesses that may be
ineligible for financing.

PART 107—SMALL BUSINESS
INVESTMENT COMPANIES

*

1. The authority citation for part 107
is revised to read as follows:

■

Authority: 15 U.S.C. 681, 683, 687(c),
687b, 687d, 687g, 687m.
§ 107.50

[Amended]

2. Amend § 107.50 by removing from
the definition of ‘‘Lending Institution’’
the term ‘‘Associates’s’’ and adding in
its place the term ‘‘Associate’s’’.
■ 3. Amend § 107.210 by revising the
paragraph (a) introductory text to read
as follows:
■

§ 107.210 Minimum capital requirements
for Licensees.

(a) Companies licensed on or after
October 1, 1996. A company licensed on
or after October 1, 1996, must have
Leverageable Capital of at least
$2,500,000 and must meet the
applicable minimum Regulatory Capital
requirement in this paragraph (a), unless
lower Leverageable Capital and
Regulatory Capital amounts are
approved by SBA as part of a Wind-Up
Plan in accordance with § 107.590(c):
*
*
*
*
*
■ 4. Amend § 107.503 by revising the
last sentence of paragraph (a) to read as
follows:
§ 107.503 Licensee’s adoption of an
approved valuation policy.

(a) * * * These guidelines may be
obtained from SBA’s SBIC Web site at
www.sba.gov/inv.
*
*
*
*
*
■ 5. Amend § 107.610 by adding
paragraph (g) to read as follows:
§ 107.610 Required certifications for Loans
and Investments.

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*

*
*
*
*
(g) For each passive business financed
under § 107.720(b)(3), a certification by
you, dated as of the closing date of the
Financing, as to the basis for the
qualification of the Financing under
§ 107.720(b)(3) and identifying one or
more limited partners in which a direct
Financing would cause those investors
to incur ‘‘unrelated business taxable
income’’ under section 511 of the
Internal Revenue Code (26 U.S.C. 511)
or ‘‘effectively connected income’’ to
foreign investors under sections 871 and
882 of the Internal Revenue Code (26
U.S.C. 871 and 882).
§ 107.630

[Amended]

6. Amend § 107.630 by removing
paragraph (d) and redesignating
paragraph (e) as paragraph (d).
■ 7. Amend § 107.720 by revising
paragraphs (b)(2) and (b)(3) and adding
paragraph (b)(4) to read as follows:
■

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*
*
*
*
(b) * * *
(2) Exception for pass-through of
proceeds to subsidiary. You may
provide Financing directly to a passive
business, including a passive business
that you have formed, if it is a Small
Business and it passes substantially all
the proceeds through to (or uses
substantially all the proceeds to acquire)
one or more subsidiary companies, each
of which is an eligible Small Business
that is not passive. For the purpose of
this paragraph (b)(2), ‘‘subsidiary
company’’ means a company in which
the financed passive business either:
(i) Directly owns, or will own as a
result of the Financing, at least 50
percent of the outstanding voting
securities; or
(ii) Indirectly owns, or will own as a
result of the Financing, at least 50
percent of the outstanding voting
securities (by directly owning the
outstanding voting securities of another
passive Small Business that is the direct
owner of the outstanding voting
securities of the subsidiary company).
(3) Exception for certain Partnership
Licensees. If you are a Partnership
Licensee, you may form one or more
wholly-owned corporations in
accordance with this paragraph (b)(3).
The sole purpose of such corporation(s)
must be to provide Financing to one or
more eligible, unincorporated Small
Businesses. You may form such
corporation(s) only if a direct Financing
to such Small Businesses would cause
any of your investors to incur
‘‘unrelated business taxable income’’
under section 511 of the Internal
Revenue Code (26 U.S.C. 511) or
‘‘effectively connected income’’ to
foreign investors under sections 871 and
882 of the Internal Revenue Code (26
U.S.C. 871 and 882). Your ownership
and investment of funds in such
corporation(s) will not constitute a
violation of § 107.730(a). For each
passive business financed under this
section 107.720(b)(3), you must provide
a certification to SBA as required under
§ 107.610(g). The wholly-owned
corporation(s) formed under this
paragraph may provide Financing:
(i) Directly to one or more eligible
non-passive Small Businesses; or
(ii) Directly to a passive Small
Business that passes substantially all the
proceeds directly to (or uses
substantially all the proceeds to acquire)
one or more eligible non-passive Small
Businesses which the passive Small
Business directly owns, or will own as
a result of the Financing, at least 50%
of the outstanding voting securities.

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(4) Additional conditions for
permitted passive business financings.
Financings permitted under paragraphs
(b)(2) or (b)(3) of this section must meet
all of the following conditions:
(i) For the purposes of this paragraph
(b), ‘‘substantially all’’ means at least
ninety-nine percent of the Financing
proceeds after deduction of actual
application fees, closing fees, and
expense reimbursements which may not
exceed those permitted by § 107.860.
(ii) If you and/or your Associate
charge fees permitted by §§ 107.860
and/or 107.900, the total amount of such
fees charged to all passive and nonpassive businesses that are part of the
same Financing may not exceed the fees
that would have been permitted if the
Financing had been provided directly to
a non-passive Small Business. Any such
fees received by your Associate must be
paid to you in cash within 30 days of
the receipt of such fees.
(iii) For the purposes of this part 107,
each passive and non-passive business
included in the Financing is a Portfolio
Concern. The terms of the financing
must provide SBA with access to
Portfolio Concern information in
compliance with this part 107,
including without limitation §§ 107.600
and 107.620.
*
*
*
*
*
§ 107.1100

[Amended]

8. Amend § 107.1100 by removing the
term ‘‘Yu’’ in the second to the last
sentence of paragraph (b) and adding in
its place ‘‘You’’, and by removing
paragraph (c).

■

Dated: September 21, 2015.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2015–25232 Filed 10–2–15; 8:45 am]
BILLING CODE 8025–01–P

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 201
[Release No. 34–75977; File No. S7–19–15]
RIN 3235–AL87

Amendments to the Commission’s
Rules of Practice
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:

The Securities and Exchange
Commission (‘‘Commission’’) is
proposing for public comment
amendments to its Rules of Practice that
would require persons involved in

SUMMARY:

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