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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AG45

Small Business Size Standards: Finance and Insurance and Management of Companies and Enterprises

AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
SUMMARY: The U.S. Small Business Administration (SBA) proposes to increase small business size standards for 37 industries in North American Industry Classification System (NAICS) Sector 52, Finance and Insurance, and for two industries in NAICS Sector 55, Management of Companies and Enterprises. In addition, SBA proposes to change the measure of size from average assets to average receipts for NAICS 522293, International Trade Financing. As part of its ongoing comprehensive size standards review, SBA evaluated all receipts based and assets based size standards in NAICS Sectors 52 and 55 to determine whether they should be retained or revised. This proposed rule is one of a series of proposed rules that will review size standards of industries grouped by NAICS Sector. SBA issued a White Paper entitled "Size Standards Methodology" and published a notice in the October 21, 2009 issue of theFederal Registerto advise the public that the document is available on its Web site atwww.sba.gov/sizefor public review and comments. The "Size Standards Methodology" White Paper explains how SBA establishes, reviews, and modifies its receipts based and employee based small business size standards. In this proposed rule, SBA has applied its methodology that pertains to establishing, reviewing, and modifying a receipts based size standard.
DATES: SBA must receive comments to this proposed rule on or before November 13, 2012.
ADDRESSES: Identify your comments by RIN 3245-AG45 and submit them by one of the following methods: (1) Federal eRulemaking Portal:www.regulations.gov, following the instructions for submitting comments; or (2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416. SBA will not accept comments to this proposed rule submitted by email.

SBA will post all comments to this proposed rule onwww.regulations.gov.. If you wish to submit confidential business information (CBI) as defined in the User Notice atwww.regulations.gov,you must submit such information to U.S. Small Business Administration, Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416, or send an email tosizestandards@sba.gov.Highlight the information that you consider to be CBI and explain why you believe SBA should hold this information as confidential. SBA will review your information and determine whether it will make the information public.

FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Ph.D., Chief, Size Standards Division, (202) 205-6618 orsizestandards@sba.gov.
SUPPLEMENTARY INFORMATION:

To determine eligibility for Federal small business assistance, SBA establishes small business size definitions (referred to as size standards) for private sector industries in the United States. SBA uses two primary measures of business size—average annual receipts and average number of employees. SBA uses financial assets, electric output, and refining capacity to measure the size of a few specialized industries. For example, currently six size standards in NAICS Sector 52 are based on total assets. In addition, SBA's Small Business Investment Company (SBIC), Certified Development Company (504), and 7(a) Loan Programs use either the industry based size standards or net worth and net income based alternative size standards to determine eligibility for those programs. At the beginning of the current comprehensive size standards review, there were 41 different size standards covering 1,141 NAICS industries and 18 sub-industry activities (“exceptions” in SBA's table of size standards). Thirty-one of these size levels were based on average annual receipts, seven were based on average number of employees, and three were based on other measures.

Over the years, SBA has received comments that its size standards have not kept up with changes in the economy, in particular the changes in the Federal contracting marketplace and industry structure. The last time SBA conducted a comprehensive review of all size standards was during the late 1970s and early 1980s. Since then, most reviews of size standards were limited to a few specific industries in response to requests from the public and Federal agencies. SBA also adjusts its monetary based size standards for inflation at least once every five years. SBA's latest inflation adjustment to size standards was published in theFederal Registeron July 18, 2008 (73 FR 41237).

Because of changes in the Federal marketplace and industry structure since the last comprehensive size standards review, SBA recognizes that current data may no longer support some of its existing size standards. Accordingly, in 2007, SBA began a comprehensive review of all size standards to determine if they are consistent with current data, and to adjust them when necessary. In addition, on September 27, 2010, the President of the United States signed the Small Business Jobs Act of 2010 (Jobs Act). The Jobs Act directs SBA to conduct a detailed review of all size standards and to make appropriate adjustments to reflect market conditions. Specifically, the Jobs Act requires SBA to conduct a detailed review of at least one-third of all size standards during every 18-month period from the date of its enactment. In addition, the Jobs Act requires that SBA conduct a review of all size standards at least once every five years thereafter. Reviewing existing small business size standards and making appropriate adjustments based on current data are also consistent with Executive Order 13563 on improving regulation and regulatory review.

Rather than review all size standards at one time, SBA is reviewing size standards on a Sector by Sector basis. A NAICS Sector generally includes 25 to 75 industries, except for NAICS Sector31-33, Manufacturing, which has considerably more industries. Once SBA completes its review of size standards for industries in a given NAICS Sector, it issues a proposed rule to revise size standards for those industries for which it believes currently available data and other relevant factors support doing so.

Below is a discussion of SBA's size standards methodology for establishing receipts based size standards that SBA applied to this proposed rule, including analyses of industry structure, Federal procurement trends and other relevant factors for industries reviewed in this proposed rule, the impact of the proposed revisions to size standards on Federal small business assistance, and the evaluation of whether a revised size standard would exclude dominant firms from being considered small.

Size Standards Methodology

SBA has recently developed a “Size Standards Methodology” for developing, reviewing, and modifying size standards when necessary. SBA published the document on its Web site atwww.sba.gov/sizefor public review and comments, and has included it as a supporting document in the electronic docket of this proposed rule atwww.regulations.gov,SBA does not apply all features of its “Size Standards Methodology” to all industries because not all features are appropriate for every industry. For example, since 36 of the 42 industries in NAICS Sectors 52 and 55 reviewed in this rule have receipts based size standards, the methodology described in this proposed rule applies only to establishing receipts based size standards. For those interested in SBA's overall approach to establishing, evaluating, and modifying small business size standards, the methodology is available on SBA's Web site atwww.sba.gov/size.SBA always explains its analysis in individual proposed and final rules relating to size standards for specific industries.

SBA welcomes comments from the public on a number of issues concerning its “Size Standards Methodology,” such as whether there are other approaches to establishing and modifying size standards; whether there are alternative or additional factors that SBA should consider; whether SBA's approach to small business size standards makes sense in the current economic environment; whether SBA's use of anchor size standards is appropriate; whether there are gaps in SBA's methodology because the data it uses are not current or sufficiently comprehensive; and whether there are other data, facts, and/or issues that SBA should consider. Comments on SBA's size standards methodology should be submitted via (1) the Federal eRulemaking Portal:www.regulations.gov,following the instructions for submitting comments; the docket number is SBA-2009-0008, or (2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416. As it will do with comments to this and other proposed rules, SBA will post all comments on its methodology onwww.regulations.gov.As of May 31, 2012, SBA has received 14 comments to its “Size Standards Methodology.” The comments are available to the public atwww.regulations.gov.SBA continues to welcome comments on its methodology from interested parties. SBA will not accept comments to its “Size Standards Methodology” submitted by email.

Congress granted SBA's Administrator discretion to establish detailed small business size standards. 15 U.S.C. 632(a)(2). Specifically, Section 3(a)(3) of the Small Business Act (15 U.S.C. 632(a)(3)) requires that “* * * the [SBA] Administrator shall ensure that the size standard varies from industry to industry to the extent necessary to reflect the differing characteristics of the various industries and consider other factors deemed to be relevant by the Administrator.” Accordingly, the economic structure of an industry is the basis for developing and modifying small business size standards. SBA identifies the small business segment of an industry by examining data on the economic characteristics defining the industry structure (as described below). In addition, SBA considers current economic conditions, its mission and program objectives, the Administration's current policies, suggestions from industry groups and Federal agencies, and public comments on the proposed rule. SBA also examines whether a size standard based on industry and other relevant data successfully excludes businesses that are dominant in the industry.

This proposed rule includes information regarding the factors SBA evaluated and the criteria it used to propose adjustments to size standards in NAICS Sectors 52 and 55. This proposed rule affords the public an opportunity to review and to comment on SBA's proposals to revise size standards in NAICS Sectors 52 and 55, as well as on the data and methodology it used to evaluate and revise the size standards.

Industry Analysis

For the current comprehensive size standards review, SBA has established three “base” or “anchor” size standards—$7.0 million in average annual receipts for industries that have receipts based size standards, 500 employees for manufacturing and other industries that have employee based size standards (except for Wholesale Trade), and 100 employees for industries in the Wholesale Trade Sector. SBA established 500 employees as the anchor size standard for manufacturing industries at its inception in 1953. Shortly thereafter, SBA established $1 million in average annual receipts as the anchor size standard for nonmanufacturing industries. SBA has periodically increased the receipts based anchor size standard for inflation, and today it is $7 million. Since 1986, the size standard for all industries in the Wholesale Trade Sector for SBA financial assistance and for most Federal programs has been 100 employees. However, NAICS codes for the Wholesale Trade Sector and their 100 employee size standards do not apply to Federal procurement programs. Rather, for Federal procurement the size standard for all industries in Wholesale Trade (NAICS Sector 42) and for all industries in Retail Trade (NAICS Sector 44-45), is 500 employees under SBA's nonmanufacturer rule (13 CFR 121.406(b)).

These long-standing anchor size standards have stood the test of time and gained legitimacy through practice and general public acceptance. An anchor is neither a minimum nor a maximum size standard. It is a common size standard for a large number of industries that have similar economic characteristics and serves as a reference point in evaluating size standards for individual industries. SBA uses the anchor in lieu of trying to establish precise small business size standards for each industry. Otherwise, theoretically, the number of size standards might be as high as the number of industries for which SBA establishes size standards (1,141). Furthermore, the data SBA analyzes are static, while the U.S. economy is not. Hence, absolute precision is impossible. SBA presumes an anchor size standard is appropriate for a particular industry unless that industry displays economic characteristics that are considerably different from other industries with the same anchor size standard.

When evaluating a size standard, SBA compares the economic characteristics of the industry under review to the average characteristics of industries with one of the three anchor size standards (referred to as the “anchor comparison group”). This allows SBA to assess the industry structure and todetermine whether the industry is appreciably different from the other industries in the anchor comparison group. If the characteristics of a specific industry under review are similar to the average characteristics of the anchor comparison group, the anchor size standard is generally appropriate for that industry. SBA may consider adopting a size standard below the anchor when (1) all or most of the industry characteristics are significantly smaller than the average characteristics of the anchor comparison group, or (2) other industry considerations strongly suggest that the anchor size standard would be an unreasonably high size standard for the industry.

If the specific industry's characteristics are significantly higher than those of the anchor comparison group, then a size standard higher than the anchor size standard may be appropriate. The larger the differences are between the characteristics of the industry under review and those in the anchor comparison group, the larger will be the difference between the appropriate industry size standard and the anchor size standard. To determine a size standard above the anchor size standard, SBA analyzes the characteristics of a second comparison group. For industries with receipts based size standards, including those in NAICS Sectors 52 and 55, SBA has developed a second comparison group consisting of industries that have the highest of receipts based size standards. To determine a size standard above the anchor size standard, SBA analyzes the characteristics of this second comparison group. The size standards for this group of industries range from $23 million to $35.5 million in average annual receipts; the weighted average size standard for the group is $29 million. SBA refers to this comparison group as the “higher level receipts based size standard group.”

The primary factors that SBA evaluates to examine industry structure include average firm size, startup costs and entry barriers, industry competition, and distribution of firms by size. SBA evaluates, as an additional primary factor, the impact that revised size standards might have on Federal contracting assistance to small businesses. These are, generally, the five most important factors SBA examines when establishing or revising a size standard for an industry. However, SBA will also consider and evaluate other information that it believes is relevant to a particular industry (such as technological changes, growth trends, SBA financial assistance, other program factors,etc.). SBA also considers possible impacts of size standard revisions on eligibility for Federal small business assistance, current economic conditions, the Administration's policies, and suggestions from industry groups and Federal agencies. Public comments on a proposed rule also provide important additional information. SBA thoroughly reviews all public comments before making a final decision on its proposed size standards. Below are brief descriptions of each of the five primary factors that SBA has evaluated for each industry in NAICS Sectors 52 and 55 that has a receipts based size standard. A more detailed description of this analysis is provided in SBA's “Size Standards Methodology,” available athttp://www.sba.gov/size.

1.Average firm size.SBA computes two measures of average firm size: Simple average and weighted average. For industries with receipts based size standards, the Simple average is the total receipts of the industry divided by the total number of firms in the industry. The weighted average firm size is the sum of weighted simple averages in different receipts based size classes, where weights are the shares of total industry receipts for respective size classes. The simple average weighs all firms within an industry equally regardless of their size. The weighted average overcomes that limitation by giving more weight to larger firms.

If the average firm size of an industry is significantly higher than the average firm size of industries in the anchor comparison industry group, this will generally support a size standard higher than the anchor size standard. Conversely, if the industry's average firm size is similar to or significantly lower than that of the anchor comparison industry group, it will be a basis to adopt the anchor size standard, or, in rare cases, a standard lower than the anchor.

2.Startup costs and entry barriers.Startup costs reflect a firm's initial size in an industry. New entrants to an industry must have sufficient capital and other assets to start and maintain a viable business. If new firms entering a particular industry have greater capital requirements than firms in industries in the anchor comparison group, this can be a basis for establishing a size standard higher than the anchor size standard. In lieu of actual startup cost data, SBA uses average assets as a proxy to measure the capital requirements for new entrants to an industry.

To calculate average assets, SBA begins with the sales to total assets ratio for an industry from the Risk Management Association's Annual Statement Studies. SBA then applies these ratios to the average receipts of firms in that industry. An industry with average assets that are significantly higher than those of the anchor comparison group is likely to have higher startup costs; this in turn will support a size standard higher than the anchor. Conversely, an industry with average assets that are similar to or lower than those of the anchor comparison group is likely to have lower startup costs; this will support the anchor standard or one lower than the anchor.

3.Industry competition.Industry competition is generally measured by the share of total industry receipts generated by the largest firms in an industry. SBA generally evaluates the share of industry receipts generated by the four largest firms in each industry. This is referred to as the “four-firm concentration ratio,” a commonly used economic measure of market competition. SBA compares the four-firm concentration ratio for an industry to the average four-firm concentration ratio for industries in the anchor comparison group. If a significant share of economic activity within the industry is concentrated among a few relatively large companies, all else being equal, SBA will establish a size standard higher than the anchor size standard. SBA does not consider the four-firm concentration ratio as an important factor in assessing a size standard if its share of economic activity within the industry is less than 40 percent. For an industry with a four-firm concentration ratio of 40 percent or more, SBA examines the average size of the four largest firms to determine a size standard.

4.Distribution of firms by size.SBA examines the shares of industry total receipts accounted for by firms of different receipts and employment size classes in an industry. This is an additional factor in assessing industry competition. If most of an industry's economic activity is attributable to smaller firms, this generally indicates that small businesses are competitive in that industry. This can support adopting the anchor size standard. If most of an industry's economic activity is attributable to larger firms, this indicates that small businesses are not competitive in that industry. This can support adopting a size standard above the anchor.

Concentration is a measure of inequality of distribution. To determine the degree of inequality of distribution in an industry, SBA computes the Gini coefficient, using the Lorenz curve. The Lorenz curve presents the cumulativepercentages of units (firms) along the horizontal axis and the cumulative percentages of receipts (or other measures of size) along the vertical axis. (For further detail, please refer to SBA's “Size Standards Methodology” on its Web site atwww.sba.gov/size.) Gini coefficient values vary from zero to one. If receipts are distributed equally among all the firms in an industry, the value of the Gini coefficient will equal zero. If an industry's total receipts are attributed to a single firm, the Gini coefficient will equal one.

SBA compares the Gini coefficient value for an industry with that for industries in the anchor comparison group. If the Gini coefficient value for an industry is higher than it is for industries in the anchor comparison industry group this may, all else being equal, warrant a size standard higher than the anchor. Conversely, if an industry's Gini coefficient is similar to or lower than that for the anchor group, the anchor standard, or in some cases a standard lower than the anchor, may be adopted.

5.Impact on Federal contracting and SBA loan programs.SBA examines the possible impact a size standard change may have on Federal small business assistance. This most often focuses on the share of Federal contracting dollars awarded to small businesses in the industry in question. In general, if the small business share of Federal contracting in an industry with significant Federal contracting is appreciably less than the small business share of the industry's total receipts, this could justify considering a size standard higher than the existing size standard. The disparity between the small business Federal market share and industry-wide small business share may be due to various factors, such as extensive administrative and compliance requirements associated with Federal contracts, the different skill set required for Federal contracts as compared to typical commercial contracting work, and the size of Federal contracts. These, as well as other factors, are likely to influence the type of firms within an industry that compete for Federal contracts. By comparing the small business Federal contracting share with the industry-wide small business share, SBA includes in its size standards analysis the latest Federal contracting trends. This analysis may support a size standard larger than the current size standard.

SBA considers Federal contracting trends in the size standards analysis only if (1) the small business share of Federal contracting dollars is at least 10 percent lower than the small business share of total industry receipts, and (2) the amount of total Federal contracting averages $100 million or more during the latest three fiscal years. These thresholds reflect significant levels of contracting where a revision to a size standard may have an impact on contracting opportunities to small businesses.

Besides the impact on small business Federal contracting, SBA also evaluates the impact of a proposed size standard revision on SBA's loan programs. For this, SBA examines the data on volume and number of its guaranteed loans within an industry and the size of firms obtaining those loans. This allows SBA to assess whether the existing or the proposed size standard for a particular industry may restrict the level of financial assistance to small firms. If current size standards have impeded financial assistance to small businesses, higher size standards may be supportable. However, if small businesses under current size standards have been receiving significant amounts of financial assistance through SBA's loan programs, or if the financial assistance has been provided mainly to businesses that are much smaller than the existing size standards, SBA does not consider this factor when determining the size standard.

Sources of Industry and Program Data

The primary source of industry data that SBA used in evaluating industries in NAICS Sectors 52 and 55 that have receipts based size standards is a special tabulation of the 2007 Economic Census (see www.census.gov/econ/census07/) prepared by the U.S. Bureau of the Census (Census Bureau) for SBA. The 2007 Economic Census data are the latest available. The special tabulation provides SBA with data on the number of firms, number of establishments, number of employees, annual payroll, and annual receipts of companies by Industry (6-digit level), Industry Group (4-digit level), Subsector (3-digit level), and Sector (2-digit level). These data are arrayed by various classes of firms' size based on the overall number of employees and receipts of the entire enterprise (all establishments and affiliated firms) from all industries. The special tabulation enables SBA to evaluate average firm size, four-firm concentration ratio, and distribution of firms by various receipts and employment size classes.

In some cases, where data were not available due to disclosure prohibitions in the Census Bureau's tabulation, SBA either estimated missing values using available relevant data or examined data at a higher level of industry aggregation, such as at the NAICS 2-digit (Sector), 3-digit (Subsector), or 4-digit (Industry Group) level. In some instances, SBA's analysis was based only on those factors for which data were available or estimates of missing values were possible.

Five of the seven industries within NAICS Subsector 525 (Funds, Trusts and Other Financial Vehicles) are not covered by the 2007 Economic Census. All industries in that Subsector currently have a common size standard. To maintain the common size standard, in this proposed rule, SBA applies the results for the two industries (NAICS 525910, Open End Investment Funds, and NAICS 525990, Other Financial Vehicles) for which the Economic Census data are available to those five industries.

To evaluate industries in NAICS Sector 52 that have assets based size standards, as discussed below, SBA obtained the data from the Statistics on Depository institutions (SDI) database of the Federal Depository Insurance Corporation (FDIC) between 1984 and 2011 (http://www2.fdic.gov/sdi/main.asp). SDI does not include a field to classify the institutions by the NAICS definition. However, it has a field that identifies an institution's primary specialization in terms of asset concentration and another field that identifies each institution as a bank or thrift. Since the SDI database does not identify minority owned financial institutions from others, SBA identified them using data on financial institutions that participate in the Department of the Treasury's Minority Bank Deposit Program, compiled by the Federal Reserve Board (FRB) (http://www.federalreserve.gov/releases/mob/). To examine characteristics of minority owned financial institutions, SBA merged the FRB data with SDI database using the common identification number for each institution.

The SDI database does not include Credit Unions, NAICS 522130, while the FRB data is limited to minority-owned credit unions only. The data to evaluate the Credit Unions industry were based on call reports for the fourth quarters of 1994 and 2011 from the National Credit Union Administration (NCUA) Web site (http://www.ncua.gov/DataApps/QCallRptData/Pages/CallRptData.aspx). The earliest year for which these data were available on the NCUA Web site is 1994.

To calculate average assets, SBA used sales to total assets ratios from the Risk Management Association's Annual Statement Studies, 2008-2010.

To evaluate Federal contracting trends, SBA examined data on Federal contract awards for fiscal years 2008-2010. The data are available from the U.S. General Service Administration's Federal Procurement Data System—Next Generation (FPDS-NG).

To assess the impact on financial assistance to small businesses, SBA examined data on its own guaranteed loan programs for fiscal years 2008-2010.

Data sources and estimation procedures SBA uses in its size standards analysis are documented in detail in SBA's “Size Standards Methodology” White Paper, which is available atwww.sba.gov/size.

Dominance in Field of Operation

Section 3(a) of the Small Business Act (15 U.S.C. 632(a)) defines a small business concern as one that is (1) independently owned and operated, (2) not dominant in its field of operation, and (3) within a specific small business definition or size standard established by SBA Administrator. SBA considers as part of its evaluation whether a business concern at a proposed size standard would be dominant in its field of operation. For this, SBA generally examines the industry's market share of firms at the proposed standard. Market share and other factors may indicate whether a firm can exercise a major controlling influence on a national basis in an industry where a significant number of business concerns are engaged. If a contemplated size standard includes a dominant firm, SBA will consider a lower size standard to exclude the dominant firm from being defined as small.

Selection of Size Standards

To simplify receipts based size standards, SBA has proposed to select size standards from a limited number of levels. For many years, SBA has been concerned about the complexity of determining small business status caused by a large number of varying receipts based size standards (see69 FR 13130 (March 4, 2004) and 57 FR 62515 (December 31, 1992)). At the beginning of the current comprehensive size standards review, there were 31 different levels of receipts based size standards. They ranged from $0.75 million to $35.5 million, and many applied to one or only a few industries. SBA believes that such a large number of different small business size standards are unnecessary and difficult to justify analytically. To simplify managing and using size standards, SBA proposes that there be fewer size standard levels. This will produce more common size standards for businesses operating in related industries. This will also result in greater consistency among the size standards for industries that have similar economic characteristics.

The SBA proposes, therefore, to apply one of eight receipts based size standards to each industry in NAICS Sectors 52 and 55 that has a receipts based standard. The eight “fixed” receipts based size standard levels are $5 million, $7 million, $10 million, $14 million, $19 million, $25.5 million, $30 million, and $35.5 million. SBA established these eight receipts based size standard based on the current minimum, the current maximum, and the most commonly used current receipts based size standards. At the start of the current comprehensive review, the most commonly used receipts based size standards clustered around the following—$2.5 million to $4.5 million, $7 million, $9 million to $10 million, $12.5 million to $14.0 million, $25 million to $25.5 million, and $33.5 million to $35.5 million. SBA selected $7 million as one of eight fixed levels of receipts based size standards because it is an anchor standard. The lowest or minimum receipts based size level will be $5 million. Other than the size standards for agriculture that are statutorily set at $0.75 million and those based on commissions (such as real estate brokers and travel agents), $5 million includes those industries with the lowest receipts based standards, which ranged from $2 million to $4.5 million. Among the higher level size clusters, SBA has set four fixed levels: $10 million, $14 million, $25.5 million, and $35.5 million. Because of the large intervals between some of the fixed levels, SBA established two intermediate levels, namely $19 million between $14 million and $25.5 million, and $30 million between $25.5 million and $35.5 million. These two intermediate levels reflect roughly the same proportional differences as between the other two successive levels.

To simplify size standards further, SBA may propose a common size standard for closely related industries. Although the size standard analysis may support a separate size standard for each industry, SBA believes that establishing different size standards for closely related industries may not always be appropriate. For example, in cases where many of the same businesses operate in the same multiple industries, a common size standard for those industries might better reflect the Federal marketplace. This might also make size standards among related industries more consistent than separate size standards for each of those industries. This led SBA to establish a common size standard for the information technology (IT) services (NAICS 541511, NAICS 541112, NAICS 541513, NAICS 541519, and NAICS 811212), even though the industry data might support a distinct size standard for each industry (57 FR 27906 (June 23, 1992)). More recently SBA adopted common size standards for some of the industries in NAICS Sector 44-45, Retail Trade (75 FR 61597 (October 6, 2010)), NAICS Sector 54, Professional, Scientific and Technical Services (77 FR 7490 (February 10, 2012)), and NAICS Sector 48-49, Transportation and Warehousing (77 FR 10943 (February 24, 2012)).

In NAICS Sector 52, currently all industries in NAICS Industry Group 5221 and NAICS Industries 522210 and 522293 have a common size standard of $175 million in total assets. Similarly, all other industries in NAICS Sector 52, with an exception of NAICS Industry 524126 which has a size standard of 1,500 employees, have a common size standard of $7 million in average annual receipts. Based on the characteristics of those industries, SBA proposes to retain common size standards for all industries within NAICS Industry Group 5222 (with the exception of NAICS 522210, Credit Card Issuing). NAICS 522210 currently has an assets based size standard and based on the evaluation of business operations and characteristics of firms in this industry SBA proposes to maintain the assets based size standard for this industry. NAICS 522293, International Trade Financing, also has an assets based size standard currently, but based on the evaluation of business operations and characteristics of firms involved in this industry, SBA proposes to replace the assets based size standard with a receipts based size standard for this industry. In addition, SBA proposes to apply the same common receipts based size standard for NAICS 522293 as that for NAICS Industry Group 5222 (except for NAICS 522210). SBA also proposes common size standards for industries within NAICS Subsector 523, NAICS Industry Group 5241 (with exception of NAICS 524126), and NAICS Subsector 525. Whenever SBA proposes a common size standard for closely related industries it will provide its justification.

Evaluation of Industry Structure

SBA evaluated 29 industries in NAICS Sector 52, Finance and Insurance, and two industries in NAICS Sector 55, Management of Companies and Enterprises (for which industry data were available from the 2007 Economic Census), to assess the appropriateness ofthe current receipts based size standards. For this, as described above, SBA compared data on the economic characteristics of each of those industries to the average characteristics of industries in two comparison groups. The first comparison group consists of all industries with $7 million size standards and is referred to as the “receipts based anchor comparison group.” Because the goal of SBA's review is to assess whether a specific industry's size standard should be the same as or different from the anchor size standard, this is the most logical group of industries to analyze. In addition, this group includes a sufficient number of firms to provide a meaningful assessment and comparison of industry characteristics.

If the characteristics of an industry are similar to the average characteristics of industries in the anchor comparison group, the anchor size standard is generally appropriate for that industry. If an industry's structure is significantly different from industries in the anchor group, a size standard lower or higher than the anchor size standard might be appropriate. The proposed new size standard is based on the difference between the characteristics of the anchor comparison group and a second industry comparison group. As described above, the second comparison group for receipts based standards consists of industries with the highest receipts based size standards, ranging from $23 million to $35.5 million. The average size standard for this group is $29 million. SBA refers to this group of industries as the “higher level receipts based size standard comparison group.” SBA determines differences in industry structure between an industry under review and the industries in the two comparison groups by comparing data on each of the industry factors, including average firm size, average assets size, the four-firm concentration ratio, and the Gini coefficient of distribution of firms by size. Table 1, Average Characteristics of Receipts Based Comparison Groups, shows the average firm size (both simple and weighted), average assets size, four-firm concentration ratio, average receipts of the four largest firms, and the Gini coefficient for both anchor level and higher level comparison groups for receipts based size standards.

Table 1—Average Characteristics of Receipts Based Comparison Groups Receipts based comparison group Average firm size
  • ($ million)
  • Simple
  • average
  • Weighted
  • average
  • Average
  • assets
  • size
  • ($ million)
  • Four-firm
  • concentration ratio
  • (%)
  • Average
  • receipts of four largest
  • firms
  • ($ million) *
  • Gini
  • coefficient
  • Anchor Level 1.32 19.63 0.84 16.6 196.4 0.693 Higher Level 5.07 116.84 3.20 32.1 1,376.0 0.830 * To be used for industries with a four-firm concentration ratio of 40% or greater.
    Derivation of Size Standards Based on Industry Factors

    For each industry factor in Table 1, SBA derives a separate size standard based on the differences between the values for an industry under review and the values for the two comparison groups. If the industry value for a particular factor is near the corresponding factor for the anchor comparison group, the $7 million anchor size standard is appropriate for that factor.

    An industry factor significantly above or below the anchor comparison group will generally imply a size standard for that industry above or below the $7 million anchor. The new size standard in these cases is based on the proportional difference between the industry value and the values for the two comparison groups.

    For example, if an industry's simple average receipts are $3.3 million, that can support a $19 million size standard. The $3.3 million level is 52.8 percent between $1.32 million for the anchor comparison group and $5.07 million for the higher level comparison group (($3.30 million−$1.32 million) ÷ ($5.07 million − $1.32 million) = 0.528 or 52.8%). This proportional difference is applied to the difference between the $7 million anchor size standard and average size standard of $29 million for the higher level size standard group and then added to $7.0 million to estimate a size standard of $18.61 million ([{$29.0 million − $7.0 million} * 0.528] + $7.0 million = $18.61 million). The final step is to round the estimated $18.61 million size standard to the nearest fixed size standard, which in this example is $19 million.

    SBA applies the above calculation to derive a size standard for each industry factor. Detailed formulas involved in these calculations are presented in SBA's “Size Standards Methodology” which is available on its Web site atwww.sba.gov/size. (However, it should be noted that figures in the “Size Standards Methodology” White Paper are based on 2002 Economic Census data and are different from those presented in this proposed rule. That is because when SBA prepared its “Size Standards Methodology,” the 2007 Economic Census data were not yet available). Table 2, Values of Industry Factors and Supported Size Standards, (below) shows ranges of values for each industry factor and the levels of size standards supported by those values.

    Table 2—Values of Industry Factors and Supported Size Standards Ifsimple avg.
  • receipts size
  • ($ million)
  • Or ifweighted avg. receipts size
  • ($ million)
  • Or ifavg. assets size
  • ($ million)
  • Or ifavg. receipts of largest four firms
  • ($ million)
  • Or ifGini
  • coefficient
  • Then implied size standard is
  • ($ million)
  • <1.15 <15.22 <0.73 <142.8 <0.686 5.0 1.15 to 1.57 15.22 to 26.26 0.73 to 1.00 142.8 to 276.9 0.686 to 0.702 7.0 1.58 to 2.17 26.27 to 41.73 1.01 to 1.37 277.0 to 464.5 0.703 to 0.724 10.0 2.18 to 2.94 41.74 to 61.61 1.38 to 1.86 464.6 to 705.8 0.725 to 0.752 14.0 2.95 to 3.92 61.62 to 87.02 1.87 to 2.48 705.9 to 1,014.1 0.753 to 0.788 19.0 3.93 to 4.86 87.03 to 111.32 2.49 to 3.07 1,014.2 to 1,309.0 0.789 to 0.822 25.5 4.87 to 5.71 111.33 to 133.41 3.08 to 3.61 1,309.1 to 1,577.1 0.823 to 0.853 30.0 >5.71 >133.41 >3.61 >1,577.1 >0.853 35.5
    Derivation of Size Standard Based on Federal Contracting Factor

    Besides industry structure, SBA also evaluates Federal contracting data to assess the success of small businesses in getting Federal contracts under the existing size standards. For industries where the small business share of total Federal contracting dollars is 10 to 30 percent lower than the small business share of total industry receipts, SBA has designated a size standard one level higher than their current size standard. For industries where the small business share of total Federal contracting dollars is more than 30 percent lower than the small business share of total industry receipts, SBA has designated a size standard two levels higher than the current size standard.

    Because of the complex relationships among several variables affecting small business participation in the Federal marketplace, SBA has chosen not to designate a size standard for the Federal contracting factor alone that is more than two levels above the current size standard. SBA believes that a larger adjustment to size standards based on Federal contracting activity should be based on a more detailed analysis of the impact of any subsequent revision to the current size standard. In limited situations, however, SBA may conduct a more extensive examination of Federal contracting experience. This may support a different size standard than indicated by this general rule and take into consideration significant and unique aspects of small business competitiveness in the Federal contract market. SBA welcomes comments on its methodology for incorporating the Federal contracting factor in its size standard analysis and suggestions for alternative methods and other relevant information on small business experience in the Federal contract market that SBA should consider.

    Eight of the 29 industries in NAICS Sector 52 that have receipts based size standards averaged $100 million or more annually in Federal contracting during fiscal years 2008-2010. The Federal contracting factor was significant (i.e.,the difference between the small business share of total industry receipts and small business share of Federal contracting dollars was 10 percentage points or more) in three of those eight industries and a separate size standard was derived for that factor for each of them. Federal contracting averaged less than $100 million annually for both industries in NAICS Sector 55 and was not included in the calculations of new size standards for them.

    New Size Standards Based on Industry and Federal Contracting Factors

    Table 3, Size Standards Supported by Each Factor for Each Industry (millions of dollars), shows the results of analyses of industry and Federal contracting factors for each industry covered by this proposed rule. Many NAICS industries in columns 2, 3, 4, 6, 7, and 8 show two numbers. The upper number is the value for the industry or federal contracting factor shown on the top of the column and the lower number is the size standard supported by that factor. For the four-firm concentration ratio, SBA estimates a size standard only if its value is 40 percent or more. If the four-firm concentration ratio is 40 percent or more, SBA indicates in column 6 the average size of the industry's four largest firms together with a size standard based on that average. Column 9 shows a calculated new size standard for each industry. This is the average of the size standards supported by each factor, rounded to the nearest fixed size level. Analytical details involved in the averaging procedure are described in SBA's “Size Standard Methodology.” For comparison with the new standards, the current size standards are in column 10 of Table 3.

    Table 3—Size Standards Supported by Each Factor for Each Industry [Millions of dollars] NAICS code/title Simple average firm size Weighted average firm size Average assets size Four-firm ratio
  • (%)
  • Four-firm average size Gini
  • coefficient
  • Federal contract factor
  • (%)
  • New size standard Current size standard
    522220 $48.8 $434.1 $162.7 42.1 $13,199.9 0.880 Sales Financing 35.5 35.5 35.5 35.5 $35.5 35.5 $7.0 522291 11.8 364.4 35.4 61.2 6,874.4 0.940 Consumer Lending 35.5 35.5 35.5 35.5 $35.5 35.5 7.0 522292 11.5 279.0 31.4 38.5 9,127.3 0.930 Real Estate Credit 35.5 35.5 35.5 $35.5 35.5 7.0 522294 796.6 6,175.9 2,987.1 97.9 25,931.0 0.871 Secondary Market Financing 35.5 35.5 35.5 35.5 $35.5 35.5 7.0 522298 16.6 750.8 62.4 0.959 All Other Nondepository Credit Intermediation 35.5 35.5 35.5 $35.5 35.5 7.0 522310 0.6 6.2 1.2 5.2 186.3 0.583 7.0 Mortgage and Nonmortgage Loan Brokers 5.0 5.0 10.0 $5.0 7.0 522320 18.9 387.6 12.9 33.1 3,624.7 0.934 1.9 Financial Transactions, Reserve, and Clearinghouse Activities 35.5 35.5 35.5 $35.5 35.5 7.0 522390 1.9 47.2 1.9 19.6 602.8 0.834 −17.0 Other Activities Related to Credit Intermediation 10.0 14.0 19.0 $30.0 10.0 19.0 7.0 523110 74.9 1,453.1 86.4 51.7 26,248.4 0.941 −1.1 Investment Banking and Securities Dealing 35.5 35.5 35.5 35.5 $35.5 35.5 7.0 523120 17.4 581.4 9.7 36.9 14,369.4 0.952 Securities Brokerage 35.5 35.5 35.5 $35.5 35.5 7.0 523130 8.4 118.6 13.3 43.4 756.7 0.903 Commodity Contracts Dealing 35.5 30.0 35.5 19.0 $35.5 30.0 7.0 523140 4.5 120.3 1.0 46.9 654.9 0.886 Commodity Contracts Brokerage 25.5 30.0 7.0 14.0 $35.5 19.0 7.0 523210 467.4 852.8 0.454 Securities and Commodity Exchanges 35.5 35.5 $5.0 19.0 7.0 523910 2.0 16.6 6.1 15.0 636.0 0.797 −27.7 Miscellaneous Intermediation 10.0 7.0 35.5 $25.5 10.0 19.0 7.0 523920 10.2 212.6 6.5 12.0 5,350.2 0.914 Portfolio Management 35.5 35.5 35.5 $35.5 35.5 7.0 523930 1.5 40.3 0.6 26.7 1,531.6 0.815 Investment Advice 7.0 10.0 5.0 $25.5 14.0 7.0 523991 5.3 64.8 8.9 35.2 887.0 0.876 Trust, Fiduciary and Custody Activities 30.0 19.0 35.5 $35.5 30.0 7.0 523999 6.7 124.9 28.8 0.909 7.0 Miscellaneous Financial Investment Activities 35.5 30.0 35.5 $35.5 35.5 7.0 524113 635.4 2,977.0 1,003.3 26.8 35,953.1 0.787 Direct Life Insurance Carriers 35.5 35.5 35.5 $19.0 30.0 7.0 524114 554.7 1,746.5 256.0 36.9 45,842.3 0.684 −0.1 Direct Health and Medical Insurance Carriers 35.5 35.5 35.5 $5.0 25.5 7.0 524127 8.9 493.1 4.1 84.3 3,628.8 0.954 Direct Title Insurance Carriers 35.5 35.5 35.5 35.5 $35.5 35.5 7.0 524128 13.7 152.5 19.6 50.9 755.9 0.890 30.0 7.0 Other Direct Insurance (except Life, Health and Medical) Carriers 35.5 35.5 35.5 19.0 $35.5 30.0 7.0 524130 214.5 771.1 50.9 5,405.7 0.724 Reinsurance Carriers 35.5 35.5 35.5 $14.0 30.0 7.0 524210 0.8 26.0 0.5 10.3 2,729.8 0.667 5.0 Insurance Agencies and Brokerages 5.0 7.0 5.0 $5.0 7.0 524291 2.0 73.7 46.7 841.7 0.840 Claims Adjusting 10.0 19.0 19.0 $30.0 19.0 7.0 524292 8.7 76.2 4.1 21.7 1,622.9 0.847 −4.0 Third Party Administration of Insurance and Pension Funds 35.5 19.0 35.5 $30.0 30.0 7.0 524298 1.9 25.5 0.8 30.6 278.7 0.817 −24.4 All Other Insurance Related Activities 10.0 7.0 7.0 $25.5 $10.0 14.0 7.0 525910 10.0 90.3