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Daily Rules, Proposed Rules, and Notices of the Federal Government

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

49 CFR Part 26

[Docket No. OST-2012-0147]

RIN 2105-AE08

Disadvantaged Business Enterprise: Program Implementation Modifications

AGENCY: Office of the Secretary (OST), DOT.
ACTION: Notice of Proposed Rulemaking (NPRM).
SUMMARY: This notice of proposed rulemaking (NPRM) proposes three categories of changes to improve implementation of the Department of Transportation's disadvantaged business enterprise (DBE) rule. First, the NPRM proposes revisions to personal net worth, application, and reporting forms. Second, the NPRM proposes modifications to certification-related provisions of the rule. Third, the NPRM would modify several other provisions of the rule, concerning such subjects as good faith efforts, transit vehicle manufacturers and counting of trucking companies.
DATES: Comments on this proposed rule must be received by November 5, 2012.
ADDRESSES: *Federal Rulemaking Portal:Go towww.regulations.govand follow the online instructions for submitting comments.

*Mail:Docket Management Facility: U.S. Department of Transportation, 1200 New Jersey Avenue SE., West Building Ground Floor, Room W12-140, Washington, DC 20590-0001.

*Hand Delivery or Courier:West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE., between 9 a.m. and 5 p.m. ET, Monday through Friday, except Federal holidays.

*Fax:202-493-2251.

Note that all comments received will become part of the docket and will be posted without change towww.regulations.govincluding any personal information provided and will be available to internet users. You may review DOT's complete Privacy Act Statement in theFederal Registerpublished on April 11, 2000 (65 FR 19477) or you may visithttp://www.gpo.gov/fdsys/pkg/FR2010-29/pdf/2010-32876.pdfDocket. For internet access to the docket to read background documents and comments received, go towww.regulations.gov.Background documents and comments received may also be viewed at the U.S. Department of Transportation, 1200 New Jersey Ave SE., Docket Operations, M-30, West Building Ground Floor, Room W12-140, Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

FOR FURTHER INFORMATION CONTACT: Jo Anne Robinson, Office of General Law, U.S. Department of Transportation, 1200 New Jersey Avenue SE., Washington, DC 20590, 202-366-9154,joanne.robinson@dot.gov.
SUPPLEMENTARY INFORMATION:

In January 2011, the Department published a final rule making a number of important policy changes to the DBE program. These included requiring greater accountability for recipients with respect to meeting overall goals, adjusting the Part 26 personal net worth cap applicable to owners of DBE firms for inflation to $1.32 million, requiring greater monitoring of contracts by recipients, adding a small business element to recipients' DBE programs, and facilitating interstate certification. In order not to delay these policy initiatives, the rulemaking did not include other, more technical, program improvements. These include modifications to the forms involved with the program, changes to certification-related provisions in response to eligibility concerns that have come to the Department's attention, and modifications to a variety of other program provisions. This NPRM addresses this series of issues. The Department notes that the DBE program was recently reauthorized in the Moving Ahead for Progress in the 21st Century Act (`MAP-21'), Public Law 112-141 (enacted July 6, 2012). The Department believes that this reauthorization is intended to maintain the status quo of the DBE program and does not include any significant substantive changes to the program.

Forms Personal Net Worth (PNW) Form and Related Requirements of 49 CFR 26.67

In an advance notice of proposed rulemaking (74 FR 15904; April 8, 2009), the Department asked for comments on potential improvements to the rule's PNW form. Some comments sought to simplify the forms, and other comments recommended additions. A number of commenters provided detailed suggestions about how the form should be configured. Based on the comments, as well as on the Department's experience with reviewing certification appeals and other issues that have come to the Department's attention, the Department is proposing a revised PNW form.

With respect to the PNW form, we mentioned in a June 2003 revision to Part 26 that we had not found anything more appropriate to capture a snapshot of a person's net worth than a Small Business administration (SBA) Form 413, and we included it in the Appendix. Some commenters recommended use of this form, with some modifications.

We have learned of several concerns regarding SBA Form 413. First, the instructions require each partner or stockholder with 20% ownership or more of voting stock to complete the form. This is not required by Part 26 and has caused some confusion. Second, in order to determine whether an applicant's net worth is below the threshold, more detailed information is needed by recipients than the SBA form provides. Third, an applicant has limited space for entering information, and it appears they are often supplementing their entries with separate documents. To correct these problems and help alleviate these concerns, the Department is proposing, in section 26.67 (a)(2)(i), the use of a newly designed PNW statement along with the accompanying instruction sheet (see the proposed Appendix B of the regulation) for use by all applicants to the program and those submitting annual affidavits. The Department would encourage recipients to post the new form electronically in a screen-fillable format on their Web site to allow users to complete and print the form on-line.

One commenter suggested that the Department mandate that the form be used without modification and that regulatory provisions be added to address violations by Uniform Certification Programs (UCPs) that modify the forms. We agree that the standard personal net worth form contained in Appendix G should be used in all cases and have stated so in this proposed revision. We understand, however, that individual situations and unique financial arrangements within certain industries may make it necessary for recipients to seek additional information beyond what is provided on the form.

For instance, if an applicant reports other business interests in section 5 of the new form, recipients should ascertain the value of these entities by obtaining financial statements, balance sheets, and federal/state tax returns. With this information, recipients will be able to verify the applicant's valuation of their ownership interests in these other firms. Similarly, an applicantreporting stock and bond holdings should be asked to provide quarterly account statements. Also, directly written on the form in section 2 (Real Estate Owner) is the requirement that applicants submit copies of real estate deeds, mortgage notes, and instruments of conveyance. In short, recipients are encouraged, during their review of the firm's eligibility, to look behind the statement and these submissions, and request additional information if necessary. Firms must cooperate with these requests pursuant to § 26.73(c) and § 26.109(c), and a failure or refusal to provide such information is a ground for a denial or removal of certification.

We propose to amend paragraphs (a)(2)(ii) and (iii) to stress that the PNW statement must include all assets owned by the individual, including any ownership interests in the applicant firm, personal assets, and the value of his or her personal residence excluding the equity. Item iii(B) clarifies that the equity in an owner's primary residence is the market value of the residence less any mortgages and home equity loan balances. It also states the basic consideration that recipients are to ensure that home equity loan balances are included in the equity calculation and not as a separate liability on the individual's personal net worth form.

Paragraph (b) of § 26.67 currently states that if an individual's statement of personal net worth shows that he or she exceeds the limitation of $1.32 million the individual's presumption of disadvantage is rebutted.

We propose adding a second component to this statement taken from the Department's long-standing guidance on personal net worth—if the person demonstrates an ability to accumulate substantial wealth, has unlimited growth potential, or has not experienced or has not had to overcome impediments to obtaining access to financing, markets, and resources, the individual's presumption of economic disadvantage is rebutted, even if the individual's PNW is less than $1.32 million. As stated in this new section and demonstrated in an example contained in the regulation text, it is appropriate for recipients to review the total fair market value of the individual's assets and determine if that level appears to be substantial and indicates an ability to accumulate substantial wealth. If a recipient makes this determination this may lead to a conclusion that the individual is not economically disadvantaged. The purpose of this proposed amendment is to give recipients a tool to exclude from the program someone who, in overall assets terms, is what a reasonable person would consider to be a wealthy individual, even if one with liabilities sufficient to bring his or her PNW under $1.32 million. The Department also seeks comment on whether a more bright-line approach would be preferable, such as saying that someone whose Adjusted Gross Income on his or her Federal income tax return was over $1 million for two or three years in a row would lose the presumption of economic disadvantage, regardless of PNW.

In certain instances, assets that individuals have transferred two years prior to filing their certification application may be counted when calculating their PNW. These circumstances are currently described in Appendix E, which attributes to an individual claiming disadvantaged status any assets which that individual has transferred to an immediate family member, or to a trust a beneficiary of which is an immediate family member, for less than fair market value, within two years prior to a concern's application for participation in the DBE program or within two years of a participant's annual program review. The Department proposes to add this same language directly to the regulation textat § 26.67 in a new paragraph (e).

We are also proposing to add a provision concerning transfers from the DBE owner to the applicant firm. This is necessary for two reasons. First, the placement of the added language within the current section better emphasizes the importance of considering transfers of funds from the DBE owner to the applicant firm when assessing a person's economic disadvantage. Second, we have learned of situations in which DBE owner/applicants are shielding a portion of their personal assets by transferring them to the applicant firm that he/she owns and controls. The Department recognizes that such financial transactions may be an acceptable business practice; however, we also recognize that asset transfers can be used to artificially depress their PNW in order to qualify for the program. Because the regulation excludes the ownership interest in the applicant firm in calculating its owner's PNW, the ability to transfer one's personal assets to this entity would defeat the purpose of ensuring that only economically disadvantaged individuals participate in the DBE program.

Additional portions of this section taken from Appendix E would be retained. These provisions state that transfers will be included in a person's net worth unless the individual claiming disadvantaged status can demonstrate that the transfer is to, or on behalf of, an immediate family member for that individual's education, medical expenses, or some other form of essential support. In addition, recipients are not to attribute to an individual claiming disadvantaged status any assets transferred by that individual to an immediate family member that are consistent with the customary recognition of special occasions, such as birthdays, graduations, anniversaries, and retirements. The Department seeks comment on whether these exceptions to the inclusions of transfers in someone's PNW would open an overly wide opportunity for people to artificially understate their assets. If so, how should such transfers be handled?

The Department also seeks comment on whether the spouse of an applicant owner should have to file a PNW statement, even if the spouse is not involved in the business in question. In this connection, we note that SBA requires the submission of a separate form from a non-applicant spouse if the applicant is married and not legally separated. Currently, recipients in the DOT program can request relevant information from spouses on a case-by-case basis. The complexities of jointly owned assets and liabilities and the ability of married couples to transfer assets in order to participate in the program could make it useful to certifying agencies to have PNW information about spouses. Recipients could use the net worth statement submitted by a non-applicant spouse as a way check to see whether applicants have transferred assets and as a basis to inquire further as to the circumstances. While this information could improve recipients' ability to protect the integrity of the program, requiring detailed information from spouses not involved with a company could also prove intrusive and add considerably to the information burden of the program for applicants and the volume of materials that recipients would have to review and evaluate. We also seek comment on whether the treatment of assets held by married couples should extend to couples who are part of domestic partnerships or civil unions where these relationships are formally recognized under state law.

In addition, we seek comment on whether the Department should adopt a provision similar to SBA language which considers a spouse's financial situation in determining an individual's access to credit and capital where the spouse has a role in the business (e.g. an officer, employee, director) or has lent money to, provided credit support to, or guaranteed a loan of the business. Although the Department does not use“access to credit and capital” as criteria for certification, should the involvement of a spouse in the firm trigger further consideration of their net worth and should the recipient collect the personal financial statement from this person? Are there other circumstances that would warrant this?

Application Form

Under the current DBE rule, certification occurs on a statewide basis through the Unified Certification Program (UCP) in each state. The “one-stop shopping” for DBE applicants within a state has simplified certification by making it unnecessary for recipients to apply multiple times for certification by various transit authorities, airports, and highway departments.

In the May 10, 2010 NPRM, we proposed several enhancements to the program to facilitate interstate certification and interstate reciprocity, many of which appear in the revised rule issued by the Department on January 27, 2011. In order to reach the goal of a simplified administrative process for certification, it is necessary to revisit the DBE/ACDBE Certification Application form used by firms applying for certification. The current form, adopted in the June 16, 2003, regulation revision (68 FR 35542), was designed to be more streamlined and user-friendly, yet comprehensive enough to supply recipients with the necessary information to form their initial line of questioning prior to and during an on-site visit and to further assist them in making determinations as to applicants' qualifications for the DBE Program. At the time, the Department sought to keep the form manageable, easy to read, and easy to follow for applicants who must fill out the form, while simultaneously being accessible and practical for many recipients that distribute the form.

It is important to bear in mind that certification has two purposes. One is to foster and facilitate DBE participation by as many firms as can be determined to be eligible. The other is to preserve the integrity of the program, a strong certification system being the first line of defense against program fraud. To some extent, these goals can be in tension with one another, particularly when information collection can be viewed as burdensome to applicants but also viewed as necessary to recipients' efforts to maintain program integrity.

Certainly, an application form that remains accessible and usable by firms is a priority, and the Department encourages the continued efforts by recipients to post the form on the Internet in a screen-fillable format. Some commenters on the ANPRM sought ways to simplify the forms, while others recommended additions. A number of commenters provided detailed suggestions about how the forms should be configured. Based on the comments, as well as on the Department's experience with reviewing certification appeals and other issues that have come to the Department's attention, the Department is proposing a revised application form.

The proposed DBE/ACDBE Certification Application form and accompanying instructions would be used for both the DBE and ACDBE programs. Applicants will be requested to provide such items as: (1) A list of dates of any site visits conducted by the firm's home state and any other UCP members; (2) details concerning denial or decertification, withdrawals, suspension/debarment actions; (3) a business profile seeking a concise description of the firm's primary activities, products, or services the company provides; (4) a written description of the applicant's relationships and dealings with other businesses, including the sharing of equipment, storage space, inventory, and staff; (5) an assessment of the amount of time the majority owner and key officers, directors, managers, and key personnel devote to firm activities such as bidding and estimating, supervising field operations, and managing staff or crew, and (6) résumés and salaries of owners, directors, managers and key personnel. The proposed form would also remove obsolete material (e.g., relating to a now-expired SBA-DOT memorandum of understanding). The proposed form revisions include commonly requested items as well as items already mentioned in the existing regulation at § 26.83. ACDBE applications would be requested to provide details concerning their concession leases at airports.

DBE Commitments/Awards and Payment Reporting Form

The Department has identified several concerns regarding the format of Uniform Report of DBE Commitments/Awards and Payments form found in Appendix B of 49 CFR part 26. These include the inability to break out woman-owned DBE participation by race; inadequate, confusing or unclear instructions; inability of the form to meet differing needs of the various types of organizations/businesses participating in the DBE program; and difficulties in collecting information regarding payments to DBE on an ongoing/“real time” basis. The Department believes the proposed form responds to these concerns by: Creating separate forms for routine DBE reporting and for transit vehicle manufacturers (TVMs) and mega projects; amending and clarifying the report's instructions to better explain how to fill out the forms; and changing the forms to better capture the desired DBE data on a more continuous basis, which should also assist with recipients' post-award oversight responsibilities.

A 2011 Government Accountability Office (GAO) report criticized the existing form because it did not permit DOT to match recipients' DBE commitments in a given year with actual payments made to DBEs on the contracts to which the commitments pertained. The form provides information on the funds that are committed to DBEs in contracts let each year. However, the “achievements” block on the form refers to DBE payments that took place during the current year, including payments relating to contracts let in previous years, but could not include payments relating to contracts let in the current year that will not be made until future years.

The form in the NPRM, while attempting to clarify various parts of the reporting process, does not directly address this issue. However, it would be possible for the Department, by looking at data in 3-5 year groupings, to assemble a surrogate for the comparison that GAO recommended. For example, if the Department looked at data from 2009-2011, we could calculate an average annual amount of commitments over that period and an average amount of DBE payments over that period. While there would still not be a year-to-year correspondence between commitments and payments, this approach could smooth out statistical anomalies (e.g., years with unusually high or unusually low commitments or payments), providing a reasonable approximation of the success of recipients in ensuring that commitments are realized in terms of actual payments.

The Department could also modify the form to reach more directly the result that GAO recommended. The modification of the achievements portion of the form could look something like this:

Actual Payments to DBEs for Completed Contracts Year contract awarded Number of
  • contracts completed that were let in each year
  • Total $ value of contracts completed DBE participation needed to meet $
  • committed
  • Total $ paid to DBEs Total % of $ committed paid to DBEs
    2012 2011 2010 4 $10m $1m $900k 90% 2009 2008 2007

    In each row, data would be entered pertaining to payments from contracts let in a given year that were completed during the reporting year. By the time all contracts let in that year had been completed, DOT could compile the data to compare the recipient's payments to DBEs for payments in a given year to commitments and to goals.

    In the example above, a recipient sends in the form in 2012. It shows four contracts let in 2010 were completed in 2012, with a total value of $10 million. The commitments on those contracts, made in 2010, were $1 million. However, actual payments were $900,000, meaning that the DBEs realized only 90 percent of the dollars committed to them in 2010 on commitments made during 2010. Of course, it would be necessary to accumulate these forms for another few years to account for contracts that were not completed until 2013, 2014, etc. Consequently, while use of this form would allow the calculation of more precise data on how well a recipient had performed in terms of ensuring that commitments resulted in payments (and consequently how it had performed in terms of meeting its goals in payment as well as in commitment terms), this calculation would take several years to accomplish and would involve greater use of resources by recipients and the Department. It may also be questioned whether getting this information 3-5 years after the year in which contracts are let would limit too greatly the use of the resulting numbers for program administration and oversight purposes.

    The Department seeks comment on how this latter alternative might be improved, and also on which of the alternatives discussed here, or other ideas, would best serve the accountability and program administration objectives of the Department.

    Certification Provisions § 26.65What rules govern business size determinations?

    In this NPRM, the Department proposes to adjust the statutory gross receipts cap for inflation to $23.98 million. The inflation rate on purchases by state and local governments for the current year is calculated by dividing the price deflator for the first quarter of 2012 (124.668) by 2008's fourth quarter price deflator (116.524). The result of the calculation is 1.0699, which represents an inflation rate of 1.070% from the fourth quarter of 2008. Multiplying the $22,410,000 figure for disadvantaged business enterprises in Department of Transportation financial assistance programs by 1.0699 equals $23,976,459, which will be rounded off to the nearest $10,000, or $23,980,000.

    In addition, we propose to add language to the section clarifying that the size standard that applies to a particular firm is the one appropriate to its primary industry classification.

    § 26.69What rules govern determinations of ownership?

    Most firms, particularly those owned and controlled by socially and economically disadvantaged individuals, begin as small operations. Their owners often contribute their own funds or assets to equip the firm (referred to as equity financing) and/or borrow or pledge their own assets as collateral in order to receive needed funds from lending institutions or venture capitalists, friends, relatives, or industry colleagues (referred as debt financing). While each financing transaction has its own unique set of circumstances and requirements, it is fair to say that lenders often require some form of the borrower's personal guarantee.

    The DBE rule reflects this reality in two of its stated objectives: (1) Create a level playing field for firms to compete for DOT-assisted contracts, and (2) assist the development of firms that can compete successfully outside the program. To achieve these objectives, it is necessary to ensure that firms are truly owned and controlled by persons who are socially and economically disadvantaged. The Department incorporated the concept of “ownership” in the regulation by requiring the socially and economically disadvantaged owner to demonstrate his or her personal stake in their firm. Specifically, under § 26.61 and § 26.69, socially and economically disadvantaged individuals who seek to participate in the program bear the burden of demonstrating that it is they who have made a contribution of capital to acquire their ownership in the firm. This contribution must be “real, substantial, and continuing, going beyond pro forma ownership of the firm.” The regulation does not define these terms, but § 26.69(e) does provide some examples of what the Department considers to be an insufficient contribution, including a promise to contribute capital, and an unsecured note payable to the firm or an owner who is not a disadvantaged individual.

    Throughout the course of the program, Unified Certification Programs (UCPs) evaluating a firm's eligibility have properly denied certification to DBE and ACDBE applicants when an owner's contribution was either not real (suggesting the owner did not actually make the contribution), insubstantial (not enough of a contribution was provided for what was received), not continuing (no subsequent contribution to the firm or rapid withdrawal of a contribution that was made), or simply a pro forma arrangement (conveying the concept of a firm created on paper but without actual evidence of a personal contribution). For example:

    • A capital contribution by the disadvantaged owner of $100 is not considered substantial to acquire a majority interest in a firm worth $1 million.

    • A situation in which 51% disadvantaged owner and a 49% non-disadvantaged owner who contribute $100 and $10,000, respectively, toacquire a firm grossing $1 million, may be indicative of a pro forma arrangement.

    • A recipient can properly question the continuing nature of an owner's contribution when it finds that the sole owner of a DBE applicant firm spends $250 to file articles of incorporation and obtains a $100,000 loan, making only nominal or sporadic payments to repay the loan.

    In each of these examples, the DBE firm is could appropriately be denied certification on the grounds that the owner's contribution of capital does not meet the requirements of § 26.69. In other arrangements, non-disadvantaged individuals and non-disadvantaged firms may have contributed or loaned funds to the disadvantaged owners at the inception of the firm and/or provided ongoing monetary support to the business. These arrangements and the source of the funds are appropriately questioned by recipients, based on provisions contained in the existing § 26.69(h). This section currently prescribes a higher “clear and convincing” standard in situations where non-disadvantaged individuals or non-DBE firms that remain involved in the firm provide interests in a business or gift other assets to the disadvantaged owner applying for DBE certification. It requires the disadvantaged owner to demonstrate that the gift or transfer they received was made for reasons other than obtaining DBE certification and that the disadvantaged owner(s) actually control the management, policy, and operations of the firm, notwithstanding the continuing participation of the non-disadvantaged individual providing the gift or transfer. This safeguard is necessary to reduce the potential for front companies and fraud. We stated that as long as there are safeguards such as § 26.69(h) in place to protect against fronts, the origin of the assets, whether from one's own contribution, a bank loan, gift, inheritance, or other means, is unimportant.

    In proposed section 26.69(c)(2), we propose to add language prohibiting situations in which a non-disadvantaged party (e.g., an individual, a company) has a prior or superior right to a DBE firm's profits, compared to that of disadvantaged owners of the DBE. Arrangements in which non-disadvantaged owners get paid a percentage the firm's net profits, before any calculation of residual profit available for other firm purposes, defeats “ownership” by the disadvantaged owners. For example, in the context of certification appeals, the Departmental Office of Civil Rights (DOCR) has seen profit sharing and other arrangements through which the disadvantaged owner is paid after another owner holding less of an interest. This is particularly prevalent in ACDBE situations in which the prime is paid first from firm profits despite the fact that the socially/economically disadvantaged owner holds the majority interest on paper.

    When a non-disadvantaged individual remains involved in a firm, § 26.69(h) adequately provides recipients with the tools to make an appropriate evaluation of the applicant firm's eligibility. We are learning, however, that recipients are encountering cases in which a non-disadvantaged individual or non-DBE firm provided some form of financing at the firm's inception, enabling a disadvantaged owner to acquire an interest in the firm, in exchange for an ownership interest. These types of arrangements call into question whether a disadvantaged owner's ownership is “real, substantial, and continuing” and what considerations should be used in evaluating the timing of transactions.

    While the Department remains committed to the principle that firms are evaluated based on present circumstances (see section 26.73(b)(1)), it is also important to pay attention to the commercial and arms-length practices involving collateral, as well as the nature, origination, and timing of firm acquisition or establishment (i.e., the real and continuing requirement). This concern applies to situations in which non-disadvantaged individuals and firms remain involved in the firm and in situations where they do not. We are also concerned that the substantiality of ownership interests be considered in the entire context of the arrangement and in comparison to the overall value of the firm. We believe that greater clarity and specificity in DOT rules would be useful in helping recipients deal with situations of this kind.

    This was most evident inThe Grove, Inc.v.U.S. Department of Transportation,(578 F.Supp. 2d 37, D.D.C., 2008), a case that upheld the DOCR certification appeal decision that The Grove, Inc., an ACDBE, lacked independence from a non-DBE entity that was intertwined in The Grove's finances. However, the Court overturned a portion of the DOCR's determination that the disadvantaged owner failed to make a real and substantial contribution of capital to acquire her ownership interest in the firm. At issue in the case were the current provisions in § 26.69 regarding the use of unsecured loans from non-disadvantaged individuals and how to treat personal and marital assets used as collateral to acquire an ownership interest asserted by one spouse. The case also presented issues relating to the timing of a transfer of funds from a non-disadvantaged individual and the disadvantaged owner's subsequent deposit of these funds into a joint/marital account. The Court ruled that that regulation clearly contemplates the use of funds derived from a non-disadvantaged individual or entity as a means to acquire an ownership interest. It also addressed what would be considered a reasonable amount of contribution given the size of the firm at the time the disadvantaged owner acquired her majority interest. It ruled that the Department did not provide a rationale why a gross profit measure is the appropriate measure to value a company as opposed to another method, such as operating margin or net income when making this determination.

    To avoid problems of this kind, the Department believes it necessary for applicants to submit additional proof to substantiate both the sufficiency of their contribution and the circumstances of any funding streams to the firm since its inception. This includes documentation of how items used as collateral (whether jointly held or otherwise) are valued, and proof of ownership in these items (particularly high valued assets), and more stringent guidelines for deposits of funds used to acquire the ownership interest in a firm. These additions are reflected in proposed revisions to § 26.69(a) and (c)(1). The revision to (c)(3) concerning dividends and distributions proposes to mandate that one or more disadvantaged owners must be entitled to receive at least 51% of the annual distributions of dividends paid on the stock of a corporate concern; 100% of the value of each share of stock owned by them in the event that the stock is sold; and at least 51% of the retained earnings of the concern and 100% of the unencumbered value of each share of stock owned in the event of dissolution of the corporation. Of course, consistent with section 26.71(i)(1), recipients should also be aware of issues concerning differences in remuneration that could affect the disadvantaged owner's control of a firm.

    A revision to § 26.69(i) would add a new requirement concerning marital assets that form the basis for ownership in the firm. Under this proposed provision, recipients would have discretion in cases where marital assets are used to require information concerning the spouse's assets and liabilities. The recipient would then make a case-by-case determination of whether the asset transfer was made forreasons other than obtaining certification as a DBE.

    In paragraph (i), concerning joint or community property, we seek comment on whether greater protections are needed to prevent what are effectively a non-disadvantaged husband's assets from being treated as the capital contribution made by his wife. At present, the wife's share or joint or community property is countable toward ownership requirements if the husband renounces his ownership interest in the property. We propose to strengthen this provision by adding a sentence to paragraph (i)(2) saying that such a renunciation must be contemporaneous with the transfer itself, to avoid after-the-fact gamesmanship.

    A new paragraph (k) would incorporate language similar to § 26.69(j)(3), which requires recipients to give “particularly close and careful scrutiny to the ownership of the firm to ensure that it is owned and controlled in substance as well as in form, by a socially and economically disadvantaged individual.” The wording of this section is one way to guard against an artificial arrangement or accounting mechanism that gives the appearance that a firm was derived from the disadvantaged owners' own assets, when in reality it was not. In the ANPRM, we invited comments on what additional safeguards could be incorporated to meet this goal without placing undue burden on the applicant firm. The NPRM's draft paragraph (k) answers this question by telling recipients to give “particularly close and careful scrutiny to all interests in a business or other assets obtained by a socially and economically disadvantaged owner that resulted from a seller-financed sale of the firm or in cases where a loan or proceeds from a non-financial institution were used by the owner to purchase the interest.”

    The following proposed conditions would apply to such a transaction: (1) Terms and conditions must be comparable to prevailing market conditions offered by commercial lenders for similar type of projects (e.g., in terms of such factors as duration, rate, and fees); (2) there must be evidence provided by the applicant firm and disadvantaged business owner of the promissory note or loan agreement clearly stating the terms and conditions of the loan, including due date and payment method, interest rate, prepayment, defaults, and collateral; (3) the note would be a full-recourse note and be personally guaranteed by the socially and economically disadvantaged owner and/or secured by assets outside of the ownership interest or future profits of the applicant firm; (4) the contributions of capital by the socially and economically disadvantaged owner and any use of collateral by the disadvantaged owner must be clearly evident from the firm's and/or individual's records and supported by appropriate documentation and appraisals; and (5) other than normal loan provisions designed to preserve property pledged as collateral, there are no conditions, provisions, or practices that have the effect of limiting the socially and economically disadvantaged owner's ability to control the applicant firm. As in all certification matters, the applicant would bear the burden of proving that the transaction meets these criteria.

    § 26.71What rules govern determinations concerning control?

    This section is intended to ensure that recipients analyze the extent to which socially and economically disadvantaged individuals control their firm in both substance and form. Along with ownership, control of an applicant or participating firm is a central concept to the DBE and ACDBE programs and the Department seeks to guard against control of the firm's ownership structure, its operations, and policy decisions by non-disadvantaged individuals. Currently, the involvement of non-disadvantaged individuals in the firm's affairs is addressed in several parts of this section, including 26.71(e), (f), and (l). In the Department's view, the disadvantaged owners' talent and expertise and that of non-disadvantaged participants must be judged concurrently. In situations where the disadvantaged owner of an applicant or participating DBE firm meets the requirements of 26.71(g), the involvement of non-disadvantaged individuals is one of support rather than control, with a clear line of authority and decision making ability passed from the owner to the non-disadvantaged employee. Alternatively, where the disadvantaged owner possesses little or no experience or expertise, non-disadvantaged individuals can be seen as more involved in the firm's affairs such as controlling field operations, making major firm decisions, or supervising other employees in the critical areas of the firm's work. They are frequently compensated at a higher rate, and all indications point to their disproportionate role at the firm above and beyond that deemed acceptable in the DBE program. To explicitly address these scenarios, the Department is placing more stringent control requirements in paragraph (e). We are proposing to add a new section regarding non-disadvantaged individuals who once served as an employer or a principal of a former employer of any disadvantaged owner of the applicant or DBE firm. Under the proposal, this would form a basis for denying certification unless it is determined by the recipient that the relationship between the former employer or principal and the disadvantaged individual or applicant concern does not give the former employer actual control or the potential to control the applicant or DBE firm. To illustrate the potential scenarios wherein non-disadvantaged individuals may be found to control the firm, the proposed paragraph (e)(2) provides examples of unacceptable arrangements that negatively affect a disadvantaged owners' control of the firm.

    The current § 26.71(l) requires a higher evidentiary standard to be met in situations where a firm was formerly owned and/or controlled by a non-disadvantaged individual and such ownership and/or control is transferred to a socially and economically disadvantaged individual, where the non-disadvantaged individual remains involved in the firm. In such a situation, § 26.71(l) requires that the disadvantaged individual now owning the firm demonstrate by “clear and convincing evidence” that: (1) The transfer of ownership and/or control to the disadvantaged individual was made for reasons other than obtaining certification as a DBE; and (2) the disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-disadvantaged individual who formerly owned and/or controlled the firm. The Department seeks comment on whether this provision should be strengthened by presuming, that non-disadvantaged individuals who make such transfers and remain involved in the firm continue to control the business, rather than the disadvantaged transferee.

    § 26.73What are other rules affecting certification?

    Under the current 26.73(g), a recipient must not require an applicant firm to be prequalified as a condition for certification “unless the recipient requires all firms that participate in its contracts and subcontracts to be prequalified.” We propose to delete this part of this statement, with the result that prequalification could no longer be used as a criterion for certification in any case. While the Department believes that prequalification requirements may be an unnecessary barrier to DBEparticipation, this provision would not prohibit prequalification as a condition for receiving certain sorts of contracts. However, whether a firm is prequalified is irrelevant to certification concerns such as size, disadvantage, ownership and control. It is important for certifiers to analyze only the factors relevant to DBE eligibility and not incorporate other recipient business requirements in decisions pertaining to an applicant's qualification for the program. Further, while prequalification may be a requirement for doing business in one mode (e.g., highway) it may not be a requirement for doing business in other modes (e.g., transit).

    § 26.83What procedures do recipients follow in making certification decisions?

    Under the current rule, recipients must take several steps in determining whether a firm meets all eligibility criteria for participation in the DBE program. The on-site visit to the firm's place of business and job sites is a crucial component of this review and the Department seeks to strengthen the information collection process. Since the issuance of the 1999 rule, the Department has received numerous appeals filed by firms denied certification on the basis of control, specifically the involvement of non-disadvantaged individuals in the firm's critical activities. Recipients base their decision after performing an on-site review of the firm and the responses owners give to their questions during the visit.

    Interviewing the principal officers of the firm is required under § 26.83(c). Some recipients, however, also interview key personnel of the firm as a means to verify or cross-check the answers they receive from the owners. We believe this is an important practice recipients should perform before determining the firm's eligibility. In addition, interviewing employees reveal how they fit in the firm's overall daily operations and management vis-à-vis the owners. By speaking with these individuals as well, recipients gain a clearer view of how owners oversee a project, whether from behind a desk or at the field. An owner who is primarily in the office handling paperwork may have delegated too much authority to employees in the field, a factor that negatively affects their control of the firm. Therefore, the Department proposes adding a requirement that recipients interview the key personnel of the firm. In addition, the on-site visit should be performed at the firm's principal place of business, which may or may not be the same as the firm's offices. Both revisions appear in the first two sentences of § 26.83(c)(1).

    Paragraph (c)(2) requires a recipient to analyze the stock ownership in a firm. Here, the Department proposes adding clarifying language that would require an analysis of documentation related to the legal structure, ownership, and control of the applicant firm. This includes, but is not limited to Articles of Incorporation/Organization; corporate by-laws or operating agreements; organizational, annual and board/member meeting records; and stock ledgers and certificates. Similarly, a revised section (c)(3) and (c)(4) would add the requirement that recipients also analyze any lease and loan agreements, bank signature cards, and payroll records.

    Where a firm is applying to be certified in more than one North American Industrial Classification System (NAICS) code, the NPRM (§ 26.83(c)(5)) would call on recipients to obtain information about the amount of work the firm has performed in the various NAICS codes involved. This will help recipients determine the socially and economically disadvantaged owners' level of knowledge in each category of work and whether they can control the firm's operations in these areas in accordance with § 26.71. The proposed Uniform Certification Application contains added space for firms to enter their NAICS Codes directly on the form, which in turn will help recipients with this determination. Particularly for start-up firms or for firms moving into new areas of work, we do not intend that recipients establish any sort of minimum “track record” as a prerequisite to certification. This proposed amendment is simply intended to provide what can be additional useful information in some cases.

    Recipients also determine whether a firm meets the applicable size standards and if the applicant owner is economically disadvantaged. Tax returns are important information for this task. The proposed (c)(7) clarifies that applicants need to provide completed income tax returns or requests for extensions filed by the firm, its affiliates, and the socially and economically disadvantaged owners for the last three years. (We recognize that, for start-up or other new firms, three years' worth of tax returns may not yet exist.) As stated in the new paragraph, a complete return is one that includes all forms, schedules, and statements filed with the Internal Revenue Service, and state taxing authority. The proposed DBE/ACDBE application form has been amended to specifically require this information.

    At various times during the application review process, recipients may seek more information from an applicant. In (c)(8)(iii), we propose to add language making explicit the discretion of certifying agencies to request clarification of information contained in the application, or to request additional information, at any time in the application process. This will help alleviate confusion by firms that believe their application is complete once it is submitted and that the UCP must make a decision solely on the information the firm has initially provided. At the same time, we caution certifying agencies against prolonging the certification process unnecessarily through repeated requests for additional information, once enough data to make an informed decision possible has been submitted.

    § 26.83(h) and (j)

    Paragraph (h) emphasizes that once a firm is certified, it remains certified unless and until it voluntarily withdraws from the program or is decertified (with the exception of circumstances spelled out in section 27.67, when an owner's PNW statement shows that the owner is no longer a disadvantaged individual). There can be partial as well as total decertifications (i.e., when a NAICS code in which a firm is currently certified is taken away). Partial and total decertifications both require use of the section 26.87 process. Recipients are reminded that certifications do not lapse; they are not like driving licenses, which expire after a given number of years if not renewed. There is no such thing as a “recertification” process, after three years or any other period, and recipients cannot require currently certified firms to reapply for certification. Any recipient who does so is acting contrary to the express requirements of this rule. However, if, at any time, information comes to a recipient's attention that would cause it to question a firm's continued eligibility, the recipient can, and should, review the firm's certification status, in the course of which it can conduct a new on-site review, announced or unannounced. Because firms' circumstances can change over time, we urge recipients, as a matter of good practice, to conduct reviews of firms' eligibility, including updated on-site reviews, from time to time.

    The Department is not changing the long-standing practice of annual affidavits of no change, and we believe that this requirement is crucial to keeprecipients current on the status of certified firms. The NPRM would strengthen this process by directing certified firms to submit additional items with their affidavits. The additional information would include updated PNW statements and a record from each individual claiming disadvantaged status regarding the transfer of assets for less than fair market value to any immediate family member, or to a trust any beneficiary of which is an immediate family member, within two years of the date of the annual review. In addition, the firm would have to submit a record of all payments, compensation, and distributions (including loans, advances, salaries and dividends) made by the DBE firm to each of its owners, officers or directors, as well as the firm's (and its affiliates') and owners' most recent completed IRS tax returns, IRS Form 4506 (Request for Copy or Transcript of Tax Return). Recipients would also have the discretion, on a case-by-case basis, to obtain other information relevant to determinations about the firm's size and its ownership and control by disadvantaged individuals.

    § 26.86What rules govern recipients' denials of initial requests for certification?

    Under paragraph (c) of this section, when a firm is denied certification, the recipient must establish a time period of no more than twelve months that must elapse before the firm may reapply for certification. This waiting period can be shorter, but, as stated in the rule, the time period for reapplication begins to run on the date the recipient's action is received by the firm. The NPRM would add a sentence clarifying that an applicant's appeal of a recipient's decision to the Department pursuant to § 26.89 does not extend this period. For example, suppose a firm is denied certification on September 1, 2012. If the recipient has six-month waiting period, the firm could reapply on March 1, 2013. If, in the meantime, the firm appealed the decision to the Department, it could still reapply on March 1, 2013, even if its appeal to the Department was still pending on that date.

    § 26.87What procedures does a recipient use to remove a DBE's eligibility?

    The Department is proposing to revise and expand the grounds on which recipients can, in the interest of program integrity, decertify DBE firms. First, the Department would delete the first sentence of 26.87(f), which says that a recipient cannot remove a DBE's eligibility on the basis of a reinterpretation or changed opinion of information available to the recipient at the time of the firm's certification. This language was intended to create a degree of finality in certifications. There can be certification decisions about which reasonable people can differ, and we believe, as a matter of policy, that it is useful to limit situations in which, for example, a new certification official reviews the same facts that his or her predecessor reviewed but simply forms a different opinion. That said, certifying agencies have expressed concerns that this language is too limiting, particularly for situations in which it appears that a bad mistake led to a firm's certification.

    In an attempt to better accommodate both objectives, we are proposing a revised paragraph (f)(5) that would permit a recipient to decertify a firm on the basis that its certification was clearly erroneous. This standard means that the basis for the decertification would be a definite and firm conviction on the recipient's part that a mistake was committed, in the absence of which the firm would not have been certified. This is more than a simple difference of opinion or different judgment call about the evidence in the matter. To decertify a firm based on this paragraph, the recipient would have to show, by the usual preponderance of the evidence standard it must meet in decertification cases, that the original certification was clearly wrong.

    We also propose to add two additional grounds for decertification, both of which refer to other provisions in the regulations. Consistent with section 26.73(a)(2), a firm can be decertified for exhibiting a pattern of conduct indicating its involvement in attempts to subvert the intent or requirements of the DBE program by, for example, repeatedly seeking DBE credit for activities that fail to involve a commercially useful function and thereby raise questions about the firm's eligibility. Likewise, a firm can be decertified for a failure to cooperate, under 26.109(c). A failure to cooperate can include such things as failure to timely file affidavits of no change or notices of change, PNW statements, and various required supporting documents.

    We also note that the current provisions of paragraph (f) cover a number of situations that can arise. For example, paragraph (f)(3), concerning concealed or misrepresented information, covers submission of false information in applications, PNW statements, affidavits of no change, etc. Paragraph (f)(1) covers situations where changes in ownership, death or incarceration of a disadvantaged owner, changes in the disadvantaged owner's involvement with management of the firm, changes in the firm's relationship with other firms, etc. may make a previously eligible firm no longer eligible. The provisions relating to failure to cooperate covers such things as failing to send in affidavits of no change or notices of change, and accompanying documents, when needed.

    We also seek comment on the relationship between decertification and suspension and debarment proceedings. If a firm is suspended or debarred (e.g., as the result of a criminal indictment or conviction), either as a matter of state or Federal action, should the firm also be decertified? On one hand, since the firm is suspended or debarred, it will not be performing any contracts, so its being or not being on a state's certified list seems somewhat moot. Moreover, certification concerns size, disadvantage, ownership and control, and the misconduct of the firm may not relate to these criteria. On the other hand, especially if the misconduct that led to the suspension and debarment concerned participation in the DBE program, the firm's conduct may constitute a pattern of conduct indicating its involvement in attempts to subvert the intent or requirements of the DBE program. Should suspension and debarment result in an automatic decertification, should it be a trigger causing recipients to evaluate the firm for decertification, or is there another approach that would make more sense?

    In paragraph (g), we would add a sentence clarifying that when a notice concerning a recipient's response to an ineligibility complaint is sent to the complainant (other than to a DOT operating administration), confidential business information concerning the DBE in question would be redacted, absent written consent from the DBE firm. This is consistent with the existing confidentiality provisions of section 26.109.

    § 26.88Summary Suspension of Certification

    As noted above, a certified firm remains certified until and unless it is decertified. But what happens if there is a significant change in the business, such as the death of its owner or the sale of the firm? Current guidance properly tells recipients to look at the changed firm and determine whether the firm should be decertified and initiate a section 26.87 proceeding if appropriate. In this situation, the recipient has the burden of proof to demonstrate that the firm should lose its eligibility.Meanwhile, the firm continues to be certified and can obtain new contracts as a DBE. Many people in the certification community have urged, to the contrary, that the firm should lose its eligibility when a dramatic change of this kind occurs, and should have to reapply for certification as if it were a new firm. Meanwhile, it would not be eligible for new contracts as a DBE.

    The proposed section 26.88 seeks a middle ground between these approaches, providing that a firm's certification would be suspended in some situations (i.e., death or incarceration of an owner whose participation is needed to meet ownership and control requirements) and could be suspended in other situations (e.g., sale of the firm to a new owner), while a recipient determines whether the firm's certification should be continued. When a firm's certification is suspended, it cannot receive new contracts as a DBE. However, its participation on a contract it has already received would continue to count toward DBE goals.

    Under the proposal, if an owner necessary to the firm's eligibility dies or is incarcerated, the recipient must suspend the firm's eligibility. By necessary to the firm's eligibility, we mean that without that owner's participation, the firm would not meet the requirement of 51 percent ownership by disadvantaged individuals or the requirement that disadvantaged owners control the firm. If a single disadvantaged individual is the 51 percent owner, then it is obvious that the suspension would take effect. However, if there were three disadvantaged owners who each owned 30 percent of the business, and one of them died, then the other two, between them, would still own more than 51 percent of the business, and the recipient would not be required to suspend the firm's certification. Of course, if the owner who died was essential to control of the business by disadvantaged individuals, it would be appropriate to suspend the firm.

    In other situations, recipients would have the discretion to suspend a firm's eligibility. For example, if a firm was sold, and there was a significant question about whether the new disadvantaged owners controlled the firm, or if the firm failed to file the required notice following a material change in its circumstances, or an affidavit of no change, the recipient could choose to suspend the firm's eligibility. (This could prove a useful incentive for firms to file these documents in a timely fashion). After a suspension, the firm would provide information relevant to its eligibility to the recipient. Within 30 days of getting that information, the recipient would have to lift the suspension or commence a decertification proceeding under section 26.87. The suspension would continue in effect during the proceeding. If the firm is not decertified as the result of the proceeding, the suspension is lifted and the firm returned to active status as a DBE.

    § 26.89What is the process for certification appeals to the Department of Transportation?

    The Department is not proposing to change the process for firms wishing to appeal a recipient's determination concerning its eligibility. However, we propose amending this section to clarify what type of information should be contained in the appeal filed with DOCR. Specifically, we propose in § 26.89(c) that the appellant provide a “full and specific statement as to why the decision is erroneous, what significant fact that the recipient failed to consider, or what provisions of this part the recipient did not properly apply.” This addition will aid the Department in reviewing the recipient's actions. Another change we propose that will also aid both recipients and the Department in the appeal process is clarification of how the regulation defines “days.” Under the proposed definition in section 26.5, days would mean calendar days; and in computing any period of time described in the regulation, the day from which the period begins to run is not counted, and when the last day of the period is a Saturday, Sunday, or Federal Holiday, the period extends to the next day that is not a Saturday, Sunday, or Federal Holiday.

    Other Provisions § 26.1What are the objectives of this part?

    The NPRM would add a new paragraph to this section, saying that a purpose of the rule is to promote the use of all types of DBEs. This language is intended to emphasize that the DBE program is not just about construction. Other types of work, including, but not limited to, professional services, supplies etc., are also appropriate for DBE participation.

    § 26.5Definitions

    In the Department's experience, recipients need clarity on terms already used in this provision, and we propose adding eight new definitions in this section for the following words or phrases: “Assets;” “business, business concern, or business enterprise;” “contingent liability;” “days;” “immediate family member;” “liabilities;” “non-disadvantaged individual;” “principal place of business;” and “transit vehicle manufacturer (TVM).” With respect to the TVM definition, the Department seeks comment on whether producers of vehicles that receive post-production alterations or retrofitting to be used for public transportation purposes (e.g., so-called “cutaway” vehicles, vans customized for service to people with disabilities) should be defined as TVMs for DBE program purposes.

    Additionally, we propose to modify the existing definition of a “socially and economically disadvantaged individual” to align with SBA principles. Most importantly, the definition specifically states that being born in a country does not, by itself, suffice to make the birth country and individual's country of origin for purposes of being included within a designated group. For example, a child born of Norwegian parents in Chile would not, based on that fact alone, be regarded as “Hispanic” under the definition. Minor technical changes to references within the existing definitions are also proposed.

    We also note that the proposed definition of “immediate family member” would include a wider group of relatives, and we seek comment on the scope of that proposed change (e.g., Is it appropriate to include grandparents? Should grandchildren also be included?). The effect of the change is to broaden the impact of provisions of the rule that call for a higher burden of proof concerning ownership and control when transfers of interests in a company are made to family members.

    The NPRM would amend the definition of “Native Americans” to be consistent with a February 2011 change in SBA's definition of the term. The term “Alaska native” would replace “Eskimos and Aleuts,” and the phrase “enrolled members of a federally or state-recognized Indian tribe” would replace “American Indians.”

    § 26.11What records do recipients keep and report?

    The NPRM proposes two new provisions, both related to certification. The first is a record retention requirement for certification-related records. These are the kind of records that recipients and UCPs normally keep, but we have heard concerns that some r