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Proposed Rule2022-14586

Disadvantaged Business Enterprise and Airport Concession Disadvantaged Business Enterprise Program Implementation Modifications

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Published

July 21, 2022

Issuing agencies

Transportation Department

Abstract

This rulemaking would strengthen implementation of the Department of Transportation's (Department or DOT) Disadvantaged Business Enterprise (DBE) and Airport Concession Disadvantaged Business Enterprise (ACDBE) Program regulations. The NPRM would update personal net worth and program size thresholds for inflation; modernizes rules for counting of material suppliers; incorporate procedural flexibilities enacted during the coronavirus (COVID-19) pandemic; add new program elements to foster greater usage of DBEs and ACDBEs with concurrent, proactive monitoring and oversight; update certification provisions with less prescriptive rules that give certifiers flexibility when determining eligibility; and make technical corrections that have led to substantive misinterpretations of the rules by recipients, program applicants, and participants.

Full Text

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[Federal Register Volume 87, Number 139 (Thursday, July 21, 2022)]
[Proposed Rules]
[Pages 43620-43685]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-14586]

[[Page 43619]]

Vol. 87

Thursday,

No. 139

July 21, 2022

Part II

Department of Transportation

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Office of the Secretary

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49 CFR Parts 23 and 26

Disadvantaged Business Enterprise and Airport Concession Disadvantaged
Business Enterprise Program Implementation Modifications; Proposed Rule

Federal Register / Vol. 87 , No. 139 / Thursday, July 21, 2022 /
Proposed Rules

[[Page 43620]]

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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

49 CFR Parts 23 and 26

[Docket No. DOT-OST-2022-0051]
RIN 2105-AE98

Disadvantaged Business Enterprise and Airport Concession
Disadvantaged Business Enterprise Program Implementation Modifications

AGENCY: Office of the Secretary (OST), U.S. Department of
Transportation (DOT or the Department).

ACTION: Notice of proposed rulemaking (NPRM).

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SUMMARY: This rulemaking would strengthen implementation of the
Department of Transportation's (Department or DOT) Disadvantaged
Business Enterprise (DBE) and Airport Concession Disadvantaged Business
Enterprise (ACDBE) Program regulations. The NPRM would update personal
net worth and program size thresholds for inflation; modernizes rules
for counting of material suppliers; incorporate procedural
flexibilities enacted during the coronavirus (COVID-19) pandemic; add
new program elements to foster greater usage of DBEs and ACDBEs with
concurrent, proactive monitoring and oversight; update certification
provisions with less prescriptive rules that give certifiers
flexibility when determining eligibility; and make technical
corrections that have led to substantive misinterpretations of the
rules by recipients, program applicants, and participants.

DATES: Comments should be filed by September 19, 2022. Late-filed
comments will be considered to the extent practicable.

ADDRESSES: You may submit comments (identified by the agency name and
DOT Docket ID Number DOT-OST-2022-0051) by any of the following
methods:
<bullet> Federal eRulemaking Portal: Go to <a href="https://www.regulations.gov">https://www.regulations.gov</a> and follow the online instructions for submitting
comments.
<bullet> Mail: Docket Management Facility: U.S. Department of
Transportation, 1200 New Jersey Ave. SE, West Building Ground Floor,
Room W12-140, Washington, DC 20590-0001.
<bullet> Hand Delivery or Courier: U.S. Department of
Transportation, West Building Ground Floor, Room W12-140, 1200 New
Jersey Ave. SE, Washington, DC 20590-0001 between 9 a.m. and 5 p.m.
EST, Monday through Friday, except Federal holidays.
<bullet> Fax: 202-493-2251.
Instructions: You must include the agency name and docket number
DOT-OST-2022-0051 or the Regulatory Identification Number (RIN) 2105-
AE98 for the rulemaking at the beginning of your comment. All comments
received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>,
including any personal information provided.
Privacy Act: Anyone is able to search the electronic form of all
comments received in any of our dockets by the name of the individual
submitting the comment (or signing the comment, if submitted on behalf
of an association, business, labor union, etc.). You may review DOT's
Privacy Act statement in the Federal Register published on April 11,
2000 (65 FR 19477-78).
Paperwork Reduction Act: Pursuant to 44 U.S.C 3506(c)(2)(B), DOT
solicits comments about the accuracy of the hours and cost burden
estimates. Comments should be submitted to Walter Bohorfoush,
Supervisory Information Technology Specialist, Office of the Chief
Information Officer, U.S. Department of Transportation, at <a href="/cdn-cgi/l/email-protection#536163617e6065657e636665637c24323f2736217d313c3b3c21353c26203b13373c277d343c25">202-366-0560/[email&#160;protected]</a> or Joseph Nye, Office of the Secretary
Desk Officer, Office of Management and Budget, at
<a href="/cdn-cgi/l/email-protection#f3b99c8096839bacb1acbd8a96b39c9e91dd969c83dd949c85">[email&#160;protected]</a>. The Office of Management and Budget (OMB) is
required to make a decision concerning the collection of information
requirements contained in this proposed rule between 30 and 60 days
after publication of this document in the Federal Register. Therefore,
a comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication. The final rule will respond
to any OMB or public comments on the information collection
requirements contained in this proposal.
Docket: For internet access to the docket to read background
documents and comments received, go to <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
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 20590-0001, between 9 a.m. and 5 p.m. EST, Monday through Friday,
except Federal holidays.
Electronic Access and Filing: A copy of the Notice of Proposed
Rulemaking, all comments, final rule and all background material may be
viewed online at <a href="https://www.regulations.gov">https://www.regulations.gov</a> using the docket number
listed above. A copy of this notice will be placed in the docket.
Electronic retrieval help and guidelines are available on the website.
An electronic copy of this document may be downloaded from the Office
of the Federal Register's website at: <a href="https://www.FederalRegister.gov">https://www.FederalRegister.gov</a>
and the Government Publishing Office's website at: <a href="https://www.GovInfo.gov">https://www.GovInfo.gov</a>.

FOR FURTHER INFORMATION CONTACT: Questions concerning part 26
amendments should be directed to Marc D. Pentino, Associate Director,
Disadvantaged Business Enterprise Programs Division, Departmental
Office of Civil Rights, Office of the Secretary, U.S. Department of
Transportation, at <a href="/cdn-cgi/l/email-protection#0b393b3926383d3d263d323d3324666a7968257b6e657f6265644b6f647f256c647d">202-366-6968/[email&#160;protected]</a>. Questions
concerning part 23 amendments should be directed to Marcus England,
Office of Civil Rights, National Airport Civil Rights Policy and
Compliance (ACR-4C), Federal Aviation Administration, 600 Independence
Ave. SW, Washington, DC 20591 at <a href="/cdn-cgi/l/email-protection#55676567786763627865616d627a3834273620267b303b3239343b31153334347b323a23">202-267-0487/[email&#160;protected]</a> or
Nicholas Giles, Office of Civil Rights, National Airport Civil Rights
Policy and Compliance (ACR-4C), Federal Aviation Administration, 600
Independence Ave. SW, Washington, DC 20591, at <a href="/cdn-cgi/l/email-protection#291b191b041b1f1e04191b19180647404a414645485a074e40454c5a694f4848074e465f">202-267-0201/[email&#160;protected]</a>.

SUPPLEMENTARY INFORMATION:

Table of Contents

Introduction

49 CFR Part 26

Subpart A--General
Bipartisan Infratructure Law (BIL) and Fixing America's Surface
Transportation (FAST) Act (Sec. 26.3)
Definitions (Sec. 26.5)
Disadvantaged Business Enterprise
Personal Net Worth
Principal Place of Business
Transit Vehicle
Transit Vehicle Dealership
Transit Vehicle Manufacturer (TVM)
Unsworn Declaration
Reporting Requirements (Sec. 26.11 and Appendix B)
Uniform Report of DBE Awards or Commitments and Payments
(Uniform Report)
Bidders lists
Moving Ahead for Progress in the 21st Century (MAP-21) data
reports
Subpart B--Administrative Requirements for DBE Programs for
Federally Assisted Contracting
Threshold Program Requirement for FTA Recipients (Sec. 26.21)
Unified Certification Program (UCP) DBE/ACDBE Directories
(Sec. Sec. 26.31 and 26.81(g))
Monitoring Requirements (Sec. 26.37)
Subpart C--Goals, Good Faith Efforts, and Counting
Prompt Payment and Retainage (Sec. 26.29)
Transit Vehicle Manufacturers (TVMs) (Sec. 26.49)
Section Heading
Terminology and Abbreviations
Post-Award Reporting Requirements
Awards to Transit Vehicle Dealerships

[[Page 43621]]

TVM Goal Setting, Submission, and Review
TVM Uniform Reports
Good Faith Efforts Procedures for Contracts with DBE Goals
(Sec. 26.53)
DBE Performance Plan (DPP)
Terminations
DBE Supplier Credit (Sec. 26.55(e))
Limiting DBE Supplier Goal Credit
Evaluating a Supplier's Designation as a Regular Dealer
Drop-Shipping and Delivery From Other Sources
Negotiating the Price of Supplies
DBE manufacturers
Suppliers of Specialty Items
Subpart D--Certification Standards
General Certification Rules (Sec. 26.63)
Business Size (Sec. Sec. 26.65, 23.33)
Changing the Measurement for NAICS Code Size Calculations From 3
to 5 Years
Statutory Gross Receipts Cap
Future Amendments and Technical Amendments
Gross Receipts of ACDBE Affiliates and Joint Venture Partners
Personal Net Worth (PNW) Adjustment
Rationale for $1.60 Million Adjustment
Periodic Adjustments to the PNW Cap
Presumption of Social and Economic Disadvantage (SED)
(Sec. Sec. 26.5, 26.63, and 26.67 and Appendix E)
Evidence and Rebuttal of Social Disadvantage
Evidence and Rebuttal of Economic Disadvantage
Individualized Determinations of Social and Economic
Disadvantage
Ownership (Sec. 26.69)
Burden Reduction, simplification, and Consistency
Reasonable Economic Sense
Control (Sec. 26.71)
Socially and Economically Disadvantaged Owner (SEDO) Decisions
Governance
Expertise
SEDO Decisions
Delegation
Independent Business
Franchises
NAICS codes
Subpart E--Certification Procedures
Technical Corrections to UCP Requirements (Sec. 26.81)
Virtual On-site Visits (Sec. 26.83(c)(1) and (h)(1))
Timely Processing of In-State Certification Applications (Sec.
26.83(k))
Curative Measures (Sec. 26.83(m))
Interstate Certification (Sec. 26.85)
Issues With the Current Rule
Post-Interstate Certification Procedures
Denials of In-State Certification Applications (Sec. 26.86)
Decertification Procedures (Sec. 26.87)
Strict Compliance
Failure to Submit Declaration of Eligibility (DOE)
Decertification Grounds
Virtual Informal Hearings
Informal Hearing Participation
Counting DBE Participation After Decertification (Sec.
26.87(j))
Summary Suspension (Sec. 26.88)
Appeals to DOCR (Sec. 26.89)
Updates to Appendices F and G

49 CFR Part 23

Subpart A--General
Aligning Part 23 With Part 26 Objectives (Sec. 23.1)
Definitions (Sec. 23.3)
Affiliation
Airport Concession Disadvantaged Business Enterprise (ACDBE)
Concession
Personal Net Worth
Socially and Economically Disadvantaged Individual
Sublease
Subpart B--ACDBE Program
Direct Ownership, Goal setting, and Good Faith Efforts
Requirements (Sec. 23.25)
Fostering ACDBE Small Business Participation (Sec. 23.26)
Retaining and Reporting Information About ACDBE Program
Implementation (Sec. 23.27)
Subpart C--Certification and Eligibility of ACDBEs
Size Standards (Sec. 23.33)
Certifying Firms That Do Not Perform Work Relevant to an
Airport's Concessions (Sec. 23.39)
Subpart D--Goals, Good Faith Efforts, and Counting
Removing Consultation Requirement When No New Concession
Opportunities Exist (Sec. 23.43)
Non-car Rental Concession Goal Base (Sec. 23.47)
Counting ACDBE Participation After Decertification (Sec. 23.55)
Shortfall Analysis Submission Date (Sec. 23.57)
Subpart E--Other Provisions
Long-tErm Exclusive Agreements (Sec. 23.75)
Five-Year Term for Long-Term Agreements
Long-Term Agreements and Options
Long-Term Agreements and Holdovers
Definition of Exclusive Agreement
Local Geographic Preferences (Sec. 23.79)
Appendix A to Part 23: Uniform Report of ACDBE Participation
Technical Corrections
Obsolete Dates in Sec. 23.31
2019 Uniform Certification Application (UCA) Inconsistency
Enhanced Consistency With Part 26

Introduction

Spanning nearly 40 years, the DBE and ACDBE Programs are small
business initiatives intended to prevent discrimination, and remedy the
effects of past discrimination, in federally assisted contracting
markets. This proposed rulemaking advances the administration's goals
of advancing equity and expanding opportunities in government programs.
We invite comment from Federal Aviation Administration (FAA), Federal
Highway Administration (FHWA), and Federal Transit Administration (FTA)
funding recipients and project sponsors, firms participating or seeking
to participate in federally assisted contracts and/or in airport
concessions, the prime contracting community at large, and the general
public about our proposed changes to the DBE and ACDBE Program
regulations at 49 CFR parts 26 and 23, respectively.
The Department revised the ACDBE Program regulation in 49 CFR part
23 (part 23) in 2005 to make it parallel, in many important respects,
to the DBE regulation in 49 CFR part 26 (part 26). DOT later modified
part 23 in June 2012, amending the small business size standards and
personal net worth limit for ACDBE Program participants. In October
2014, the Department published a final rule for part 26, revising the
Uniform Certification Application (UCA) and the Uniform Report of DBE
Awards or Commitments and Payments (Uniform Report), and adding the
Personal Net Worth (PNW) Statement. The rule also strengthened the
certification-related provisions, amended provisions addressing good
faith efforts, overall goal setting, transit vehicle manufacturers, and
counting for trucking companies.
Since 2014, FAA, FHWA, FTA, and the Departmental Office of Civil
Rights (DOCR) have held outreach and listening sessions and conducted
trainings on a range of critical program topics including
certification, counting, goal setting, good faith efforts, joint
ventures, long-term exclusive (LTE) agreements at airports, PNW, gross
receipts calculation adjustments, and participatory reporting. In
Fiscal Year 2019, for example, FAA conducted six listening sessions,
each focusing on issues identified within the specific subparts of part
23 with input from airport sponsors, ACDBEs, certifying agencies,
consultants, and industry groups. In that same fiscal year, FHWA held
stakeholder listening sessions about supply transactions and counting
mechanisms for DBEs considered brokers, manufacturers, and regular
dealers.
The Department also conducted internal research and analysis of
issues raised by stakeholders before and during the COVID-19 pandemic,
including those presented by the Transportation Research Board, the
Airport Cooperative Research Program, prime contractor associations,
and small businesses submitting certification appeals to DOCR. The
Department found that many portions of the current rules seem outdated
for today's DBE and ACDBE marketplace. They might inhibit firm growth
and success, and limit recipient and sponsors' ability to effectively
monitor program compliance by all participants in a pandemic and post-
pandemic environment. The Department seeks to update several core

[[Page 43622]]

provisions of the regulation to maintain optimal program performance,
improve operational cohesiveness, and provide contemporary solutions
for program deficiencies.
The DBE Program was reauthorized in the Bipartisan Infrastructure
Law (BIL) (enacted as the Infrastructure Investment and Jobs Act (Nov.
15, 2021) (Pub. L. 117-58)). The ACDBE Program is authorized and
mandated by 49 U.S.C. 47107(e), 42 U.S.C. 2000d, 49 U.S.C. 322, and
Executive Order 12138.

Part 26

Subpart A--General

1. Bipartisan Infrastructure Law (BIL) and Fixing America's Surface
Transportation Act (FAST Act) (Sec. 26.3)

The Department is amending Sec. 26.3 to add applicable Titles in
the reference to the Department's surface authorizations, the BIL
enacted on November 15, 2021, and the Fixing America's Surface
Transportation Act (FAST Act), enacted on December 4, 2015.

2. Definitions (Sec. 26.5)

We propose minor technical and spelling corrections for the
following terms: ``Alaska Native, ``Department or DOT,'' ``Indian tribe
or Native American tribe,'' ``primary industry classification,''
``recipient,'' and ``Secretary.'' We also propose expanding current
definitions and adding new definitions, as described below.

Disadvantaged Business Enterprise

We would like to clarify the term ``Disadvantaged Business
Enterprise'' to align it with the definition in the Department's
official guidance regarding the types of firms that should apply for
DBE and/or ACDBE certification.\1\ The guidance provides that
certification in the DBE Program be limited to business concerns
engaged in transportation-related industries. We propose adding that
language to the definition of Disadvantaged Business Enterprises.
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\1\ See ``USDOT Official Guidance--DBE and ACDBE Certification
for Non-Transportation Industry Businesses'' at <a href="https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/dbe-and-acdbe-certification-non-transportation">https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/dbe-and-acdbe-certification-non-transportation</a>.
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Personal Net Worth

The Department seeks to modify the definition of ``personal net
worth'' for simplicity and to include a reference to the applicable
provision (i.e., proposed Sec. 26.68).

Principal Place of Business

We would like to clarify the definition of ``principal place of
business'' to explain that it does not include construction trailers or
other temporary construction sites. This clarification would mirror the
Small Business Administration's (SBA) definition of ``bona fide place
of business'' in 13 CFR 124.3.

Transit Vehicle

The Department recognizes that the term ``transit vehicle'' is used
throughout part 26 yet is not defined; some recipients and TVMs have
expressed confusion over whether ``transit vehicle'' refers to only
those vehicles produced by a TVM. The Department believes that defining
this term in the regulation is important because whether a vehicle
qualifies as a ``transit vehicle'' under part 26 has a significant
impact on a recipient's goal setting and reporting efforts. For
example, pursuant to Sec. 26.45(a)(2), ``transit vehicle purchases''
are to be excluded from a recipient's goal calculation. Some recipients
have incorrectly interpreted ``transit vehicle'' to mean ``vehicles
used by the recipient for transit purposes,'' and therefore have
excluded from their goal vehicles such as minivans manufactured by
major automakers to be used for micro-transit pilots. In practice,
funds used to purchase such vehicles must be included in the
recipient's goal calculations because such manufacturers do not qualify
as TVMs and therefore do not have their own DBE programs. The
Department proposes to alleviate this confusion by adding the following
definition of ``transit vehicle'' to Sec. 26.5: a vehicle manufactured
by a TVM. Additionally, the Department proposes to make explicit that a
vehicle manufactured by a non-TVM is not considered a transit vehicle
for purposes of part 26, notwithstanding the vehicle's ultimate use.
Thus, when a recipient procures vehicles that are not manufactured by a
TVM, the FTA funds used in that procurement must be included in either
the recipient's overall triennial goal or in a project goal established
pursuant to Sec. 26.45(e)(3) and must not be treated as if the funds
were awarded to a TVM. Relatedly, any FTA funds used to procure
vehicles that are not manufactured by a TVM must be reported in the
recipient's Uniform Report pursuant to Sec. 26.11(a).

Transit Vehicle Dealership

The Department proposes to add a definition of ``transit vehicle
dealership'' to Sec. 26.5. This change, in combination with the
proposed edits to Sec. 26.49, will clarify the Department's existing
practice regarding transit vehicle dealerships. The Department proposes
to define ``transit vehicle dealership'' as follows: a business that is
primarily engaged in selling transit vehicles but that does not
manufacture vehicles itself. This addition would facilitate more
accurate tracking of FTA funds and DBE participation, thus better
serving the program.

Transit Vehicle Manufacturer (TVM)

The Department first added a definition of TVM to Sec. 26.5 on
October 2, 2014 (79 FR 59592). Through experience, we have seen that
the current definition creates confusion for manufacturers of both
public and private mass transportation vehicles. The Department's
practice is to require all manufacturers of vehicles intended for
public mass transportation to become certified TVMs to bid on FTA-
funded contracts for such vehicles, even if they also manufacture
vehicles for both public and private transportation and industrial
vehicles. However, under the current definition such a manufacturer may
question whether its ``primary business purpose is to manufacture
vehicles specifically built for public mass transportation,''
especially if the combined sales to private operators and from
commercial vehicles exceed the sales of vehicles sold to public transit
operators. The Department has found that the current definition of TVM
is ambiguous and does not clearly convey which entities qualify as
TVMs. Thus, we are proposing several changes to the TVM definition. We
wish to remove ``specifically'' and ``public'' from the definition.
This would clarify that such manufacturers are considered TVMs and are
therefore subject to all applicable DBE regulation requirements.
Further, the Department has found that the TVM definition creates
ambiguity as to which entities are subject to part 26 when a vehicle
receives post-production alterations or is retrofitted for public
transportation purposes (e.g., so-called ``cutaway'' vehicles, vans
customized for service to people with disabilities). In practice, the
Department has noted that the current definition, which includes
``producers of vehicles that receive post-production alterations or
retrofitting to be used for public transportation purposes,'' has
caused some recipients and TVMs to mistakenly believe that any
manufacturer of any motor vehicle could become a TVM based on the
actions of a third-party modifier. However, as the Department stated in
its response to comments on the 2014 final rule, we intended to include
only those businesses that perform the alterations

[[Page 43623]]

or retrofitting to vehicles for public transportation purposes.
Accordingly, the Department proposes to address this confusion by
clarifying that the businesses that perform retrofitting or post-
production alterations to vehicles so that such vehicles may be used
for public transportation purposes are considered TVMs.
Further, the current TVM definition states that ``businesses that
manufacture, mass-produce, or distribute vehicles solely for personal
use and for sale ``off the lot'' are not considered transit vehicle
manufacturers.'' With this language, the Department intended to exclude
from the TVM definition entities that mass produce vehicles that are
not specifically intended to carry a large number of passengers, which
generally lack significant opportunities for recipient-requested
specifications at the manufacturing stage. The Department recognizes
that some recipients do use such vehicles for transit purposes. For
example, a transit agency may use a completely unmodified four-door
sedan to provide paratransit services for riders who do not require
specialized equipment. In practice, the Department has noted that it is
unclear whether any vehicle manufacturer makes vehicles ``solely'' for
personal use. Still, the Department intends to exclude vehicle
manufacturers that are primarily engaged in selling vehicles that are
ultimately designed to be used by individuals, notwithstanding their
actual use. Generally, public transportation does not currently
represent a major line of business for these manufacturers, and their
business structures and supply chains do not create the sort of
subcontracting opportunities that would allow for meaningful DBE
participation. The Department would like to exclude such manufacturers
and requests comments on whether such manufacturers should be treated
as TVMs when they intend to bid on FTA-assisted contracts, particularly
in light of new transit models and emerging vehicle technologies.
Additionally, the Department has found that the ``off the lot''
condition is unnecessary and results in further confusion. The
Department initially included the ``off the lot'' language to highlight
that once a vehicle reaches the lot there are no longer meaningful
opportunities for DBEs to participate in the manufacturing process,
therefore obviating the rationale for requiring a TVM to operate a DBE
Program. However, the language has caused some eligible TVMs to
question how they should treat vehicles that they manufacture and sell
to recipients from their own lots. The current definition creates some
confusion over whether a vehicle must be both for personal use and for
sale off the lot to meet the exception, or instead only needs to meet
one of those conditions.
The Department proposes to address this ambiguity by replacing
``solely'' with ``primarily,'' removing the reference to ``off the
lot'' purchases and, as discussed below and in the discussion of the
proposed changes to Sec. 26.49, add a definition and specify the
requirements for transit vehicle dealerships. The Department expects
that these revisions would clarify to vehicle manufacturers primarily
engaged in producing personal use vehicles that they are generally not
subject to part 26 and would clarify to eligible TVMs that the point of
sale is irrelevant if it is the TVM that bids on the contract from the
recipient.

Unsworn Declaration

Parts 26 and 23 contain several sections that require applicants
and DBEs to submit documentation by notarized statement, sworn
affidavit or unsworn declaration. See e.g., Sec. Sec. 23.31(c)(2),
23.39(b), 26.61(c), 26.67(a), 26.83(c)(3), (i)(3), and (j), and
26.85(c)(4). The Department recognized (and continues to recognize)
that the COVID-19 public health emergency made it difficult and unsafe
to have forms notarized in person. Thus, on April 30, 2020, we issued
temporary guidance to address this challenge.\2\ It was extended until
June 30, 2022, and permits alternative methods to meet the notary
requirements in parts 26 and 23 by:
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\2\ See ``COVID-19 Public Health Emergency: Update and
Supplemental Guidance'' at <a href="https://www.transportation.gov/sites/dot.gov/files/2020-05/DOCR%20Guidance%20April%2030%2C%202020_0.pdf">https://www.transportation.gov/sites/dot.gov/files/2020-05/DOCR%20Guidance%20April%2030%2C%202020_0.pdf</a>.
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1. Allowing the use of online notary public services if the
recipient's state permits notarized digital signatures validated with
an electronic notary seal.
2. Allowing the use of a subscribing witness if the recipient's
state permits such use permitting the document to be signed in the
presence of a witness; the witness, not the signer, then appears before
a notary if doing so does not compromise social distancing.
3. Allowing the filing of unsworn declarations executed under
penalty of perjury rather than sworn affidavits, including affidavits
of no change.
4. Allowing unsworn declarations as an interim measure and
requiring the applicant or certified firm to follow up with a sworn
version at a to-be determined later date.
The Department is aware that the remote online notarization process
is working effectively, and states are increasingly permitting this
process in furtherance of the DBE requirements. The Department
understands that in response to the COVID-19 pandemic, some states
accelerated the implementation of laws permitting remote notarization
or temporarily waived certain provisions of law that would otherwise
impede the availability of remote notarization.
Further, the Department believes the use of unsworn declarations
executed under penalty of perjury rather than sworn affidavits has been
viewed as a positive development. There are compelling reasons to
continue allowing declarations under circumstances in the regulation
where affidavits or verifications are normally required. The Department
underscores that the use of declarations in lieu of sworn affidavits
does not diminish the legal sanctions available. Section 26.107(e)
acknowledges that the Department may refer false statement claims under
18 U.S.C. 1001 to the U.S. Department of Justice for prosecution.
Additionally, misstatements in a declaration are punishable as perjury
under 18 U.S.C. 1621. Moreover, 28 U.S.C. 1746 recognizes that a matter
required or permitted to be supported, evidenced, or proved by the
sworn affidavit, may be supported by an unsworn declaration under
penalty of perjury, with like force and effect.
The use of online notarization services and the use of declarations
in lieu of sworn affidavits has reduced burdens for small businesses
that do not have direct or immediate access to a notary public. The
Department, however, believes more benefits with even less burden can
be achieved by relying on declarations rather than sworn affidavits;
these benefits include convenience, time, and cost savings. Based on
the success of the temporary practices and the benefits to small
businesses, the Department is proposing to eliminate the requirement
for sworn affidavits and notarization and instead require the use of
unsworn declarations under penalty of perjury.

3. Reporting Requirements (Sec. 26.11 and Appendix B)

The Department proposes three changes to reporting requirements:
(1) revise the Uniform Report to include additional data fields, (2)
direct recipients to obtain a standardized set of bidders list data and
enter it into a centralized database specified by DOT, and (3) expand
data collection requirements for Moving Ahead for

[[Page 43624]]

Progress in the 21st Century (MAP-21) data reports.
The proposed revisions to reporting requirements are critical to
DOT's efforts to improve data-driven program evaluation and DBE Program
decision making going forward. The Department believes the proposed
revisions would remedy current reporting deficiencies. They would also
be a meaningful step toward a more data-driven and uniform approach to
making future program improvements. An expanded data collection would
allow DOT to look at data across several years to get a thorough
assessment of the impact of the DBE Program.

Uniform Report

The Department collects much of its DBE utilization data from the
Uniform Report. Recipients annually submit it to the OA(s) that provide
funding to them. We propose to revise the Uniform Report to include
additional data that would assist the OAs and the Department with
evaluating whether the DBE Program is making progress toward meeting
its stated objectives in Sec. 26.1. The Department proposes to revise
the Uniform Report to include the following new data fields:
<bullet> Names of the DBEs with contracts that are included in the
Uniform Report.
<bullet> Zip code of the firm's principal place of business.
<bullet> Owner(s)' contact information.
<bullet> Work category/trade firm performed in that contract.
<bullet> North American Industry Classification System (NAICS) code
associated with the type of work performed.
<bullet> Dollar value of the contract.
<bullet> Federally assisted contract number.
<bullet> Ethnic group membership.
<bullet> DBEs decertified during the reporting period for excess
gross receipts beyond the relevant size standard or because the
disadvantaged owner exceeded the personal net worth cap.
<bullet> Number of DBEs listed at time of commitment that were
replaced during the life of the contract.
The Department believes that access to this data would help inform
the Department about areas that may need to be addressed through future
policy decisions and regulation revisions. For example, the names of
DBEs and NAICS codes would allow the Department to identify the firms
working on federally assisted contracts to determine whether the DBE
Program is benefiting a large subsection of all DBEs and not only a
select few.
Information on firms that have ``outgrown'' the DBE Program by
exceeding the business size or PNW limits, would allow the Department
to determine whether firms later reenter the program. This data would
help the Department to evaluate progress towards the DBE Program
objective: ``[t]o assist the development of firms that can compete
successfully in the marketplace outside the DBE Program.'' Sec.
26.1(g).
The proposed data collection would make it possible for the
Department to compare information from 3 datasets: the new MAP-21
report (e.g., the total number of DBEs, delineated by NAICS code and
prequalification), bidders list (i.e., those DBEs that are actively
bidding on federally assisted contracts), and Uniform Report (i.e.,
those DBEs that are awarded contracts and subcontracts). The new
information would improve the Department's ability to evaluate program
trends and would help establish a national baseline for the status of
the DBE Program.
The Department also proposes to revise the method that recipients
use to submit the Uniform Report. Section 26.11(a) instructs recipients
to transmit the Uniform Report form in appendix B for review by the
applicable OA. Recipients currently submit the information
electronically and no longer submit printed spreadsheets. For this
reason, the Department proposes to amend the rule, instructing
recipients to submit this information in a form acceptable to the
concerned OA. We also propose to remove the Uniform Report form from
appendix B. Official forms are not required to be reproduced in the
Code of Federal Regulations (CFR), and the Uniform Report is readily
available on the DOT website.\3\ Removing this form from the CFR is an
administrative action and would not impact the ability of the public to
comment on any amendments to the information collections contained in
these forms.
---------------------------------------------------------------------------

\3\ See ``New DBE Uniform Report'' at <a href="https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/new-dbe-uniform-report">https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/new-dbe-uniform-report</a>.
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The proposal would make a minor change to instruction 5, which
specifies the reporting period for FHWA and FTA recipients. The change
would clarify that FTA recipients that do not meet the new $670,000
threshold in Sec. 26.21, are required to report data to the OA that
covers the entire year.
The proposal would also make a technical correction to line 18 of
the report to conform the form text with the Department's official
guidance on reporting payments on ongoing contracts and add an example
to explain the number of contracts reported in item 18(C) may differ
from the number reported in item 18(A).\4\
---------------------------------------------------------------------------

\4\ See ``Guidance on Completing Ongoing Payments'' at <a href="https://www.transportation.gov/sites/dot.gov/files/2020-01/docr-20180425-001part26qa.pdf">https://www.transportation.gov/sites/dot.gov/files/2020-01/docr-20180425-001part26qa.pdf</a>.
---------------------------------------------------------------------------

Finally, the Department does not currently collect data on the
number of DBEs committed in response to a contract goal (prior to
contract award) that were terminated during the life of the contract by
the prime contractor. Nor do we collect information on the reasons for
those terminations. This data would assist the Department with
identifying any trends in the number of terminations and the most
common reasons for terminations. For example, many terminations may
occur in certain parts of the country, or many terminations may occur
due to overcommitments by DBEs. With this data available, the
Department can provide focused technical assistance and training to
reduce the number of DBEs terminated and provide supportive services to
DBEs to assist in appropriate bidding practices. The Department seeks
comment about how frequent and detailed the collection should be as
well as what would be the best and most efficient method to capture
data on terminations of committed DBEs.

Bidders Lists

Section 26.11(c) instructs recipients to create and maintain a
bidders list with certain information about DBE and non-DBE contractors
and subcontractors who seek work on federally assisted contracts.
Section 26.11(c)(1) states that the purpose of the list is related to
determining availability for use in goal-setting. In the 1999 final
rule, the Department noted ``bidders lists appear to be a promising
method for accurately determining the availability of DBE and non-DBE
firms'' and that ``creating and maintaining a bidders list would give
recipients another valuable way to measure the relative availability of
ready, willing and able DBEs when setting their overall goals.'' (64 FR
5096, 5104 (Feb. 2, 1999)) The Department also noted in the 1999 final
rule that flexibility was important because of potential burdens
related to collecting data about ``subcontractors that were
unsuccessful in their attempts to obtain contracts.'' Id. At the time,
the Department did not seek to impose procedural requirements for
collecting the data, in the interest of reducing burdens. The
Department suggested several possible collection methods, including
disseminating surveys and aggregating data from multiple sources.

[[Page 43625]]

These suggestions were incorporated into Sec. 26.11(c)(3). It is not
currently known how many recipients engaged or continue to engage in
surveys and questionnaires to obtain bidders list information or how
many are using this information to set overall goals. In practice, when
setting overall goals many--if not most--recipients use DBE directories
and U.S. Census Bureau data, a method described in Sec. 26.45(c)(1) or
use data from a disparity study as described in Sec. 26.45(c)(3).
Many recipients of DBE Programs specify that bidders list
information is collected from all bidders at the time of bid
submission, and many recipients rely on electronic systems for
capturing and storing this information. Currently, all bidders list
information is obtained and maintained locally by each recipient and is
not reported to the Department or the concerned OA. As a result, this
data is disaggregated among thousands of recipients in a wide variety
of formats and may contain a variety of different data points. In a
standardized and centralized format, this data could be of great value
to the Department in evaluating the extent to which the program is
achieving the objectives of Sec. 26.1(b) and (g). A centralized
database, searchable by recipients, could also improve the viability of
the bidders list method described in Sec. 26.45(c)(2) as a means for
recipients to identify DBE availability at Step 1 of the overall goal
setting process.
The Department therefore proposes revising Sec. 26.11(c) to
require recipients to obtain and enter bidders list data into a
centralized database the Department would specify. The purpose of this
proposed change is twofold: first, the revision would build a data
source that would allow more accurate and more granular analysis of
firms actively seeking to participate in DOT-funded contracts in
relation to the DBE Program objectives of Sec. 26.1; secondly, a
searchable, centralized database with bidders list information that
includes an expanded dataset would aid recipients in evaluating DBE
availability for goal setting purposes. We invite comment on estimated
costs for developing and maintaining such a database (this is not a
request for proposals or offers, and the Department is not seeking or
accepting unsolicited proposals).
The Department also proposes to amend Sec. 26.11(c)(2) to require
recipients to obtain and report the following additional data sets:
race and gender information for the firm's majority owner; and NAICS
code applicable to each scope of work the firm sought to perform in its
bid. This proposed revision would help ensure that the bidders list
information to be collected includes at least the same elements as
those being required in the proposed change to the Uniform Report. In
conjunction with the proposed changes to the MAP-21 Report in Sec.
26.11(e) and the Uniform Report, the proposed bidders list reporting
requirement would provide the Department with data showing how many and
what types of DBE firms are certified, how many DBEs are actively
bidding as prime or subcontractors, and which of them are actually
awarded contracts or subcontracts.
To ensure uniformity of data collection for proper analysis, the
Department proposes a change to Sec. 26.11(c)(3) regarding the
collection of bidders list information to require a standard practice
of requesting the information with bids or initial proposals.
The Department anticipates minimal impact to stakeholders from
these changes as recipients already collect most (if not all) of this
information when conducting good faith efforts to obtain DBE
participation on contracts with DBE goals. Additionally, contrary to
the situation in 1999, current internet and data capture technology
makes sending out surveys and questionnaires and aggregating that data
less burdensome.

MAP-21 Data Reports

In 2014, the Department implemented a longstanding provision in the
Department's surface transportation program authorizations, adding a
new reporting requirement which we called the MAP-21 data report. Under
Sec. 26.11(e), state departments of transportation, on behalf of their
UCP members, submit UCP directory information yearly to the
Departmental Office of Civil Rights reporting the percentage and
location in the state of DBEs controlled by women; socially and
economically disadvantaged individuals (other than women); and
individuals who are women and are otherwise socially and economically
disadvantaged individuals. The Department usually sends a request for
this information each Fall with a January due date and we have
interpreted the ``location in the state'' to mean certified in a
recipient's home state or certified out-of-state.
The MAP-21 report information is distinct from what is included in
the Uniform Report that recipients and sponsors annually submit to the
relevant OAs. It provides a yearly snapshot of the number and
percentage of DBEs in that state. However, the MAP-21 report is limited
in scope and utility largely because the Department is unable to break
out the number of firms certified, denied, or decertified by ethnicity.
This limitation prevents any comparison to section C of the Uniform
Report that could show volume of participation in relation to firm
ownership data contained in state directories.
We are mindful that similar concerns were raised in a 2001
Government Accountability Office (GAO) report (``Disadvantaged Business
Enterprise: Critical Information is Needed to Understand Program
Impact,'' GAO-01-586, pp. 18-19 (Jun. 1, 2001)), which criticized
elements of the Department's data collection as not truly reflective of
the environment that exists for the small business community of DBEs
and DBE applicants. The GAO observed, for example, that a lack of key
information prevents anyone from gaining a clear understanding of the
firms that participate in the DBE Program and how these firms compare
with the rest of the transportation contracting community.
In response to the GAO report and subsequent observations, the
Department instituted many changes to the Uniform Report, mandated
improvements to state directories, and instituted the current MAP-21
collection. The existing MAP-21 data collected shows the number of DBE
certifications steadily increasing (approximately 3.5 percent each
year). More can be done now, however, to inform our understanding of
the DBE Program's impact and depth of coverage.
The Department believes the proposed revision remedies the current
report deficiencies and is a meaningful first step toward a data-driven
and uniform approach to future program improvements and coordination
among program actors. The proposed revision does not replace existing
data collection requirements under the BIL but expands the collection
of data to cover the number of firms denied certification, summarily
suspended, or decertified by ethnicity and gender. This expanded data
collection would allow the Department to look at data across several
years to develop a thorough assessment of the impact of the DBE
certification process.
We invite comment on expanding this collection to cover: (1) the
number and percentage of in-state and out-of-state DBE certifications
for socially and economically disadvantaged owners by gender and
ethnicity (Black American, Asian-Pacific American, Native American,
Hispanic American, Subcontinent-Asian American, and non-minority); (2)
the number of DBE

[[Page 43626]]

certification applications received from in-state and out-of-state
firms and the number found eligible and ineligible; (3) the number of
in-state and out-of-state firms decertified and summarily suspended;
(4) the number of in-state and out-of-state applications received for
an individualized determination of social and economic disadvantage
status; (5) the number of in-state and out-of-state firms certified
whose owner(s) made an individualized showing of social and economic
disadvantaged status; and (6) the number of DBEs pre-qualified in their
work type by the recipient.
The Department proposes to create a similar data reporting
requirement for the ACDBE Program (excluding prequalification data).
The proposed rule would add a new paragraph to Sec. 23.27 that would
require state departments of transportation, on behalf of their UCP
members, to include ACDBE data in the yearly report to DOCR. This data
collection would provide the Department a yearly snapshot of the number
and percentage of ACDBEs. The Department anticipates that expanding the
collection to include information on ACDBEs would pose minimal burden
on recipients because UCPs are already required to report this data for
DBEs. It is highly useful in our view for data on ACDBEs to be reported
in order for the Department to gain a deeper understanding of the firms
that participate in that program and how these firms compare with the
rest of the airport concession community. It is important for the
Department to be able to do this in order to enhance the Department's
ability to conduct more detailed trend analyses of changes in ACDBE
participation levels and assess the program's overall success.

Subpart B--Administrative Requirements for DBE Programs for Federally
Assisted Contracting

4. Threshold Program Requirement for FTA Recipients (Sec. 26.21)

Currently, the rule requires only those FAA and FTA recipients that
will award prime contracts with cumulative total value exceeding
$250,000 in a fiscal year to have a DBE Program. The $250,000 value for
the threshold was first introduced in a 1983 final rule, but it
originally meant that FTA and FAA recipients who received over $250,000
in a fiscal year were required to have a DBE Program--in 2000, the
$250,000 threshold was updated to apply to contract awards.
There is little documentation as to the rationale for the threshold
when it was originally introduced. However, program experience shows
that recipients with lower dollar amounts of total prime contract
awards have low levels of DBE participation. Those lower contract
amounts necessarily imply low amounts of DBE participation simply
because the pool of available contract awards is small. In addition,
small prime contract awards have fewer opportunities for unbundling to
allow for subcontracting opportunities. It is only with subcontracting
opportunities that race-conscious awards can be used. Further,
subcontracts of small prime contracts are of low total value and may
not attract much interest from DBEs.
The proposed rule makes one adjustment to the rule based on
observed changes in the consumer price index (CPI) from 1983 to 2020.
The change sets a new threshold level for FTA recipients that would
trigger full adherence to those rule requirements FTA deems essential
for all recipients. This change amends the rule so that FTA recipients
receiving planning, capital and/or operating assistance less than
$670,000 must maintain a program locally that includes the requirements
of Sec. 26.11, reporting and record keeping; Sec. 26.13, contract
assurances; Sec. 26.23, a policy statement; Sec. 26.39, fostering
small business participation; and Sec. 26.49, concerning transit
vehicle manufacturers. FTA recipients receiving planning, capital and/
or operating assistance that will award prime contracts (excluding
transit vehicle purchases) the cumulative total value of which exceeds
$670,000 in FTA funds in a Federal fiscal year must have a DBE Program
meeting all the requirements of the rule. The Department will adjust
the threshold for inflation in its discretion as the need arises.
The Department conducted an economic analysis of this change,
identifying how many FTA recipients would no longer need a full program
(approximately 80), and the cost savings to those recipients and the
Department. FTA also conducted a public outreach session on October 14,
2021 and received general comments on changes to the DBE Program,
including increasing the threshold and amending the reporting
requirements for recipients of that OA. The Department found that
raising the threshold is expected to provide administrative cost
savings to FTA recipients with reduced reporting requirements and only
minor levels of reductions in total program-level DBE participation.
The FTA Office of Civil Rights will also experience reduced workload
related to monitoring, oversight, and training of these smaller
recipients. Further, the FTA Office of Civil Rights staff will be able
to direct their resources to recipients in other areas of need. That
redeployment of FTA staff resources may produce more DBE participation
from other recipients that may offset any losses in DBE participation
from recipients who are below the revised threshold.
We anticipate that recipients would experience cost savings
resulting from lower administrative burdens if the threshold were
raised. The exact impacts of this change would vary from year to year,
given that recipients have varying amounts of Federal contract dollars
every year, but an average impact can be estimated. The categories of
cost savings included in the analysis are:
<bullet> Program development and goal setting: These are the
administrative costs associated with the development of a recipient's
DBE Program and establishing the DBE Program goals every three years.
This work involves some amount of effort by recipients. In some cases,
recipients may contract this work out to a consultant.
<bullet> Monitoring, reporting, and outreach: These are the
administrative costs incurred by the recipient related to administering
their DBE Program every year. The recipient must monitor their
contracts to ensure the work committed to DBEs is actually performed by
DBEs, and verify payments made to DBEs. The recipient performs this
work by conducting contract reviews and work site visits. Entities must
report on their DBE participation twice a year to FTA. They must also
conduct regular outreach to DBEs in their community.
<bullet> Conferences and trainings: Recipients may send their
employees to conferences or trainings related to the DBE Program. The
cost to the recipient is incurred through travel expenses and the
opportunity cost of the employee's time. Some trainings provided by
private companies and organizations include registration fees, but DOT
offers training free of charge. This analysis assumes no registration
fees for the conferences and trainings.
<bullet> DOT technical assistance: FTA provides technical
assistance to transit agencies for their DBE Programs. This cost is
measured by the typical number of hours spent by FTA staff providing
such assistance per recipient.
The Department conducted a Regulatory Impact Analysis (RIA)
(available in the docket) of this proposal in connection with this
rulemaking; and believes that the revisions proposed reduces the
administrative burden of the DBE Program on recipients receiving less
funding and would have a minimal impact on race-neutral awards. We are
proposing to retain annual reporting

[[Page 43627]]

requirements, nondiscrimination contract assurances, strategies for
expanding contracts with small businesses, and transit vehicle
manufacturing requirements.

5. Unified Certification Program (UCP) DBE/ACDBE Directories
(Sec. Sec. 26.31 and 26.81(g))

Under the current DBE and ACDBE rules, each UCP must maintain a
directory of all DBE and ACDBE firms, in the state in which the UCP is
located. The directories must include each firm's address, phone
number, and types of work the firm has been certified to perform.\5\
The directories must be publicly available both electronically and in
print. UCPs are to make additions, deletions, and other changes as soon
as they learn of them.
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\5\ The UCP directory provisions in Sec. Sec. 26.31 and
26.81(g) are applicable to the ACDBE program per Sec. 23.23(a).
---------------------------------------------------------------------------

The Department enacted this requirement in 1999, noting in its
final rule that commenters discussed whether the directories should
include information concerning the qualifications of the firm to do
various sorts of work. For example, has the firm been pre-qualified by
the recipient or another state agency? Can it do creditable work? What
kinds of work does the firm prefer to do? Some commenters also
requested that the directory should list the geographical areas in
which the firm is willing to work.
The primary purpose of the directories is to show the results of
the certification process, with sufficient identifying information for
prime contractors to contact the DBEs or ACDBEs for those areas of work
or supply they could perform or provide on a potential project or
concession opportunity. Information about firms' qualifications,
geographical preferences for work, performance track record, capital,
etc., were not required to be part of the directories because, as
stated in the 1999 preamble, this would ``clutter up the directory and
dilute its focus on certification.'' The Department expected that a
prime contractor or prime concessionaire would contact a DBE or ACDBE
to discuss its qualifications before hiring it to perform work as a
subcontractor, sub-concessionaire, or supplier on a federally assisted
contract or concession opportunity. While the Department continues to
believe that the directories serve this purpose, the current regulation
was written before the widespread adoption of the internet and the
availability of online resources.
The proposed rule would direct UCPs to expand their directories of
DBE and ACDBE firms, allowing them to display other essential
information about DBEs and ACDBEs that attests to the firms' ability,
availability, and capacity to perform work. While the UCP would in no
way be required to vouch for the quality of the DBE or ACDBE's work, it
could expand information regarding a DBE or ACDBE beyond merely its
contact information and NAICS code(s). Under the proposal, all UCPs
would amend their directories so that firms would have a standard set
of options for information they can choose to make public, such as a
capability statement, state licenses held, pre-qualifications,
personnel and firm qualifications, bonding coverage, recently completed
project(s), equipment capability, and a link to the firm's website.
Under the proposed rule, UCPs would be required to incorporate these
information fields as additional criteria by which the public can
search and filter the UCP directory. We invite comments about the
specific categories of information that prime contractors or prime
concessionaires and DBEs or ACDBEs would find useful to have publicly
available. We anticipate that most DBEs and ACDBEs will avail
themselves of this opportunity, recognizing this is a cost-effective
and timesaving alternative to market their qualifications while
providing a one-stop baseline tool for prime contractors and prime
concessionaires as they seek out potential subcontractors and sub-
concessionaires. Further, the Department also proposes eliminating the
paper requirement for the directory in Sec. 26.81; we see no continued
utility for this requirement as all directories are available online.
We invite comments on whether prime contractors and prime
concessionaires will see time-and-resource savings with such a change
to the directory. There is a clear benefit to prime contractors and
prime concessionaires that seek out information regarding a firm's
capabilities, experience, and past performance. Given the growing size
of DBE/ACDBE directories each year, this may expedite contractor or
concessionaire selection and overall bid or solicitation response
times. Additional time savings would be realized in ``contract or
concession specific goal'' situations, wherein an award to a prime
contractor or prime concessionaire cannot be made unless that prime
contractor or prime concessionaire commits to contracting to a
sufficient number of DBEs or ACDBEs to meet a contract or concession
specific goal or demonstrates good faith efforts if it falls short of
the goal through contracting commitments. Also, when a prime contractor
complies with the regulatory requirements to terminate and replace a
DBE or ACDBE to which it committed at the time of award, it is
typically required to make good faith efforts to replace that DBE or
ACDBE. A more informative directory could assist prime contractors or
prime concessionaires with the replacement process as well and could be
used as one element in the good faith efforts analysis, a point
referenced by prime contracting organizations in response to the
Department's October 2017 request for public input on existing
regulatory and agency actions. (82 FR 45750 (Oct. 2, 2017))
We are aware that some UCPs have already expanded the search
capabilities of their current directories of DBE and ACDBE firms. We
anticipate UCPs being able to implement the requirement by January 1,
2024, or within 180 days of the final rule, but we invite comment on
how long UCPs expect the proposed enhancements may take, if
enhancements are feasible given existing resources, and whether the
benefits we describe above outweigh any upfront costs. We invite
comment on whether the directory enhancements should consist of drop-
down menus that draw from available data sources, open-ended fields
with a word limitation (e.g., 250 words more or less), or some
combination thereof. We invite comment on which of these approaches
would be most conducive to useful search functionality, feasibility,
and resource efficiency. If the proposed change takes effect, the
Department anticipates having a phase-in period for the additional
requirements described and will not make compliance mandatory until the
certification members of UCPs can build the enhancements and make them
operational.

6. Monitoring Requirements (Sec. 26.37)

Since 1999, Sec. 26.37 has set forth a recipient's responsibility
for monitoring the performance of other program participants. This
regulation in Subpart B, however, focuses on a recipient's
responsibility to include in its DBE Program a monitoring and
enforcement mechanism to verify that work committed to a DBE at
contract award is actually performed by that DBE. In addition, the
recipient must keep a running tally of actual DBE payments to ensure
that DBE participation is credited toward overall and contract

[[Page 43628]]

goals only when payments are actually made to DBEs.
The Department has learned that certain language in Sec. 26.55(h)
has caused confusion among recipients. The heading of this section is
misleading; it suggests that the section is limited to monitoring the
performance of other program participants, when it also sets forth
significant oversight requirements for recipients, including the
requirement to keep a ``running tally'' of payments toward the
achievement of the recipient's overall goal as well as each contract
with a DBE goal. Recipients also questioned how the requirement to
certify in writing each DBE was actually performing the work for which
it was committed intersected with Sec. 26.55, which requires
recipients to count DBE participation toward its annual goal and a
contract goal only if the DBE is performing a commercially useful
function (CUF).
The Department also learned that the requirement for the recipient
to keep a ``running tally'' was often overlooked or misconstrued.
Finally, the Department learned that many recipients were confused by
use of the word ``certification,'' used in this section as it pertains
to the requirement that there must be written, signed confirmation that
each DBE was monitored. The word ``certification'' in the DBE Program
more often than not refers to the application process a firm undertakes
to achieve DBE status or ``certification.''
We seek to clarify Sec. 26.37 by changing the title from ``What
are a recipient's responsibilities for monitoring the performance of
other program participants?'' to ``What are a recipient's
responsibilities for monitoring?'' We believe that this would better
describe the substantive content of the regulatory requirements.
The Department also wants to make clear that even DBEs used race-
neutrally must be monitored to count toward a recipient's overall goal.
We have learned that some recipients do not monitor DBE participation
unless there is a race-conscious contract goal.
We also seek to combine the requirements under this section with
the commercially useful function (CUF) requirements in Sec. 26.55. In
order for a recipient to verify that a DBE is performing the work it
was committed to perform, the recipient would be required to also
verify that the DBE is performing in the manner in which it can be
counted toward the recipient's overall goal and a contract goal. This
would clarify that while a CUF review can be an additional step in
monitoring, a CUF review is necessary for every DBE that performs for
credit toward a recipient's overall goal and a contract goal. A CUF
review could be combined with the Sec. 26.37 requirement for the
written verification or performed in a subsequent monitoring. Our
official guidance on this section also makes this clear.\6\
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\6\ See ``Official Questions and Answers (Q&A's) Disadvantaged
Business Enterprise Program Regulation (49 CFR 26)--Commercially
Useful Function'' at <a href="https://www.transportation.gov/sites/dot.gov/files/2020-01/docr-20180425-001part26qa.pdf">https://www.transportation.gov/sites/dot.gov/files/2020-01/docr-20180425-001part26qa.pdf</a>.
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The Department seeks to emphasize the importance of the ``running
tally'' requirement. Since 1999, the Department has made it clear that
a running tally applies to a recipient's overall goal and contract
goals. Therefore, we want to underscore in this revision that each
recipient would be required to keep a running tally, or ongoing
accounting, of its attainment of its overall DBE goal (including race-
neutral DBE participation) and make adjustments, if necessary, as set
forth in Sec. 26.51(d).
The running tally requirement would also require recipients to keep
an accounting of each contractor's progress in attaining a contract
goal through progressive payments to the committed DBE. This would be
necessary to allow recipients to intervene in real time when and/or if
they observe a prime contractor fall short of its contract goal.
Keeping an accounting of a prime contractor's progress toward meeting a
contract goal would allow recipients to observe when a prime contractor
is not on target toward achieving the goal. This information would
allow the recipient to question whether there has been unreported
termination of a DBE pursuant to a change order or otherwise; or
whether the DBE has withdrawn, and whether the contractor should be
using good faith efforts to find additional DBE credit, etc. If a
recipient were to wait until the end of the contract to match
commitments to actual payments, it would be too late to rectify any
shortfalls during contract performance. This is also why the Department
is also removing the sentence that indicates the monitoring requirement
in this section could be performed during contract close-out reviews.
The elimination of this sentence also conforms to the Department's
official guidance on this issue.\7\
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\7\ See ``Recipient Responsibilities for Oversight and
Monitoring of DBE Participation'' at <a href="https://www.transportation.gov/sites/dot.gov/files/docs/mission/civil-rights/disadvantaged-business-enterprise/318146/oversight-and-monitoring-dbe-participation.pdf">https://www.transportation.gov/sites/dot.gov/files/docs/mission/civil-rights/disadvantaged-business-enterprise/318146/oversight-and-monitoring-dbe-participation.pdf</a>.
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The Department proposes replacing the word ``certification'' with
``verification'' to avoid confusion with other parts of the regulation.
We also recommend eliminating the last sentence in this section
regarding DBE reports because it is misplaced.

Subpart C--Goals, Good Faith Efforts, and Counting

7. Prompt Payment and Retainage (Sec. 26.29)

In the 1999 preamble to the final rule, we stated that prompt
payment mechanisms are an important race-neutral mechanism that can
benefit DBEs and other small businesses. Without the protections
embedded in the rule, we remain concerned that DBE subcontractors can
be significantly--and, to the extent that they tend to be smaller than
non-DBEs, disproportionately--affected by late payments from prime
contractors. As we said in 1999, lack of prompt payment constitutes a
very real barrier to the ability of DBEs to compete in the marketplace;
since that time, the Department has required recipients to take
reasonable steps to address this barrier.
In the 2021 BIL (section 1101(e)(8)) Congress repeated mandates it
made in prior surface authorizations that the Department should take
additional steps to ensure that recipients comply with Sec. 26.29.
Similarly, the Department's Office of Inspector General recommended the
Department improve oversight of this issue.\8\
---------------------------------------------------------------------------

\8\ See ``New Disadvantaged Business Enterprise Firms Face
Additional Barriers to Obtaining Work at the Nation's Largest
Airports,'' USDOT Office of Inspector General, Report ZA-2016-002
(Nov. 3, 2015) at <a href="https://www.oig.dot.gov/sites/default/files/New%20DBE%20Participation%20Is%20Decreasing%20at%20the%20Nation%E2%80%99%20Largest%20Ariports%2C%20and%20Certification%20Barriers%20Exist.pdf">https://www.oig.dot.gov/sites/default/files/New%20DBE%20Participation%20Is%20Decreasing%20at%20the%20Nation%E2%80%99%20Largest%20Ariports%2C%20and%20Certification%20Barriers%20Exist.pdf</a>.
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In response, the OAs recommended that guidance on this section was
necessary to underscore the Department's intent. Thus, on April 15,
2016, we published official guidance \9\ consisting of 12 questions and
answers regarding Sec. 26.29. With respect to prompt payment and
return of retainage monitoring, the Department specified the need for
recipients to create a mechanism to affirmatively monitor a
contractor's compliance with subcontractor prompt payment and return of
retainage requirements, and that a recipient's reliance on complaints
or notifications from subcontractors is

[[Page 43629]]

insufficient. The guidance provides, in relevant part, as follows:
---------------------------------------------------------------------------

\9\ See ``USDOT Official Questions and Answers (Q&A's)
Disadvantaged Business Enterprise Program Regulation (49 CFR 26)''
at <a href="https://www.transportation.gov/sites/dot.gov/files/docs/Official%20Questions%20and%20Answers%204-15-16.pdf">https://www.transportation.gov/sites/dot.gov/files/docs/Official%20Questions%20and%20Answers%204-15-16.pdf</a>.

Relying only on complaints or notifications from subcontractors
about a contractor's failure to comply with prompt payment and
retainage requirements is not a sufficient mechanism to enforce the
requirements of section 26.29 . . .
While this section does not mandate that a recipient employ a
specific type of mechanism for monitoring prompt payment, recipients
are expected to take affirmative steps to monitor and enforce prompt
payment and retainage requirements.

The guidance continues, providing examples of affirmative
monitoring methods.
In 2020, FHWA performed a national review on recipient compliance
with prompt payment and return of retainage compliance. Among other
things, the review found most recipients are not affirmatively
monitoring subcontractor payments on FHWA-assisted projects. Many
recipients wait for subcontractor payment complaints or other
notification of non-payment before taking any action.
The Department believes including in this regulatory section a
specific reference to the need for affirmative monitoring of
subcontractor prompt payment and return of retainage by the recipient
will reinforce the Department's position on this matter. This revision
also makes clear that the requirements within this rule are intended to
flow down to all lower tier subcontractors through an addition of a
paragraph (f) to Sec. 26.29.

8. Transit Vehicle Manufacturers (TVMs) (Sec. 26.49)

Section Heading

The current heading of Sec. 26.49 is ``How are overall goals
established for transit vehicle manufacturers?'' The heading of Sec.
26.49 has remained constant since its introduction in 1999, but it no
longer accurately describes the section's contents. The Department
proposes to revise the heading to ``What are the requirements for TVMs
and for awarding DOT-assisted contracts to TVMs?'' This heading would
describe the contents of the section more accurately, which includes
requirements for TVMs that go beyond goal setting and pre- and post-
award requirements for recipients.

Terminology and Abbreviations

Section 26.49 in the current rule uses language and terms
inconsistently and does not match the language and terms used by the
Department in related documents and used by the industry.
The Department proposes to abbreviate ``transit vehicle
manufacturer'' to ``TVM'' throughout Sec. 26.49 so that the term's
usage is uniform throughout part 26. The Department proposes to revise
Sec. 26.49(b) to use ``you'' and its forms consistently when referring
to a party subject to this regulatory provision.
The Department also proposes to change references to ``certified''
TVMs to ``eligible'' TVMs in Sec. 26.49(a)(1) and (2) to reduce any
confusion as to whether a TVM must first receive a certification from
FTA prior to becoming eligible to bid on FTA-assisted transit vehicle
procurements. While FTA does evaluate whether a vehicle manufacturer
meets the qualifications for a TVM and whether it is eligible to bid,
such entities do not receive any sort of formal certification, and
their eligibility is always conditioned on whether they are maintaining
a DBE Program in compliance with part 26 and in good faith. We expect
that this change will reduce the likelihood of a recipient mistakenly
determining that a TVM is ineligible to bid because the TVM is unable
to produce a certification from FTA.

Post-Award Reporting Requirements

Section 26.49(a) details the pre- and post-award requirements for
FTA recipients engaged in procuring transit vehicles with FTA
assistance.
Section 26.49(a)(4) requires FTA recipients ``to submit within 30
days of making an award, the name of the successful bidder, and the
total dollar value of the contract in the manner prescribed in the
grant agreement.'' Since 2016, the Department has maintained an
internet-based reporting form for recipients to fulfill this
requirement. The Department has found that as currently written, Sec.
26.49(a)(4) results in inconsistent and inaccurate reporting. These
issues are especially prevalent when recipients report contracts with
options or schedules.
Recipients occasionally do not know which events trigger the 30-day
requirement and from which day they must begin counting. Some of the
confusion comes from the use of the word ``award.'' Generally, FTA
defines ``award'' as the Federal assistance FTA has provided to the
recipient to carry out the scope of work that FTA has approved.
However, Sec. 26.49(a)(4) uses ``award'' to refer to the procurement
mechanism used by a recipient to procure a transit vehicle from a TVM.
Additionally, some recipients are unsure when to report when they
exercise an option or receive a delivery from a schedule. One of the
most common errors the Department observes related to this requirement
is a recipient reporting the date the initial procurement occurred
instead of the date the option was exercised. To alleviate this
confusion, the Department proposes to replace ``making an award'' with
``becoming contractually required to procure a transit vehicle'' in
Sec. 26.49(a)(4), and to revise that paragraph for clarity. This
clarifies that a recipient needs to reference its contract with the TVM
to determine the trigger for the reporting requirements.
Recipients have also expressed confusion about which information is
required to be reported. Recipients sometimes do not know what to
include and exclude from the report. Section 26.49(a)(4) states that
recipients must report the ``total dollar value of the contract in the
manner prescribed in the grant agreement.'' Since the Uniform Report
specifies that recipients are only to report the Federal share, some
recipients misinterpret the language in Sec. 26.49(a)(4) to mean both
the Federal and non-Federal share.
Additionally, when reporting exercised options or scheduled
deliveries, some recipients report the value of the entire contract. In
practice, they must only report the value of the vehicles received from
the option or schedule. For example, if a recipient contracts with a
TVM to purchase 10 buses at a cost of $100,000 per bus, with the option
to purchase up to 10 additional buses at the same price per bus over
the next two years, and the Federal share is 50 percent; the recipient
is to report only $500,000 for the initial contract, and only $50,000
per bus if and only if the recipient exercises the option to procure
additional buses.
To alleviate this misunderstanding, the Department proposes to
specify in Sec. 26.49(a)(4) that the recipient is to report ``the
Federal share of the contractual commitment at that time.'' This
clarifies that only the Federal share is to be reported and only the
funds actually required to be paid at that time.
These proposals, if adopted, would result in the Department
collecting the information most useful to it, including in situations
in which recipients use options and schedules. The Department clarifies
that when a recipient uses a schedule in a contract and becomes
contractually obligated to pay for the vehicles that will be delivered
in the future as of the initial contract signing, the recipient must
report once and only once. This is because the entirety of the funds
will be expended by the recipient and received by the TVM in a single
reporting period.

[[Page 43630]]

Awards to Transit Vehicle Dealerships

As currently written, part 26 does not specifically address
situations in which an FTA recipient procures transit vehicles through
a dealership. Reports received by FTA show that the transit vehicle
market includes both direct-from-manufacturer procurements and
procurements from dealerships. Previously, the rationale for requiring
TVMs to maintain a DBE Program was that TVMs control their
subcontracting opportunities and thus are better positioned than
recipients to promote a level playing field for DBEs in the transit
vehicle manufacturing market. Transit vehicle dealerships, however, are
not required to maintain a DBE Program. Consequently, a transit vehicle
dealership is generally not eligible to bid on FTA-assisted transit
vehicle contracts. Recipients may procure vehicles from these entities
but must treat such procurements as any other procurement when
calculating their DBE goal. Thus, recipients may only procure transit
vehicles from transit vehicle dealerships by establishing project-
specific goals pursuant to Sec. 26.49(f) and must report using the
Uniform Report for that project. Further, many FTA recipients currently
incorrectly report contracts with dealerships as if they were contracts
with TVMs, complicating FTA's oversight efforts and resulting in
inaccurate data.
The Department proposes adding new paragraph (a)(5) to Sec. 26.49
to expressly state that a contract with a transit vehicle dealership
does not qualify as a contract with a TVM, even if a TVM manufactured
the vehicles procured by the recipient from the dealership. Further, as
described in the discussion of Sec. 26.5, the Department proposes
defining ``transit vehicle dealership'' and ``transit vehicle'' to
clarify which procurements qualify as transit vehicle procurements. The
Department expects that clarifying this aspect of the DBE Program will
result in more accurate DBE goals, more accurate reporting, and
generally greater compliance.

TVM Goal Setting, Submission, and Review

As currently written, Sec. 26.49(b) states that development,
submission, and approval of goals is generally the same for TVMs as it
is for recipients. Recipients and TVMs have expressed confusion
regarding how frequently TVMs must submit their goal, what period their
goal should cover, and whether FTA approval is required prior to the
TVM becoming eligible to bid. The Department proposes adding language
to expressly state that TVMs' goals are set and submitted annually.
Further, the Department proposes eliminating the language related to
FTA's approval to harmonize the requirements for TVMs with the
requirements for recipients.
The proposed removal of the ``approval'' language is not intended
to have any substantive effect on the conditions necessary for a TVM to
be eligible to bid on FTA-assisted transit vehicle procurements, nor
any effect on the process by which FTA reviews a TVM's goal and goal
methodology. Even though Sec. 26.49(a)(1) expressly states that TVMs
that have submitted goals that have yet to be approved are eligible to
bid, recipients and TVMs often express confusion over whether prior
approval is required. Further, Sec. 26.45(f)(4), part of the section
TVMs are to reference when setting their goals, expressly states that
recipients ``are not required to obtain prior Operating Administration
concurrence with [their] overall goal[s].'' Additionally, Sec.
26.49(b)(2) expressly states that the requirements for goal approval
apply to TVMs in the same manner that they apply to recipients. Thus,
by removing ``approval'' from Sec. 26.49(b), the Department expects
that recipients and TVMs will better understand that FTA need not
approve a TVM's goal prior to the TVM becoming eligible to bid without
affecting the eligibility processes and conditions.

TVM Uniform Report

As currently written, Sec. 26.49(c) requires ``transit vehicle
manufacturers awarded'' to submit the Uniform Report in the same manner
as recipients to remain eligible to bid on FTA-assisted transit vehicle
procurements. Some TVMs have expressed confusion over the word
``awarded'' and that confusion has resulted in eligible TVMs failing to
report properly. These TVMs misinterpret the current text to mean that
only TVMs that have actually been awarded contracts by FTA need to
submit the Uniform Report. However, TVMs that are eligible to bid on
FTA-assisted transit vehicle procurements in a given fiscal year must
submit the Uniform Reports for that fiscal year, even if they were not
awarded any contracts with FTA assistance. Reporting zero contracts is
important for the Department's oversight efforts because it allows the
Department to cross-reference the data provided by TVMs with data
provided by recipients.
The Department proposes eliminating the word ``awarded'' to clarify
that an eligible TVM must fulfill the relevant reporting requirements
for the years in which it is eligible. This revision should not be
construed to mean that an entity that otherwise qualifies as a TVM is
required to submit any reports to FTA or the Department if it is not
eligible to bid on FTA-assisted transit vehicle procurements.

9. Good Faith Efforts Procedures for Contracts With DBE Goals (Sec.
26.53)

Considerations for administering the DBE Program in the context of
a design-build contract were introduced by the Department in 1999, in
Sec. 26.53(e). In this section of the regulation, pertaining to
contract goal attainment, the Department recognized that at the time a
design-build contract is awarded, the project is minimally designed,
and future subcontracting opportunities are unknown. In light of this,
the Department acknowledged that specific DBEs that will subsequently
be involved in the contract cannot reasonably be identified as required
under paragraph (b)(2) of this section.

DBE Performance Plan (DPP)

To address this issue, in 2014, DOT revised Sec. 26.53(b)(3) to
provide that bidders in negotiated procurements, such as design-build
procurements, may make a commitment to meet the DBE goal at the time of
their response to initial proposals but provide the information
required by paragraph (b)(2) of this section before the recipient makes
its final contractor selection. However, challenges to identifying
specific DBEs when the project is minimally designed, and
subcontracting opportunities are unknown, remain at the time the
recipient makes its final selection and even after contract award.
Further, in the event the design builder is unable to meet the goal
through committing to enough DBEs before the recipient makes its final
selection, the design builder must submit documented good faith
efforts. In practice, the Department has noted that by requiring the
contractor to identify specific DBEs and document good faith efforts at
this early stage of a design-build project, goal achievement is often
attained through minimal DBE subcontracting commitments and large
submissions of documented good faith efforts. Thus, as currently
written, Sec. 26.53(b)(3)(ii) may unnecessarily limit the
participation of DBEs in a design-build project that likely includes an
abundance of subcontracting opportunities.
Since 1999, design-build contracts have become much more prevalent,
and best practices for administering the DBE Program in the context of
this contract delivery method have been identified. The Department
proposes to revise

[[Page 43631]]

Sec. 26.53(e), to align with current best practices which allow for
continued DBE participation as the contract proceeds and definitive
subcontracting opportunities arise.
The Department proposes to revise Sec. 26.53(e), to direct
recipients requesting proposals for a design-build project to require a
design builder to submit a DBE Performance Plan (DPP) with its
proposal. The DPP replaces the need to commit to specific DBEs or
submit good faith efforts at the time of the proposal or prior to final
selection. To be considered responsive, a contractor's DPP must include
a commitment to meet the goal by providing details of the types of work
and projected dollar amounts the contractor will solicit DBEs to
perform. The DPP must also include an estimated time frame in which
actual DBE subcontracts would be executed. Once the contract is
awarded, the recipient must provide ongoing monitoring and oversight of
the contractor to evaluate its good faith efforts to comply with the
DPP and schedule. The parties may agree to revise the DPP throughout
the life of the project, e.g., replacing the type of work items the
contractor will solicit DBEs to perform and/or adjusting the proposed
schedule as long as the contractor continues to use good faith efforts
to meet the goal. The Department believes this method will result in
greater opportunities for DBEs to participate in design-build
contracts.
In addition, DOT proposes clarifying Sec. 26.53(b)(3)(ii) to
address negotiated procurements outside of the context of design-build
procurements.

Terminations

Since 1999, Sec. 26.53(f)(1) has prohibited a prime contractor
from terminating a DBE used in response to a contract goal without the
recipient's prior written consent. The Department implemented
protections in these situations to prevent abuse, i.e., that absent a
recipient's consent, a prime contractor may not terminate a DBE
committed on the contract for convenience and then perform the work
with its own forces. Also, since 1999, Sec. 26.53(g) has required a
prime contractor that has terminated a DBE to make good faith efforts
to substitute another DBE to perform the same amount of work as the DBE
that was terminated. In 2005, these termination and substitution
provisions in Sec. 26.53(f) and (g) were made applicable by Sec.
23.25(e)(1)(iv) to concession specific goals. The Department expanded
Sec. 26.53(f)(4) and (5) in 2011 to require recipients to include a
provision in its prime contract requiring the prime contractor or prime
concessionaire to give written notice to the DBE or ACDBE subcontractor
or sub-concessionaire (within five days) of its intention to request
termination and/or substitution, and the reasons for the request. The
prime contractor or prime concessionaire must also give the DBE or
ACDBE five days to respond to the prime contractor's or prime
concessionaire's notice and advise the recipient of any reasons the
request should not be approved.
The 2014 revisions to Sec. 26.53(g) expanded the good faith
efforts requirements a prime contractor or prime concessionaire must
follow to replace the terminated DBE or ACDBE. After making this
change, the Department has learned that because the section above
combines the terms ``terminate and/or substitute,'' some recipients
permit a prime contractor or prime concessionaire that wishes to
terminate a DBE or ACDBE in response to a contract or concession
specific goal to seek written concurrence only for a DBE or ACDBE
substitution. This action often omits the procedures a prime contractor
or prime concessionaire is required to follow prior to terminating a
firm. The required actions a prime contractor or prime concessionaire
must take prior to terminating a firm provide the DBE or ACDBE with an
opportunity to respond in writing to the recipient, indicating the
reasons why it objects to the proposed termination. Requiring a prime
contractor or prime concessionaire only to seek written concurrence for
a proposed substitution deprives the DBE or ACDBE from these due
process protections.
To avoid this unintended result, the Department proposes a minor
revision to this section to eliminate the pairing of ``termination''
with ``substitution'' to clarify that proposed DBE and ACDBE
terminations require the prime contractor or prime concessionaire to
follow specific actions and provide a DBE or ACDBE an opportunity to
respond before a recipient may provide written concurrence or denial.
Under this proposed revision, the prime contractor or prime
concessionaire would be permitted to propose a substitution only after
a recipient's written concurrence with the proposed termination is
received.
The revisions also make clear that a prime contractor's or prime
concessionaire's desire to eliminate a portion of the work committed to
a DBE or ACDBE as a condition of award would also constitute a
``termination'' in which the prime contractor or prime concessionaire
and recipient must follow the above-referenced procedures.

10. DBE Supplier Credit (Sec. 26.55(e))

The Department first adopted regulatory provisions related to
``regular dealer'' suppliers in the 1987 DBE final rule (52 FR 39225
(Oct. 21, 1987)) (revising then-existing Sec. 23.47(e) to Sec.
23.47(e) and (f)). This regulation has gone through several revisions
since then, most recently in 2014 (79 FR 59566 (Oct. 2, 2014)), and now
appears as Sec. 26.55(e). This section assists recipients in
evaluating the appropriate credit to be given toward a contract goal
(and a recipient's overall goal) when a DBE provides services as a
manufacturer, supplier, or transaction facilitator; the latter is
sometimes referred to as packager, broker, manufacturers'
representative, or other firm that arranges or expedites transactions.
The Department requested stakeholder feedback on the regular dealer
concept in the 2012 Notice of Proposed Rulemaking. See 77 FR 54592
(Sept. 6, 2012), which led to the 2014 final rule. The preamble to the
2014 final rule states: ``Specifically, we sought comment on: (1) how,
if at all, changes in the way business is conducted should result in
changes in the way DBE credit is counted in supply situations;? (2)
what is the appropriate measure of the value added by a DBE that does
not play a traditional regular dealer/middleman role in a transaction;?
and (3) do the policy considerations for the current 60% regular dealer
credit actually influence more use of DBEs as contractors that receive
100% credit?'' See 79 FR 59566, 59588 (Oct. 2, 2014).
In response to the 2012 NPRM, the Department received over 50
comments from prime contractors, DBEs, stakeholder associations, and
recipients, many of which emphasized the need for additional
clarification of, or changes to, the terminology used to describe
regular dealers, middlemen, transaction expediters, and brokers. The
Department responded that more analysis and discussion was needed to
make informed policy decisions about how best to amend the regulations
governing regular dealers and transaction facilitators; it committed to
continuing the conversation through future stakeholder meetings.
On September 26 and 27, 2018, the Department held stakeholder
meetings on the topic of ``regular dealers.'' Prime contractors,
recipients, stakeholder associations, and DBEs, attended and many
shared valuable information from their various perspectives. While the
Department often hears that the ``regular dealer'' concept is outdated,
does not reflect current industry practice, and

[[Page 43632]]

should be eliminated, most meeting contributors did not propose doing
away with the regular dealer concept. Most acknowledged that even
though the market has changed to allow prime contractors the ability to
obtain goods through e-commerce without the need for a ``middle-man,''
many DBE suppliers reported that they rely upon the DBE Program and
contract goals to maintain a viable business. Similarly, prime
contractors conveyed their reliance on DBE suppliers to assist in
meeting contract goals.
Based on the input from the stakeholder sessions and DOT's
continued analysis of the role of the regular dealer provisions in the
success of the DBE Program, DOT proposes several modifications to the
regular dealer provisions designed to better align with modern business
practices. Modifications to this section also include clarifying the
definition of ``manufacturer'' and ``suppliers of specialty items.''

Limiting DBE Supplier Goal Credit

Since the beginning of the DBE Program in 1980, DOT has never
placed a cap on the total amount of credit a prime contractor could
obtain from supply contracts toward meeting a contract goal. DOT has
long had a concern, however, that if prime contractors could frequently
meet contract goals primarily through supply contracts with DBEs,
opportunities for DBEs that perform other types of work would be too
limited. DOT addressed this concern by allowing prime contractors to
only count a certain percentage of the value of individual supply
contracts toward contract goals. The Department's initial comprehensive
Minority Business Enterprise regulation, issued in 1980, limited goal
credit for a contract with a non-manufacturer supplier to 20 percent of
the expenditures with the supplier, provided the supplier performed a
commercially useful function (CUF).\10\ In 1987, based on feedback from
stakeholders, DOT adjusted the limit on goal credit to 60 percent of
expenditures with a non-manufacturer supplier, determining that the
adjusted figure would better balance the considerations that too low of
a credit figure would unduly limit participation by MBE suppliers and
that too high of a figure would unduly limit participation by other MBE
firms (e.g., construction contractors). The 60 percent figure was set
in 1987.\11\
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\10\ See 45 FR 21172, 21181 (Mar. 31, 1980) available at <a href="https://www.transportation.gov/sites/dot.gov/files/2020-06/1980%20Final%20Rule%2045%20Fed.%20Reg.%2020771%2C%2021172%28Mar.%2031%2C%201980%29.pdf">https://www.transportation.gov/sites/dot.gov/files/2020-06/1980%20Final%20Rule%2045%20Fed.%20Reg.%2020771%2C%2021172%28Mar.%2031%2C%201980%29.pdf</a>.
\11\ See 52 FR 39225 (Oct. 21, 1987) available at <a href="https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/1987-final-rule">https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/1987-final-rule</a>).
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During the 2018 stakeholder meetings, some DBE participants
conveyed that although crediting suppliers is limited to 60 percent of
the value of the contract, some contractors, are still able to meet all
or most of a contract goal through DBE suppliers, especially suppliers
that provide high-cost or bulk items such as petroleum or steel,
diminishing or even eliminating the need for the prime to employ
additional DBE subcontractors on a project.
In consideration of the comments received, the Department proposes
to revise this Part by adding a provision at Sec. 26.55(e)(6) to limit
the total allowable credit for a prime contractor's expenditures with
DBE suppliers (manufacturers, regular dealers, distributors, and
transaction facilitators) to no more than 50 percent of the contract
goal. This revision would allow exceptions to the crediting limit (50
percent) for DBE material suppliers on a contract-by-contract basis
(for example, certain contracts may be material-intensive), with the
prior approval of the appropriate OA.
The following hypothetical is an example of how DBE credit should
be applied under the proposed rule:

A prime contractor seeks to bid on a $1M contract with a DBE
goal of 20%. The prime contractor's total creditable portion of the
commitment submitted to meet the contract goal-cannot exceed
$100,000 in DBE material supplier participation: ($1M x 0.2 =
$200,000 (total amount to meet goal)) ($200,000 x 50% = $100,000
(material supplier limit)). For example, the prime will use a DBE
manufacturer of bricks for $50,000 and a regular dealer of steel
costing $100,000. The regular dealer of steel can only count 60% of
the cost of steel ($100,000 x 0.6 = $60,000). The total amount for
DBE supplies is ($50,000 plus $60,000 = $110,000). The prime can
only count $100,000.

Evaluating a Supplier's Designation as a Regular Dealer

The Department proposes to continue to credit 60 percent of the
cost of supplies toward the contract goal (and recipient's overall
goal) should a DBE meet the regular dealer requirements. This
determination is made up of two components: (1) whether the DBE is an
established business regularly engaged in the sale or lease of a
product of the ``general character'' of that required under the
contract; and (2) whether the DBE meets certain performance
requirements in supplying the item.
The Department has learned that recipients often find it difficult
to determine whether a DBE is ``regularly engaged'' in a supply
activity, versus a firm that occasionally engages in such work or does
so on an ad hoc or contract-by-contract basis. Similarly, recipients
find it difficult to determine if the DBE regularly sells products of
the ``general character'' of those called for in a specific contract.
Moreover, recipients often wait to make these determinations until
after the contract is awarded, during a CUF review in the field. While
field inspectors performing CUF monitoring can evaluate a DBE
supplier's performance, they are unlikely to have a method to determine
if the DBE supplier meets the fundamental criteria to be considered a
regular dealer.
In a design-bid-build contract, contractors/bidders must submit,
either at the time of bid or within 5 days thereafter, information
regarding the specific DBE firms to which they have committed to meet a
contract goal. To determine if a contractor/bidder is eligible for
contract award, recipients must evaluate these commitments to determine
if the contractor/bidder met the goal either by sufficient
subcontracting to DBEs and/or by demonstrating sufficient good faith
efforts. See Sec. 26.53(b). Contractor/bidder commitments often
include the use of DBE suppliers and indicate 60 percent credit of the
cost of the supplies toward goal achievement.
The Department has learned that many recipients accept the 60
percent commitment at face value without knowing whether the DBE
``regularly engages'' in the purchase and sale or lease of items, or
those of the ``general character,'' that it is committed to supply for
the contract at issue.
This face-value determination could affect whether a contractor/
bidder has actually met the contract goal and is eligible for contract
award. To avoid overcounting upfront toward contract goal achievement
prior to contract award, and potential overcounting of goal credit in
the field, the Department proposes to add a requirement in Sec.
26.55(e)(2)(iv) for a recipient to establish a system to determine,
prior to award, that the DBE supplier meets the fundamental
characteristics of a ``regular dealer,'' i.e., whether the committed
DBE is ``regularly engaged'' in the purchase or sale of items, or those
of the ``general character,'' called for in the contract. (In the race-
neutral context, this information should first be considered prior to
entering the DBE's participation into the recipient's reporting system,
which usually occurs when subcontracts are approved.) To make such a
determination, the

[[Page 43633]]

recipient must evaluate whether the DBE supplier keeps sufficient
quantities of the items in question and regularly sells the items to a
sector of the public that demands such items.
To address the second component of the determination, the
Department proposes under Sec. 26.55(e)(2)(iv)(A) to add a requirement
that a recipient establish a system, pre-award, to determine whether a
DBE supplier submitted by the contractor/bidder as a ``regular dealer''
has demonstrated capacity and intent to perform as a regular dealer to
ensure preliminary counting determinations are based on the DBE's
capacity and intent to comply with the CUF requirements. Such
procedures would be flexible but should include preliminary questions
to identify whether the products sold or leased will be provided from
the DBE's inventory or whether the DBE will have physical possession
before they are sold or leased to the prime.
Under this same section, these procedures would also address the
supply of bulk items by including questions on the disclosure of
information to determine if the DBE will deliver the items using
distribution equipment it owns and operates. This system is necessary
to provide a sound basis for evaluating goal attainment prior to
contract award and is necessary to support the likelihood that the DBE
supplier will actually perform as a regular dealer in the field. Should
the additional information a recipient receives result in a
determination that the committed DBE supplier's services would not be
entitled to the goal credit listed, the recipient would then determine
that the contractor/bidder fell short of the goal and would then
evaluate the bidder's good faith efforts to determine eligibility for
contract award or subcontractor approval.
Ultimately, goal crediting would be made on a contract-by-contract
basis contingent upon the outcome of a recipient's final CUF and
counting determination of the DBE supplier's performance during the
contract.

Drop-Shipping and Delivery From Other Sources

Many DBE suppliers said that the absolute prohibition on drop-
shipping materials from the manufacturer to the desired location
severely impacts their ability to compete with non-DBE suppliers. On
the other hand, it is of concern to the Department and DBE
subcontractors that a firm would receive 60 percent credit of the cost
of supplies if the DBE's role is limited to making phone calls or
sending emails to manufacturers or suppliers and asking them to drop-
ship the materials to the desired location. The latter role is akin to
a broker or transaction facilitator, and credit should be limited to
the amount paid by the prime as a commission or fee for these services.
During the 2018 stakeholder meetings, the Department learned that
the prohibition of drop-shipping materials is especially of concern to
DBEs with distributorship agreements for the supply of bulk items.
Those with distributorship agreements conveyed that these agreements
with manufacturers are limited in nature, costly, and require them to
assume significant risk of loss or damage. They stressed that the
requirement that they use and operate their own distribution equipment
to deliver the products is a barrier to their ability to compete fairly
with other suppliers of bulk items.
Recognizing that a DBE with a distributorship agreement typically
has more control regarding the quality of materials and bears
significant risk, the Department proposes to add language to Sec.
26.55(e)(3) to allow materials or supplies purchased from a DBE
distributor that neither maintains sufficient inventory nor uses its
own distribution equipment for the products in question to receive
credit for 40 percent of the cost of materials, including
transportation costs.
In this section, a DBE distributor is defined as an established
business that engages in the regular sale or lease of the general
character of items specified by the contract and described under a
valid distributorship agreement. This section further explains that a
DBE distributor performs a CUF, entitling it to 40 percent credit, when
it operates in accordance with the terms of its distributorship
agreement; and with respect to shipping, the DBE distributor must
assume the risk for lost or damaged goods. The Department proposes that
recipients must review the language in distributorship agreements,
prior to contract award, to determine their validity relevant to each
purchase order/subcontract and the risk assumed by the DBE. Where the
DBE distributor drop-ships materials without assuming risk, or
otherwise does not operate in accordance with its distributorship
agreement, credit is limited to fees or commissions.
Stakeholders also expressed concern regarding how to credit
supplies from a DBE regular dealer that provides the major portion of
items under the contract from its inventory, but must provide
additional quantities ``of the general character'' of those kept and
regularly sold, from other sources. The Department believes it places
an undue burden on recipients to segregate minor quantities of an order
delivered by sources other than the DBE, to eliminate them from regular
dealer credit (60 percent). The Department proposes to clarify in Sec.
26.55(e)(2)(iv)(A) that 60 percent credit of the cost of materials or
supplies (including transportation costs) is appropriate when all, or
the major portion, of the supplies under a purchase order or
subcontract are provided from the DBE's inventory, and when necessary,
any additional minor quantities, of the ``general character'' as those
kept and regularly sold, are delivered from other sources (e.g., the
manufacturer). The Department proposes that the recipient's system
mentioned above should include a means to evaluate at the commitment
stage, prior to contract award, the type and quantity of items the DBE
intends to have delivered by other sources.

Negotiating the Price of Supplies

The Department made clear that to receive credit for supplying
materials, a DBE must demonstrate ownership by negotiating the price of
supplies, determining quantity and quality, ordering the materials, and
paying for the materials itself. Some DBE suppliers conveyed that they
are unable to compete with those prices negotiated by larger companies
with established relationships with manufacturers, or who purchase
supplies regionally in bulk; and that this scenario is a barrier for
DBEs to fairly compete. They asked us to consider eliminating the need
to negotiate price for certain bulk items, and still allow 60 percent
goal credit. We considered this request but ultimately do not support
it. The Department reaffirms the following statement set forth in
official guidance posted on May 24, 2012:

The Department understands that there may be some kinds of
transactions in which no subcontractor performs all of the four
required functions (e.g., a prime contractor decides who will supply
a commodity and at what price, with the result that a subcontractor
cannot negotiate the price for the item). In such situations, the
way the transaction occurs does not lend itself to the performance
of a CUF by a DBE subcontractor, and it is not appropriate to award
DBE credit for the acquisition of the commodity by the DBE
subcontractor. All the DBE has done with respect to acquiring the
commodity is to carry out, in a ministerial manner, a decision made
by the prime contractor.\12\
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\12\ Official FAQs on DBE Program Regulations--Commercially
Useful Function <a href="https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/dbe-guidance/official-faqs-dbe-program-regulations-49-cfr-26#Commercially">https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/dbe-guidance/official-faqs-dbe-program-regulations-49-cfr-26#Commercially</a>.

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[[Page 43634]]

DBE Manufacturers

The Department has learned from the OAs that the definition of a
DBE manufacturer should be clarified to assist recipients in evaluating
whether a DBE is a manufacturer, allowing 100 percent credit of the
cost of supplies and materials it manufactures toward a contract goal
(and a recipient's overall goal). In response, we propose revising
Sec. 26.55(e)(1) to clarify the meaning of the term ``manufacturer.''
A DBE is a manufacturer if it owns or leases and operates a factory or
establishment that produces the materials, supplies, articles, or
equipment required under the contract. Manufacturing also includes
blending or modifying raw materials or assembling components to create
the product to meet contract specifications. A DBE does not meet the
definition of a manufacturer, however, when it makes minor
modifications to the materials, supplies, articles, or equipment.

Suppliers of Specialty Items

The Department proposes a new provision at Sec. 26.55(e)(2)(iv)(C)
to address a common scenario in which a DBE supplies items that are not
typically stocked due to their unique characteristics (e.g., limited
shelf life, or specialty items requested by contractors on an ad hoc
basis). We consider a DBE supplier that operates in this manner as a
regular dealer of bulk items that can receive 60 percent credit for the
items only if it owns and operates its own distribution equipment. We
propose that the recipient include in its pre-award system procedures
to determine whether the DBE supplier of such items will operate its
own distribution equipment in order to be entitled to 60 percent
credit.

Subpart D--Certification Standards

11. General Certification Rules (Sec. 26.63)

To begin, we propose changing ``recipient'' to ``certifier''
throughout subparts D and E because firms often do not know that
``recipient'' refers to ``certifier.''
Currently, Sec. 26.73 is a catch-all section that mostly provides
broad certification requirements. The overall objective of the proposed
revisions is to create more succinct and clearer paragraphs for rules.
For this reason, we propose changing the title of this section from
``What are the other rules affecting certification?'' to ``General
Certification Rules;'' and redesignating Sec. 26.73 to Sec. 26.63.
These changes provide context to the certification rules that follow
and more accurately reflect the section's purpose.
The proposal would restate and compile the rules discussed in
current paragraphs (a) through (d) and (f) through (g) into new
paragraph (a). The Department believes that the new paragraph (a) would
increase readability, making the rules more accessible to the general
public.
The most notable change in proposed Sec. 26.63(b) pertains to
firm's owned and controlled by a parent or holding company. The current
Sec. 26.73(e) states that a DBE must be owned by individuals and not
another firm. However, Sec. 26.73(e)(1) provides an exception to the
general rule and states that ``if socially and economically
disadvantaged individuals own and control a firm through a parent or
holding company, established for tax, capitalization, or other purposes
consistent with industry practice, and the parent or holding company in
turn owns and controls an operating subsidiary, you may certify the
subsidiary if it otherwise meets all [other certification]
requirements.'' Sec. 26.73(e)(1).
Because the text of current Sec. 26.73(e) does not clearly define
``parent,'' ``holding company,'' or ``tax, capitalization or other
purposes,'' the ambiguity created by these terms makes the entire
provision difficult to apply. The Department interprets the exception
to the general rule to allow a DBE to be owned by another firm so long
as the parent or holding company is owned and controlled by
disadvantaged individuals. The proposal takes this approach. As we
acknowledged in the 1999 preamble when we issued the rule, ``[t]he
purpose of the DBE Program is to help create a level playing field for
DBEs. It would be inconsistent with the program's intent to deny DBEs a
financial tool that is generally available to other businesses.'' (64
FR 5096, 5120 (Feb. 2, 1999))
Contrary to the goal stated in the preamble, the ``general rule''
in Sec. 26.73(e) unduly excludes the disadvantaged owner from
indirectly owning a firm through another entity--a flexibility that is
available to non-DBEs. This restriction arguably puts the DBE at a
competitive disadvantage with its non-disadvantaged competitors.
We are aware that the more complex a firm's ownership structure is,
the more difficult it is for the certifier to assess its eligibility.
Our proposal would permit only one tier of ownership above the
subsidiary DBE. No firm would be certified based on ownership of a
business, control on the grandparent level (i.e., a DBE cannot be 51
percent owned by firm B, which is 51 percent owned by firm C, which is
owned by the disadvantaged owner).
Also, the firm would still be required to meet all other
certification requirements, including the PNW limit and business size
standard, which may create eligibility issues related to the outside
business interests and affiliation counting rules. The firm's refusal
to provide pertinent information about its parent or holding company
would be grounds for denial or decertification for failure to
cooperate.
The proposal also makes technical corrections to the portions of
the section concerning Indian tribes and Alaska Native Corporations.
Overall, proposed Sec. 26.63 simplifies and removes ambiguous
language that exists within the current rule. It preserves common
business practices while securing program integrity.

12. Business Size (Sec. Sec. 26.65, 23.33)

Size standards in the DBE and ACDBE regulation are important for a
number of reasons. They implement the statutory requirement that
participants be small businesses. They provide a means to ensure that
participation in the DBE and ACDBE Programs is not necessarily of
indefinite duration: if a firm grows to exceed the applicable size
standard, it ceases to be eligible for the applicable Program. The size
standards are calibrated to help meet the objectives of the Programs,
including permitting ACDBEs to compete in the transportation and
airport concessions markets.
To be classified as a small business under the DBE Program, a
business's gross receipts (including those of its affiliates) must
satisfy two size standards. Per Sec. 26.71(n), DBEs must meet a size
limit for each North American Industry Classification System (NAICS)
code corresponding to the firm's work. The size standard represents the
highest amount of receipts a firm can have to be considered small. For
example, an architecture firm, assigned NAICS Code 541310, cannot
exceed $11 million in average annual gross receipts (SBA's size limit
for NAICS Code 541310) and still be considered small. DBEs must also
meet a secondary size standard prescribed in the Department's surface
reauthorization legislation, known as the statutory or secondary gross
receipts cap. This provision is currently implemented through Sec.
26.65(b) and (c), and to qualify as a DBE, a firm cannot exceed the
size cap prescribed by this regulation. The NAICS code standard cap is
expressed in either millions of dollars or number of employees whereas
the statutory gross receipts cap is

[[Page 43635]]

measured in average annual gross receipts.
The Federal Aviation Administration (FAA) Reauthorization Act of
2018 (Pub. L. 115-254) removed the secondary gross receipts cap under
Sec. 26.65(b) for purposes of eligibility for FAA-assisted work.
Therefore, the revised rule published on December 14, 2020, reflects
that the secondary gross receipts cap of Sec. 26.65(b) and (c) does
not apply for purposes of determining a firm's eligibility for FAA-
assisted work.\13\
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\13\ See 85 FR 80646 (Dec. 14, 2020) available at <a href="https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/december-14-2020-final-rule-gross-receipts">https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/december-14-2020-final-rule-gross-receipts</a>.
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Size limits are similarly placed on ACDBEs and firms applying for
ACDBE certification, but under Sec. 23.33, these are not currently
aligned with the SBA limits based on individual NAICS codes. Section
(a) of the current provision requires recipients to treat a firm as a
small business eligible to be certified as an ACDBE if its gross
receipts, averaged over the firm's previous 3 fiscal years does not
exceed $56.42 million. Unique types of businesses have size standards
that differ--Banks and financial institutions; car rental companies;
pay telephone companies; and automobile dealers.

Changing the Measurement for the NAICS Code Size Calculations From 3 to
5 Years

Section 1101(e)(3) of the BIL states that for purposes of the DBE
Program's definition of a small business, the term is defined as used
in section 3 of the Small Business Act (15 U.S.C. 632). The Small
Business Runway Extension Act of 2018 (SBREA) (Pub. L. 115-324) amended
Section 3 of the Small Business Act, which in turn changed the method
used by the SBA to calculate business size under 13 CFR part 121. The
SBA implemented this change on January 6, 2020, through a final
rule.\14\ This rule changed the time period for calculating average
annual gross receipts under 13 CFR part 121 from 3 years to 5 years but
provided firms with the option to use either the 3-year calculation or
the 5-year calculation until the 5-year period became mandatory on
January 6, 2022.
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\14\ See 84 FR 66561 (Dec. 5, 2019) available at <a href="https://www.federalregister.gov/documents/2019/12/05/2019-26041/small-business-size-standards-calculation-of-annual-average-receipts">https://www.federalregister.gov/documents/2019/12/05/2019-26041/small-business-size-standards-calculation-of-annual-average-receipts</a>.
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The SBA final rule applies to FHWA, FTA, and FAA-assisted projects
because the DBE regulation requires recipients to use the current SBA
business size standard(s) found in the SBA regulation. On October 19,
2020, the Department issued guidance stating that until January 6,
2022, DBEs participating in FHWA, FTA, and FAA-assisted projects may
choose between using a 3-year averaging period or a 5-year averaging
period for the purposes of meeting the requirements of the DBE Program,
as described in Sec. 26.65(a), and after that date, the 5-year
averaging period would become mandatory.\15\
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\15\ See ``DBE/ACDBE Size Standards'' at <a href="https://www.transportation.gov/DBEsizestandards">https://www.transportation.gov/DBEsizestandards</a>.
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The Department proposes to incorporate the 5-year calculation
changes in Sec. 26.65(a) to meet these statutory requirements. Under
the proposed additional language, a firm would be eligible as a DBE in
any Federal fiscal year if the firm (including its affiliates) has had
average annual gross receipts, as defined by the SBA regulation at 13
CFR 121.104, over the firm's previous five fiscal years.

Statutory Gross Receipts Cap

For the statutory DOT size cap found at Sec. 26.65(b), DBEs are
still subject to the 3-year averaging period because this 3-year period
is specifically prescribed by the BIL. Therefore, while a DBE firm may
elect to submit its average annual gross receipts for either the last 3
years or last 5 years to show it meets the size standard for a NAICS
code under 13 CFR part 121, only the last 3 years may be considered for
determining whether the firm also meets the DOT size standard
prescribed by Sec. 26.65(b).

Future Adjustments and Technical Amendments

In December 2020, the Department removed the requirement from part
26 to publish a Federal Register document informing the public of
inflationary adjustments. In this proposed rulemaking, the Department
will make a similar change to part 23 and will strike this language
from paragraph (c) of Sec. 23.33. Like Sec. 26.65(c), the proposed
Sec. 23.33(c) language states that the Departmental Office of Civil
Rights will publish the annually adjusted number on its web page.\16\
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\16\ See <a href="https://www.transportation.gov/DBEsizestandards">https://www.transportation.gov/DBEsizestandards</a>.
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We propose adding the word ``passenger'' to car rental companies,
replacing ``automobile dealer'' with ``new car dealer,'' and remove
reference to pay telephone operators. The size standards for these
types of firms (with the proposed new titles) will remain the same,
i.e., $1 billion in assets for banks and financial institutions; $75.23
million average annual gross receipts from passenger car rental
companies' 5 previous fiscal years; and 350 employees for new car
dealers.
We also propose removing the regulatory requirement for the
Department to adjust the ACDBE size standards every two years. The
Department last adjusted the ACDBE size standards in June 2012. We seek
comments on whether any inflationary adjustment to the ACDBE size
standards is needed at this time. The standards far exceed the SBA
small business size limits placed on these types of businesses, and any
adjustment must be made in recognition of the overall intent to
narrowly tailor all program requirements. We are contemplating whether
there is a need to further raise the current size standards,
particularly given that we propose changing the period of measurement
under Sec. 23.33 from 3 to 5 years. It is the Department's view that
raising the standards too high could result in smaller firms seeking to
enter the concession industry having to compete with larger firms for
space that is already limited in opportunities because of limited
airport opportunities.
The Department seeks data on whether the additional categories with
different size standards, like car rental companies, are still needed
and if the size standards applicable to these categories require an
adjustment. If proponents advise that an adjustment is needed, should
the Department again use an inflation rate tied to purchases by state
and local governments as it does in part 26 adjustments? We currently
use data from the Department of Commerce's Bureau of Economic Analysis
(BEA). The BEA measures constant dollar estimates of state and local
government purchases of goods and services by deflating current dollar
estimates by suitable price indexes. These indexes include purchases of
durable and non-durable goods, and other services.

Gross Receipts of ACDBE Affiliates and Joint Venture Partners

The Department is proposing to address how an ACDBE must account
for annual gross receipts of affiliates and joint ventures for size
purposes, as provided in 13 CFR 121.104(d) and Sec. 121.103(h)(3) of
the SBA regulations, respectively. The Department will add a new
paragraph (d) to Sec. 23.33, making clear that an ACDBE that is a
party to a joint venture must include in its gross receipts its
proportionate share of receipts generated by the joint venture.

13. Personal Net Worth (PNW) Adjustment

Section 26.67(a)(1) provides a presumption of social and economic
disadvantage for citizens (or lawfully admitted permanent residents)
who are

[[Page 43636]]

women, Black Americans, Hispanic Americans, Native Americans, Asian-
Pacific Americans, Subcontinent Asian Americans, or other minorities
found to be disadvantaged by the SBA. However, individuals who belong
to a group(s) whose members are presumed socially and economically
disadvantaged (SED) could be too wealthy to be considered economically
disadvantaged for purposes of the DBE Program. As a mechanism for
excluding those individuals from the DBE Program, in 1999, the
Department adopted a PNW cap of $750,000. A PNW cap means that,
regardless of membership in a group whose members are presumed SED, any
individual whose PNW exceeds the PNW cap is not considered economically
disadvantaged. This helps ensure that the DBE Program is narrowly
tailored and that only those individuals who are actually economically
disadvantaged are eligible for the DBE Program.
The Department's 2011 final rule raised the PNW limit from $750,000
to $1.32 million to keep up with inflation.\17\ The Department now
proposes raising the limit to $1,600,000 ($1.60 million) for the DBE
and ACDBE Programs, based on a number of factors. In addition, the
Department proposes establishing a method for adjusting the PNW cap in
the future that would allow the DBE and ACDBE Programs to adjust the
PNW cap in a timely and responsive manner while avoiding the delay and
the administrative burden of a formal rulemaking.
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\17\ The $750,000 PNW cap was adjusted using the CPI from the
base year of 1989. As explained in previous rulemakings, 1989 was
used as the base year because this was the year the Small Business
Administration initially proposed the $750,000 PNW cap. See January
2011 final rule, available at <a href="https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/dbe-laws-policy-and-guidance">https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/dbe-laws-policy-and-guidance</a>.
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The DBE Program adjusts the traditional definition of total
personal net worth by excluding the disadvantaged owner's interest in
the firm in question, equity in the owner's primary residence, and 50
percent of any assets held as community property with a spouse or
domestic partner. The existence of a PNW cap highlights a tension
between the DBE Program's multiple objectives. If the PNW cap is set
too high, the program would include business owners who are not in fact
economically disadvantaged. If the PNW cap is set too low, the program
will exclude some truly disadvantaged business owners who could benefit
from participating in the program and whose participation would advance
the program's progress towards achieving equity in Federal contracting.
A 2007 report commissioned by the Congressional Black Caucus
Foundation, ``Increasing the Capacity of the Nation's Small
Disadvantaged Businesses,'' points out that businesses need resources
to build capacity and be competitive, thus a PNW cap that is too low
will limit the success of participating businesses.
In 2019, the Federal Aviation Administration (FAA) conducted
listening sessions related to this rulemaking. Commenters noted that
the current $1.32 million PNW cap hinders the success of the ACDBE
Program. They noted that restaurants in airports can have very high
upfront financing needs related to build-out costs, covering initial
operating costs, and the need to refresh their facilities midway
through a typical 7 to 10-year lease. In addition, because of the
nature of those types of expenses (and possibly the risk inherent with
the airport concession industry), banks require a high amount of
collateral for loans to finance those upfront expenses.\18\
Consequently, a PNW cap that is too low means that the business owners
who have the means to provide the collateral for airport concessions
with high upfront investment requirements are generally not eligible to
participate in the ACDBE Program. Note, however, that the business
owner's total household net worth can be used as collateral for a loan,
so that while the PNW as defined by the program must be below the
rule's cap, the amount available to use as collateral might be higher
than the cap due to how PNW is calculated for the DBE and ACDBE
Programs.
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\18\ Fed. Aviation Admin., ``49 CFR Part 23 Review Virtual
Virtual Listening Session Subpart C'' (Apr. 4, 2019).
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Rationale for $1.60 Million Adjustment

As part of this proposed rulemaking, the Department conducted an
original analysis to establish an appropriate PNW cap. We recognize
that the determination of economic disadvantage is a comparative
exercise, not an absolute determination made in isolation.\19\ In this
analysis, the determination of an economically disadvantaged business
is based on comparing the business owner to other business owners,
since the wealth of business owners generally is likely higher than the
wealth of the general population. Further, this analysis focuses on the
wealth of business owners who are not presumed to be socially and
economically disadvantaged: White, non-Hispanic men. To make this
comparison, this analysis uses data from the 2019 Survey of Consumer
Finances (SCF) to analyze the distribution of PNW among business owners
to determine where a new PNW cap should be set.\20\
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\19\ As explained in the 1983 final rule, ``[when] considering
the economic disadvantage of firms and owners, it is important for
recipients to understand that they are making a comparative judgment
about relative disadvantage. Obviously, someone who is destitute is
not likely to be in any position to own a business. The test is not
absolute deprivation, but rather disadvantage compared to business
owners who are not socially disadvantaged individuals and firms
owned by such individuals.'' 48 FR 33432, 33452 (July 21, 1983)
available at <a href="https://www.transportation.gov/sites/dot.gov/files/docs/Final%20Rule%2C%20July%2021%2C%201983.pdf">https://www.transportation.gov/sites/dot.gov/files/docs/Final%20Rule%2C%20July%2021%2C%201983.pdf</a>.
\20\ The Survey of Consumer Finances (SCF) is a cross-sectional
survey of primary economic units (PEU) in the United States
conducted every three years from 1983 to 2019. The PEU consists of
the economically dominant individual or couple and all individuals
in the household that are financially dependent on the individual or
couple. The SCF is sponsored by the Federal Reserve Board of
Governors and the U.S. Department of the Treasury. The survey
includes information on demographics, income, assets, and debts,
among other topics. The SCF presents five replicates of each record
as a method of approximating missing values in the data. Thus, the
number of records in the public dataset is 28,885, five times more
than the number of households that responded to the survey (5,777).
See <a href="https://www.federalreserve.gov/econres/scfindex.htm">https://www.federalreserve.gov/econres/scfindex.htm</a>.
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In the SCF, the race and ethnic group for a household is based on
the identification of the original respondent to the survey. The
employment status and other demographic descriptors are based on the
reference person for the family. The reference person used for the
household in the SCF data is the male in an opposite-sex couple, the
older person in a same-sex couple, or the individual if the household
is led by a single person. The SCF data allows for identification of
the following race and ethnic group categorizations: White, Non-
Hispanic; Black, Non-Hispanic, Hispanic, and Other. ``Other'' includes
individuals who identify as Asian, American Indian, Alaska Native,
Native Hawaiian, Pacific Islander, other race, and all respondents
reporting more than one racial identification.\21\ Table 1 shows that
the mean net worth of White, Non-Hispanic households is roughly 6 to 7
times higher than for Black, Non-Hispanic and Hispanic households. Even
at the highest wealth levels, the disparity exists: the wealth of the
top 10 percent of White households exceeds the wealth of the top 10
percent of Black, Non-Hispanic, and Hispanic households by a factor of
5.
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\21\ Codebook for 2019 Survey of Consumer Finances, Board of
Governors of the Federal Reserve System, assessed at <a href="https://www.federalreserve.gov/econres/files/codebk2019.txt">https://www.federalreserve.gov/econres/files/codebk2019.txt</a>.

[[Page 43637]]

Table 1--Total Net Worth of the Household by Race and Ethnic Group in 2019
[2019 Dollars]
----------------------------------------------------------------------------------------------------------------
Total number 90th
Race & ethnicity of households Mean Median percentile
----------------------------------------------------------------------------------------------------------------
ALL............................................. 5,777 $746,821 $121,774 $1,219,499
White, Non-Hispanic............................. 3,980 980,549 188,985 1,610,000
Black, Non-Hispanic............................. 679 142,330 24,100 324,901
Hispanic........................................ 490 165,541 36,031 333,500
Other........................................... 627 656,603 74,500 1,164,100
----------------------------------------------------------------------------------------------------------------
Source: 2019 SCF.

The current PNW calculation for the DBE and ACDBE Programs allows
the firm owner to omit the value of their primary residence and the
value of the business for which the owner is applying for
certification. In addition, the PNW definition includes only the assets
of the firm owner, meaning that only half the value of any assets held
jointly by the owner and their spouse (community property) are included
in the calculation of PNW. Finally, applicants are instructed only to
report the current value of any retirement accounts, after any early
withdrawal penalties and applicable taxes are subtracted. During
stakeholder engagement events and compliance reviews, the Department
received many comments that the calculations required to compute the
applicable taxes and penalties on retirement accounts is highly
burdensome to applicants and certifiers. Those calculations require a
great deal of information including what portion of the account is the
initial contributions versus subsequent capital gains or interest
earned, applicable state and Federal income tax rates, and applicable
state and Federal capital gains tax rates. In response to those
comments, the Department proposes to exclude the full balance of
retirement accounts in calculating PNW.
In addition, the Department proposes to increase the PNW cap to
$1.60 million in order to account for factors such as inflation, since
the PNW cap was last updated 10 years ago. The Department's proposal to
make future adjustments to the PNW cap is discussed later in this
section.
The analysis underlying the proposal to increase the PNW cap
constructs a proxy measure for PNW under the proposed definition of PNW
for the DBE and ACDBE Programs. Using the 2019 SCF data, the proxy
measure, shown in Equation 1, calculates PNW using measures of total
household net worth, home equity (value in primary residence minus any
home secured debt), active business equity (equity the individual owns
in a business they actively manage), and current balance of retirement
accounts.\22\ The calculation is performed separately for single
individuals versus couples in order to account for adjustments for
community property made in the definition of PNW for the DBE and ACDBE
Programs. Only 50 percent of any jointly held assets between a couple
(community property) should be accounted for in an individual's PNW
according to that definition. Equation 2 shows the calculation for the
proxy measure for PNW under an alternative proposal (not being proposed
in this NPRM), which would include the full amount of the retirement
account balances in the calculation of PNW. In the SCF, net worth is
reported using the current balance of any retirement accounts with no
adjustments made for early withdrawal penalties or taxes.
---------------------------------------------------------------------------

\22\ The SCF data does not allow a distinction between all of an
applicant's active businesses and the sole business the applicant
might choose to certify as a DBE or ACDBE. Therefore, the PNW proxy
measure used here removes the total value of all active businesses.
As a result, this proxy measure for PNW could be under-estimating an
applicant's true PNW.
[GRAPHIC] [TIFF OMITTED] TP21JY22.000

[[Page 43638]]

In addition, the analysis includes only White, Non-Hispanic
households with male reference persons identified as owning a business
and who indicated they were self-employed or in a partnership as their
occupational status. The focus is on self-employed business owners
because the intent is to identify a comparison group for business
owners who are likely to participate in the DBE and ACDBE Programs.
Table 2 shows the percentile distribution related to the estimated
PNW calculation from the 2019 SCF for the proposal.

Table 2--Percentile Distribution of the Personal Net Worth for Male,
White, Non-Hispanic, Self-Employed, Business Owners, as Calculated Under
the Proposal
[2019 Dollars]
------------------------------------------------------------------------
PNW as calculated
Percentile under proposal
------------------------------------------------------------------------
10th................................................. -$50
20th................................................. 11,610
30th................................................. 24,050
40th................................................. 48,300
50th................................................. 77,875
60th................................................. 157,500
70th................................................. 265,000
80th................................................. 558,950
90th................................................. 1,601,500
95th................................................. 3,757,750
------------------------------------------------------------------------
Source: 2019 SCF.

Under the proposal that the Department is recommending in this
NPRM, retirement accounts (along with home and business equity) would
be removed from the calculation of PNW. The 90th percentile of PNW for
male, White, Non-Hispanic self-employed business owners is roughly
$1.60 million, which is $1.04 million higher than the 80th percentile
of $0.56 million, which is in turn just $0.29 million greater than the
70th percentile. Using the proposed definition of PNW with exclusion of
all retirement accounts, the Department proposes to set the PNW cap at
the 90th percentile of the group of male, White, Non-Hispanic, self-
employed business owners ($1.60 million). Determining a threshold
beyond which an individual is considered to have accumulated wealth too
substantial to need the program's assistance, we used the 90th
percentile to identify a high level of wealth or income, which is a
common convention.\23\ Choosing a substantially lower threshold, such
as the 80th percentile, would result in a cap that is lower than the
current cap and would act to remove eligible businesses that are
currently participating in the DBE and ACDBE Programs. Choosing a
substantially higher threshold would increase the possibility that the
program would no longer be sufficiently narrowly tailored. While the
Department proposes to use the 90th percentile, it acknowledges that
using a different threshold amount could also meet the goals of the
program and requests comment from the public on how an appropriate PNW
cap should be set.
---------------------------------------------------------------------------

\23\ See Bricker, Goodman, Moore and Volz. ``Wealth and Income
Concentration in the SCF: 1989-2019'' in ``FEDS Notes'' (Sept. 28,
2020) available at <a href="https://www.federalreserve.gov/econres/notes/feds-notes/wealth-and-income-concentration-in-the-scf-20200928.htm">https://www.federalreserve.gov/econres/notes/feds-notes/wealth-and-income-concentration-in-the-scf-20200928.htm</a>;
see also Credit Suisse, ``World Wealth Report 2020,'' at p. 29 and
available at <a href="https://worldwealthreport.com/resources/world-wealth-report-2020/">https://worldwealthreport.com/resources/world-wealth-report-2020/</a>; see also Kochar and Cilluffo, ``Income Inequality in
the U.S. Is Rising Most Rapidly Among Asians,'' Pew Research Center
(July 12, 2018) available at <a href="https://www.pewresearch.org/social-trends/2018/07/12/income-inequality-in-the-u-s-is-rising-most-rapidly-among-asians/">https://www.pewresearch.org/social-trends/2018/07/12/income-inequality-in-the-u-s-is-rising-most-rapidly-among-asians/</a>.
---------------------------------------------------------------------------

Data from the 2019 SCF suggests that between 88.7 and 90.8 percent
of self-employed business owners who are presumed to be socially and
economically disadvantaged (i.e., individuals who are women, Hispanic,
or non-White) have a PNW lower than the current PNW cap as PNW is
currently defined.\24\ Under the proposed cap of $1.60 million, 92.6
percent of that group would fall under the cap, an increase of 2.0 to
4.4 percent.
---------------------------------------------------------------------------

\24\ The range on this estimate is the result of lack of
information in the SCF on how to appropriately adjust the current
balances of retirement accounts for early withdrawal penalties and
taxes. The lower end of the estimated range (88.7 percent) assumes
that the entire balance of retirement accounts is counted toward the
PNW cap while the upper end (90.8 percent) assumes that no portion
of retirement account balances are counted toward the PNW cap. The
Department believes that the true value is likely closer to 88.7
percent than 90.8 percent because the deduction for early withdrawal
penalties and taxes is likely to be less than 50 percent, but a more
precise estimate is not possible with the available information.

Table 3--Comparison of Current and Proposed Methods
----------------------------------------------------------------------------------------------------------------
Label Description Cap amount
----------------------------------------------------------------------------------------------------------------
Current Method............................... Applicants must calculate current value of $1.32 million.
retirement accounts by determining any early
withdrawal penalties and applicable taxes.
Proposed Method.............................. Full current retirement account balance $1.60 million.
excluded from PNW calculation.
----------------------------------------------------------------------------------------------------------------

Periodic Adjustments to the PNW Cap

The previous adjustment of the PNW cap in January 2011 used the CPI
to reflect the increase in prices due to inflation. However, while
household net worth is expected to grow in nominal terms over time,
simply due to inflation, it is also subject to additional influences.
For instance, the 2008 financial crisis significantly reduced household
net worth but a CPI adjustment would not account for that change caused
by the financial crisis. In consecutive periods of sustained economic
growth that raises the net worth of all business owners in real terms
(after adjusting for inflation), an adjustment using only the CPI could
maintain a PNW cap that remains too low over time.
One alternative to using a CPI adjustment includes using data on
the changes in aggregate household net worth data published quarterly
by the Federal Reserve.\25\ Another alternative is to calculate the
90th percentile of PNW for self-employed business owners using future
editions of the SCF, which is published every three years. An advantage
of using the Federal Reserve data is that the information is readily
and frequently available whereas analysis of the SCF requires
specialized statistical programming skills and the updates would be
limited to a 3-year cycle.
---------------------------------------------------------------------------

\25\ Federal Reserve, ``Financial Accounts of the United States;
Balance Sheet of Households and Nonprofit Organizations Table Z.1,''
available at <a href="https://www.federalreserve.gov/releases/zl/dataviz/zl/balance_sheet/chart/">https://www.federalreserve.gov/releases/zl/dataviz/zl/balance_sheet/chart/</a>.
---------------------------------------------------------------------------

Table 4 compares the nominal growth rates inferred by the CPI, the
Federal

[[Page 43639]]

Reserve measure of total household net worth, and the historic
information of the 90th percentile of PNW (calculated with exclusion of
retirement accounts) for male, White, non-Hispanic, self-employed
business owners from previous editions of the SCF. While the SCF data
might be considered the most precise in terms of accurately
representing the proposed cap based on the 90th percentile of self-
employed business owners, the Federal Reserve data historically shows
very similar dynamics and is more accessible because it is easily
computed and is updated more frequently. The CPI does not adequately
reflect the underlying dynamics of household net worth. Using the CPI
to adjust the cap going forward would result in a cap that may block
participation from a growing number of firms over time. Therefore, the
Department proposes to make future adjustments to the PNW cap using
growth in Federal Reserve measure of total household net worth from
``Financial Accounts of the United States: Balance Sheet of Households
and Nonprofit Organizations Table Z.1'' using 2019 as the base year.

Table 4--Growth of CPI, Federal Reserve Total Household Net Worth, and Personal Net Worth 90th Percentile of
White, Non-Hispanic, Male, Self-Employed Business Owners From the SCF
[Indexed to 1992]
----------------------------------------------------------------------------------------------------------------
Personal net
Federal Reserve worth 90th
Year CPI total household percentile from
net worth SCF
----------------------------------------------------------------------------------------------------------------
1992................................................... 100.0 100.0 100.0
1995................................................... 108.6 118.2 105.8
1998................................................... 116.2 154.1 183.0
2001................................................... 126.2 184.4 237.1
2004................................................... 134.6 228.2 327.3
2007................................................... 147.8 287.7 411.5
2010................................................... 155.4 263.9 325.3
2013................................................... 166.0 319.4 535.3
2016................................................... 171.1 383.5 498.0
2019................................................... 182.2 467.4 514.2
----------------------------------------------------------------------------------------------------------------

Based on the above analysis, the proposed rule would simplify the
PNW calculation by excluding retirement accounts and changing the PNW
cap for the DBE and ACDBE Programs from $1.32 million to $1.60 million.
The proposed rule would increase that cap every 5 years using growth in
the Federal Reserve measure of total household net worth from
``Financial Accounts of the United States: Balance Sheet of Households
and Nonprofit Organizations Table Z.1,'' using 2019 as the base year.
If household net worth were ever to decline by that measure, the
Department would not revise the PNW cap and thereby avoid a downward
adjustment of the PNW. A downward adjustment of the PNW cap might cause
certain firms to be decertified due to circumstances beyond their
control and would be an undesirable outcome for the DBE and ACDBE
Programs.
Note that the above analysis is broad-based in that it analyzes the
distribution of PNW for all self-employed business owners and does not
focus on the types of businesses that would be expected to be involved
in the DBE and ACDBE Programs. The SCF does not contain sufficient
detail on the industry of the business owners to permit a more focused
analysis. There may be additional industry-specific factors that
warrant consideration, and we invite comment on what factors could be
considered for further analysis.
The Department requests comment on the proposed $1.60 million PNW
cap and seeks comment on whether the cap for the ACDBE Program should
be different than the cap for the DBE Program. If recommending that the
PNW cap be different than $1.60 million, wet request data and
information that can be used to support an alternative PNW cap.

Rules for Reporting PNW

The Department proposes revisions for clarity and enhanced
specificity. Our goal overall is to remove the ambiguity and confusion
that we have seen caused by the current rules for reporting PNW. To
start, we would like to remove any consideration of state marital laws
or community property rules when calculating the socially and
economically disadvantaged owner's (SEDO) equity in the primary
residence. It is neither appropriate nor practicable for the Department
to interpret state marital laws or community property rules. Every
state has its own laws and rules. The DBE Program is a Federal program
governed by a Federal regulation.
We are also proposing a detailed explanation of ``household
contents'' in Sec. 26.68(e) because of disputes we have seen between
owner-applicants and certifiers. One hundred percent of the contents of
the SEDO's primary residence belong to the SEDO. The exception is if
the SEDO's spouse or domestic partner cohabits with the SEDO in the
SEDO's primary residence; in that case, fifty percent of the value of
all household contents is attributable to the SEDO, regardless of who
acquired them and regardless of whether they were acquired before or
after cohabitation.
Motor vehicles of any type belong to the individual who holds title
to the vehicle. We would like comments on how to treat leased vehicles
under the definition of ``household contents.'' Specifically, should a
vehicle leased in the SEDO's name be considered an asset or should it
be considered a liability?
The general purpose behind the proposed asset transfers rule is to
prevent individuals from offloading wealth immediately before or
concurrent with applying for DBE certification to stay within the PNW
limit. To what extent might there be administrative difficulties in
implementing the proposed rule that could outweigh the intended
benefits?
In addition, as stated above, we would like to exclude all
retirement assets from PNW calculations. Our rationale is twofold. The
current rule states that the value of all assets held in vested pension
plans, Individual Retirement Accounts, 401(K) accounts, etc. must be
included, minus the tax and interest penalties that would accrue if the
asset were distributed at the present time. The Department has
witnessed multiple conflicts among certifiers, firm owners,
accountants, etc. about how to

[[Page 43640]]

determine the amount of tax and interest penalties. To eliminate this
problem, and perhaps more importantly, to avoid the unintended
consequence of penalizing individuals from saving for retirement, we
propose fully excluding all retirement assets.

14. Social and Economic Disadvantage (Sec. Sec. 26.5, 26.63, and
26.67)

Section 26.5 currently defines ``socially and economically
disadvantaged individual'' as any individual who is a citizen (or
lawfully admitted permanent resident) of the United States and who has
been subjected to racial or ethnic prejudice or cultural bias within
American society because of the individual's identity as a member of a
group and without regard individual qualities. The social disadvantage
must stem from circumstances beyond the individual's control. These
individuals who are members of one or more of the following groups are
rebuttably presumed to be socially and economically disadvantaged
(SED): Black Americans, Hispanic Americans, Native Americans, Asian-
Pacific Americans, Subcontinent Asian Americans, women, and any
additional groups whose members are designated as SED by the Small
Business Administration (SBA), at such time as the SBA definition
becomes effective.

Evidence and Rebuttal of Social Disadvantage

Section 26.61(c) states that certifiers must rebuttably presume
that members of the designated groups identified in Sec. 26.67(a) are
socially and economically disadvantaged (SED). This means that
individuals who are members of the designated groups do not have the
burden of proving that they are (SED). In order to obtain the benefit
of the rebuttable presumption, individuals must only submit a signed,
notarized statement that they are a member of one of the groups in
Sec. 26.67(a). Applicants do, however, have the obligation to provide
certifiers with information concerning their economic disadvantage. See
Sec. 26.67.
Section 26.63(a)(1) provides that if, after reviewing the signed,
notarized affidavit of membership in a Sec. 26.5 presumptively
disadvantaged group, the certifier has a well-founded reason to
question the individual's claim of membership, the certifier must
require the individual to present additional evidence of group
membership. See Sec. Sec. 26.61(c) and 26.63(b)(1). The current rule
states that in making such a determination, the certifier must consider
whether the person has held himself/herself/themselves out to be a
member of the group over a ``long period of time'' prior to applying
for certification and whether the person is regarded as a member of the
group by the relevant community. The certifier may require the
individual to produce additional evidence of group membership. If,
after reviewing the evidence, the certifier determines that the
individual is not a member of a Sec. 26.5 group, the individual may
elect to apply for certification by demonstrating social and economic
disadvantage on an individualized basis.
Current Sec. 26.67(a)(1) states that certifiers must rebuttably
presume that citizens of the United States (or lawfully admitted
permanent residents) who are women, Black Americans, Hispanic
Americans, Native Americans, Asian-Pacific Americans, Subcontinent
Asian Americans, or other individuals, as defined by the SBA, are SED.
Each owner claiming the presumption must submit a signed, notarized
affidavit as evidence of the claim. Section 26.67(b)(2) provides that
if a certifier has a reasonable basis to believe that an individual who
is a member of one of the designated groups is not, in fact, socially
and/or economically disadvantaged, the certifier may, at any time,
start a proceeding to determine whether the individual's presumption of
social and economic disadvantage should be deemed rebutted. Section
26.67(b)(3) explains that the certifier bears the burden of
demonstrating, by a preponderance of the evidence, that the individual
is not SED. The certifier may, however, require the individual to
produce information relevant to the determination of the individual's
disadvantage.
The Department acknowledges there has been confusion caused by the
definition of SED in Sec. 26.5, the provisions governing group
membership determinations, in Sec. 26.63 and the rebuttal of social
and economic disadvantage provisions in Sec. 26.67.
To more clearly address group membership, the presumption of social
and economic disadvantage that attaches to group membership, and the
rebuttal of presumed social and economic disadvantage, we propose
several changes. Current Sec. 26.63(b)(1) explains that when
questioning an individual's group membership, the certifier ``must
consider whether the person has held himself out to be a member of the
group over a long period of time prior to application for certification
. . .'' (italics added). Without that requirement, a White male (for
example) could suddenly discover he has Black ancestry and apply for
DBE certification based on that recent discovery--even though he has
never held himself out as Black, and he would likely have no evidence
that the Black community regards him as a member of the Black
community. The Department has not previously defined what constitutes
``a long period of time.'' Because of confusion expressed by certifiers
and applicants alike, the Department now proposes defining ``a long
period of time'' as a period of at least five years. We also propose
adding procedural requirements to be followed by the certifier and the
owner of the applicant firm claiming group membership in the event that
the certifier questions the owner's claim of group membership.
We also propose folding the requirements of Sec. 26.63 into Sec.
26.67 for clarification and simplicity. Under Sec. 26.67(a)(1), an
individual claims the presumption of social disadvantage by filing a
signed, notarized Affidavit of Certification. We propose changing the
name of this document to Declaration of Eligibility (DOE). Like the
Affidavit of Certification, the DOE is found in the Uniform
Certification Application (UCA).
In the current rule, the definition of social disadvantage is
immediately followed by the definition of economic disadvantage; both
definitions precede the provisions regarding rebuttal of each type of
disadvantage. We propose that the social disadvantage rebuttal
provisions immediately follow the definition of social disadvantage,
and likewise for economic disadvantage (i.e., definition immediately
followed by rebuttal provisions. It is our view that this reordering
will increase efficiency for certifiers and applicants when trying to
find the rules for each type of disadvantage.
To claim a presumption of social disadvantage, an owner must only
check the box(es) on the DOE for which group(s) the individual is a
member, and sign and submit the DOE with the firm's UCA. To claim the
presumption of economic disadvantage, the owner must sign and submit
the DOE as well as a PNW statement.
We propose adding a reminder in Sec. 26.67 that the signed DOE is
the only evidence of group membership an individual must provide with
the UCA. We want to add this reminder because we have seen instances in
which certifiers burden applicants to provide additional evidence of
group membership as a matter of course without a well-founded reason to
question the individual's claim of membership. This NPRM would clarify
that certifiers must not request

[[Page 43641]]

additional evidence as a matter of course. Additional evidence may only
be requested if the certifier has a well-founded reason to question the
individual's claim of group membership. When group membership is in
question, Sec. 26.61(b) states that the firm seeking certification
bears the burden of demonstrating, by a preponderance of the evidence,
that it meets the regulation's group membership requirements.
In the proposed rule, we are placing timelines/deadlines in Sec.
26.67 to ensure that the process of questioning group membership is not
unduly delayed by certifiers or applicants. For example, if a certifier
properly asks an owner for additional evidence of group membership, the
owner would be required to submit the evidence within 15 days of the
certifier's written explanation. If the owner timely submits the
evidence requested, the certifier would be required to notify the owner
in writing, no later than 30 days after receiving the evidence, of the
certifier's determination of group membership.
We emphasize that the presumption of social disadvantage remains
rebuttable. If a certifier has a reasonable basis to believe that,
despite membership in one of the groups whose members are presumed
socially disadvantaged, the individual is not, in fact, socially
disadvantaged, the certifier may commence a proceeding to determine
whether the presumption of social disadvantage should be regarded as
rebutted. When social disadvantage is questioned, Sec. 26.67(b)(3)
states that the certifier bears the burden of proof. We point out that
current Sec. 26.67(b)(2) states that a certifier may (not must), at
any time start a proceeding under Sec. 26.87 to determine whether an
individual's presumption of social disadvantage should be rebutted. We
believe that if a certifier has a well-founded basis to question an
individual's social disadvantage, it must initiate a proceeding under
Sec. 26.87, and we have adjusted this language accordingly. We propose
allowing the owner of a firm that is denied certification to submit a
claim of individual disadvantage at any time, without regard to the
waiting period in Sec. 26.86(c). A certifier would not be able to
require the individual to file a new application; the individual would
be permitted to simply amend the original application.

Evidence and Rebuttal of Economic Disadvantage

Under the current rule, an owner claiming a presumption of economic
disadvantage must, in addition to submitting a signed DOE, demonstrate
that the owner's PNW does not exceed the DBE Program's current $1.32
million limit. The owner must also submit a signed statement of PNW,
with appropriate supporting documentation, using the Department's PNW
Statement without change or revision.
As explained in current guidance, the DBE Program ``should not
include people who can reasonably be regarded as having accumulated
wealth too substantial to need the program's assistance.'' \26\ For
example, there are instances in which an individual's PNW is below the
program's cap, yet the individual is not, in fact, economically
disadvantaged. Thus, if a certifier has an articulable reason, on a
case-by-case basis (and not as a matter of course) to believe that an
individual whose PNW does not exceed the cap should not be regarded as
economically disadvantaged, the certifier is permitted under Sec.
26.67(b)(1)(ii)(A) to evaluate whether the individual has the ability
to accumulate substantial wealth (AASW). Under the current rule, the
individual's presumption of economic disadvantage will be rebutted if
the certifier finds that the individual does have the AASW. In making
its determination under the current rule, a certifier may consider
factors such as, but not limited to: (1) whether the average adjusted
gross income of the owner over the most recent three year period
exceeds $350,000; (2) whether the income was unusual and not likely to
occur in the future; (3) whether the earnings were offset by losses;
(4) whether the income was reinvested in the firm or used to pay taxes
arising in the normal course of operations by the firm; (5) other
evidence that income is not indicative of lack of economic
disadvantage; and (6) whether the total fair market value of the
owner's assets exceed $6 million.
---------------------------------------------------------------------------

\26\ See ``Official Questions and Answers (Q&A's) Disadvantaged
Business Enterprise Program Regulation (49 CFR Part 26)'' available
at <a href="https://www.transportation.gov/sites/dot.gov/files/docs/mission/civil-rights/disadvantaged-business-enterprise/55851/official-questions-and-answers-disadvantaged-business-enterprise-program-regulation-49-cfr-26-4-25.pdf">https://www.transportation.gov/sites/dot.gov/files/docs/mission/civil-rights/disadvantaged-business-enterprise/55851/official-questions-and-answers-disadvantaged-business-enterprise-program-regulation-49-cfr-26-4-25.pdf</a> and ``Official FAQs on DBE Program
Regulations (49 CFR 23)--Section 23.31; 27.67(b)(2)--Personal Net
Worth'' available at <a href="https://www.transportation.gov/osdbu/disadvantaged-business-enterprise/official-faqs-dbe-program-49-cfr-23">https://www.transportation.gov/osdbu/disadvantaged-business-enterprise/official-faqs-dbe-program-49-cfr-23</a>.
---------------------------------------------------------------------------

During the last eight years, the Department has seen, on multiple
occasions, that certifiers and applicant firms misinterpret the AASW
rule. For example, they often treat the six factors as a checklist and
unduly focus on the owner's adjusted gross income while ignoring the
other five factors, rather than doing a holistic evaluation. In
addition, calculating whether an owner's assets exceed $6 million has
resulted in overly complex calculation disputes, while again largely
ignoring any other factors that could have indicated an AASW. Thus, the
Department proposes eliminating the six factors in favor of a more
``big picture'' approach. Specifically, the provision would instruct
certifiers to evaluate whether a reasonable person would consider the
owner economically disadvantaged. Indicators could include (but are not
limited to) ready access to wealth, lavish lifestyle, income or assets
of a type or magnitude inconsistent with economic disadvantage, or
other circumstances that economically disadvantaged people typically do
not enjoy. We emphasize that inquiry would have no effect on the PNW
asset exclusions or limitations on inclusions. It would entirely
disregard liabilities. We welcome comment on whether this proposed
replacement swings the pendulum too far in the opposite direction of
the current AASW provision. In other words, are the proposed elements
too vague in nature and result in just as much confusion and dispute as
the current provision? Would the proposal lead to inconsistent
application of the regulation? If so, what factors should be considered
in making an AASW evaluation?

Individualized Determinations of SED Status

Because the DBE Program is intended to be as inclusive as
possible--without compromising the program's integrity and while
remaining narrowly tailored--firms whose owners are not presumed
socially and economically disadvantaged can still apply for
certification. The DBE Program regulation has allowed for this since
the program began in 1983. Appendix E of the regulation provides
guidance for evaluating disadvantage on an individualized basis under
Sec. 26.67(d) (Sec. 26.67(e) in the proposed rule). The Department
regularly receives feedback from certifiers, applicants, and other
stakeholders about the excessive burdens related to gathering and
submitting evidence under appendix E, particularly the evidence of
economic disadvantage. Though not the Department's intention, much of
the required evidence of economic disadvantage can be more challenging
to obtain than necessary. The list of required evidence also focuses
largely on the stature of other firms rather than on the applicant
firm. Multiple stakeholders have told us that the standards set forth
in appendix E are nearly impossible to meet. The standard is
``preponderance of the evidence,'' but

[[Page 43642]]

in practice is ``clear and convincing.'' The latter is a much more
stringent burden to bear. Thus, we propose replacing appendix E with
flexible, less prescriptive rules that will better allow certifiers to
make accurate case-by-case determinations using the correct
``preponderance of the evidence'' standard. Further, we want to reduce
the cost and hours burden for applicants to submit evidence of their
individual disadvantage.

15. Ownership (Sec. 26.69)

The Department proposes considerable revisions to Sec. 26.69,
which has remained largely unchanged since 1999. The changes are
essential because disadvantaged ownership is the foundation of the DBE
Program.

Burden Reduction, Simplification, and Consistency

The revisions would preserve the section's programmatic objectives
and effect but articulate the operative concepts differently. We
believe that the revisions would serve several related goals: burden
reduction, simplification, improved understanding and thus compliance,
streamlined administration, consistent results, and enhanced program
integrity. We also think that revised Sec. 26.69 can drive efficiency
gains across the board. The proposed changes would further these goals
by stating rules and intent plainly and directly. They would more
logically organize the material. Our proposed changes would replace
language that has proved confusing, impractical, awkward, or outdated,
with text that we believe corrects or mitigates these shortcomings.
Clear rules and consistent results are what stakeholders tell us they
value above all. Accordingly, we propose several bright-line rules that
we believe will make certification easier to obtain, maintain, and
monitor. The overarching objective of subpart D, after all, is to
certify eligible firms.
The Department's proposed revisions would describe and prescribe.
It is more flexible than the language it replaces. At the same time,
the revised rules would provide detail when detail can resolve
longstanding misinterpretations. The intent is to confront interpretive
challenges directly and unambiguously. A measure of certainty should
provide all stakeholders peace of mind. The proposed revision would
also make the certification process quicker and less intrusive. To the
extent possible, we prefer to leave business decisions to business
owners and give certifiers similar latitude to determine how the rules
apply to individual applicants and DBEs. They are in the best position
to make these judgments. Broad anti-abuse rules, rather than long lists
of suspect transactions, safeguard the integrity of the ownership
requirements. We consider the revision to be notably more user-friendly
than the present Sec. 26.69.
The Department has come to believe that current Sec. 26.69(a) is
too complex. It is more a chronology or summary of ownership-related
events than a statement of the core requirement for eligibility. It is
also out of sync with current business realities. The revised rule
reworks and simplifies the essential concepts and moves them to places
in Sec. 26.69 that correspond to their role in explaining the general
rule. There, we develop and update those concepts and cross-refer to
related provisions.
The current Sec. 26.69(b), streamlined and restated as the general
rule, would become the new Sec. 26.69(a). The restatement would
overtly tie the rules that follow to the general rule that SEDOs must
own at least 51 percent of the business. It would explain concisely and
precisely the import of the provision and what the firm must prove to
be eligible for certification.

Reasonable Economic Sense

The proposed new Sec. 26.69(b) replaces the concepts of ``real,
substantial, and continuing'' (RS&C) capital contributions and
ownership, and the binary alternative of ``pro forma'' ownership, with
the broader, more flexible requirement that transactions affecting
ownership make reasonable economic sense (RES). The revision would
accomplish several objectives, not least of which are objectivity and
neutrality. The revision would recast the requirement in terms less
awkward and more descriptive. The revision would also address the
rigidity of the RS&C, avoiding outcomes (e.g., ineligibility
determinations based on a one-dollar deficiency in contributed capital)
that can seem capricious.
We propose retiring RS&C in favor of a more workable standard, one
that can adapt to unforeseen transactions and business structures. RES
is less absolute. It acknowledges that substance trumps form and one
size never really fits all. Our objective is to encourage certifiers
not just to ``consider'' all pertinent facts but to weigh them in firm-
specific context. The current language obscures the fact that
certifiers have always had the freedom and discretion to make these
judgments. We believe that the proposed revision would make certifiers
more confident and business owners less wary. Paragraph (b) of the
revised Sec. 26.69 describes the proposed standard's components and
signals that reasonable proportionality, economic effect, and common
sense are the new touchstones. We intend, in the ``benefits and
burdens'' clauses, to give certifiers a more useful yardstick for
assessing initial and continuing eligibility.
The proposed revisions to Sec. 26.69(c) would define the new term
``investments'' to include purchase of ownership interests, capital
contributions, and certain gifts, and additional investments after
acquiring the ownership. This would be consistent with the current RS&C
standard but more straightforward and less strained. Stakeholders
frequently do not understand what the current language means. A
purchase, for example, is not a capital contribution, and investments
``to acquire'' ownership are not the only ones to which the rules
apply. The single-sentence numbered provisions under new paragraph (c)
attempt to remedy these deficiencies in the current rule, which too
often confuse SEDOs who are not versed in certification nuances.
The paragraphs under Sec. 26.69(c) would also streamline the rule
and make it more equitable. The proposed Sec. 26.69(c)(3) would treat
all joint owners the same, regardless of marital status or state-
specific community property law. We intend for the same rules to apply
to all SEDOs and to all cases of joint ownership regardless of
jurisdiction. Hence the simple statement that ownership tracks title.
Paragraph (c)(4) clarifies which gifts count as investments, simplifies
the analysis, and minimizes opportunities for gamesmanship.
These proposed changes would permit us to eliminate the marital
property rule in current Sec. 26.69(i) and extend the renunciation and
transfer remedy to all joint owners. We would remove as unnecessary the
complex machinery of current Sec. 26.69(h), which applies when a non-
disadvantaged individual gifts or transfers interest or other assets
without adequate consideration. The presumption and two-pronged
rebuttal/higher standard of proof is overly complex. The streamlined,
modernized proposed rule would work in better coordination with the
rest of part 26 and would enable us to simplify or eliminate
corresponding rules in other sections, e.g., in Sec. Sec. 26.67 and
26.71. Revised Sec. 26.69(c), in short, should minimize haggling, save
resources, and improve program administration. We expect it to produce
speedier, more accurate results that do not vary by state.
The proposed Sec. 26.69(d) explains how the rules for purchases
differ from those for capital contributions, and they provide simple
but significant

[[Page 43643]]

backstops. These rules tie into concepts introduced in preceding
paragraphs and replace rules that have proved nearly impossible to
administer effectively. The revised rule explains the concepts more
objectively and more directly than do current Sec. 26.69(c) through
(f).
The proposed revisions to Sec. 26.69(e) would provide new, bright-
line rules for debt-financed capital contributions and purchases. They
would replace disjointed and often misunderstood provisions. The
proposed would substitute an RES analysis for RS&C and go a step
further toward clarity and preventing abuse. They give effect to
longstanding Departmental and Congressional intent and, we believe,
substantially reduce certifier burden. We intend for them to
significantly reduce administrative bottlenecks. They should preempt at
least some frivolous or premature applications and give certifiers a
clear reason for rejecting the ones that get through.
Paragraph (f) revisions bring Department policy into the
regulation. We want to make clear that legitimate efforts to correct
impediments to certification are not evasive or subversive. The
ultimate objective remains certifying eligible small, disadvantaged
businesses with as little hindrance as possible.
The three, short anti-abuse rules in proposed paragraph (g) would
put firms on notice of particular, and logical, results of the RES
requirement and would give certifiers explicit authority to streamline
the analysis.
We believe that all of the proposed revisions would save firms and
certifiers time and significantly improve program administration. We
expect to see results that are more accurate and more equitable.

16. Control (Sec. 26.71)

Control of DBEs has been part of the certification eligibility
criteria since the program began in 1983. Certifiers are required to
analyze the extent to which disadvantaged individuals control their
business in both substance and form. However, the Department believes
that strict requirements about non-disadvantaged participants hinder
the certifier from conducting a meaningful analysis of whether the
disadvantaged owner controls the firm. As such, we are proposing
significant revisions to the control provisions found in Sec. 26.71.
The rationale of our revisions is to give certifiers flexibility when
determining whether the SEDO controls the firm. Thus, we recommend
replacing the current checklist-type requirements with less
prescriptive rules. The proposed revisions would also give applicants
more flexibility in demonstrating control.
The proposed revisions would shift the focus from the actions and
experience of non-disadvantaged participants in the firm to those of
the SEDO. The proper and originally intended inquiry is whether the
SEDO controls the firm through managerial oversight, revocable
delegation of authority, and critical and independent decision-making.
The proposal would also streamline Sec. 26.71 by removing redundancy,
and in some instances, excessively burdensome requirements.
The Department proposes to add general rules to Sec. 26.71(a).
Proposed Sec. 26.71(a)(1) would state that disadvantaged owners who
own at least 51 percent of the firm must also control it. Proposed
Sec. 26.71(a)(2) would add a fine point that the certifier must
consider all relevant facts together in context.
Because control requires the certifier to make a fact-intensive
determination, proposed rule Sec. 26.71(a)(3) would state that a firm
must have operations in the type of business that it seeks to perform
as a DBE before it applies for certification. We believe there are two
benefits to this proposal. First, the proposed rule would allow the
certifier to evaluate the disadvantaged owner's control of the firm
based on demonstrable actions that the owner takes to run the business.
Second, the proposed rule would help certifiers better allocate their
resources by relieving them from the burden of evaluating applications
from firms that are not conducting business and have no ability to bid
on DBE contracts. The proposed rule would exclude firms that are
applying for ACDBE certification, since many potential ACDBEs have no
operations before obtaining a contract.

SEDO as the Ultimate Decision Maker

The Department proposes Sec. 26.71(b) to clarify that a
disadvantaged owner must be the ultimate decision maker. The rule
reminds certifiers and firms that the control inquiry requires an
analysis that goes beyond formalities shown in business structure,
governing documents, and policies. What the firm must prove under this
provision is that the SEDO ``runs the show'' by having the final say on
all matters. This means that the firm's chain of command must be led by
the disadvantaged owner, whether in a small startup business or a large
multifaceted corporation. Except under narrow circumstances described
in Sec. 26.71(c)(4), other participants at the firm must faithfully
carry out every decision that the SEDO makes.

Governance

Proposed rule Sec. 26.71(c) combines the requirements of the
current Sec. 26.71(c) and (d) rules and clarifies what a firm must
prove to demonstrate control of the firm's governance.
The proposal simplifies current Sec. 26.71(c) into one general
rule that precludes provisions that require non-SEDO concurrence or
consent for the SEDO to act. The proposed rule would simplify the
introductory language of current Sec. 26.71(d), denoting that the
disadvantaged owners must ``possess the power to direct or cause the
direction of the management and policies of the firm and to make day-
to-day as well as long-term decisions on matters of management, policy
and operations.'' This phrase comes from an earlier rule that the
Department intended to remove after it issued the more specific
provisions of Sec. 26.71(e), (f), and (g). The phrase has caused
certifiers to misinterpret this broad, introductory language as the
rule itself, independent of the precise paragraphs (d)(1) through
(3).\27\ We have previously opined that the introductory language is
merely prefatory and does not constitute an eligibility requirement
independent of paragraphs (d)(1) through (3).\28\
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\27\ See, e.g., 17-0058 ARS Electric, LLC (Oct. 10, 2017) at 2
(omitting any eligibility analysis under paragraphs (d)(1) through
(3)). <a href="https://www.transportation.gov/sites/dot/files/data/dbe/appeal-docs/17-0058%20ARS%20Electric%20FINAL-REDACTED.pdf">https://www.transportation.gov/sites/dot/files/data/dbe/appeal-docs/17-0058%20ARS%20Electric%20FINAL-REDACTED.pdf</a>.
\28\ See, e.g., 13-0073 C2PM, Inc. (Nov. 7, 2013) (certifier
disregarded SEDO's holding of highest officer position and
demonstrated control of board of directors; decision reversed) and
16-0017 Tamarac Land Surveying, LLC (Apr. 28, 2016) (certifier cited
introductory language of Sec. 26.71(d) to support denial but did
not dispute SEDO's ability to control board of directors; decision
reversed).
---------------------------------------------------------------------------

The Department intends the proposed rule to reflect what is
described in the current Sec. 26.71(d)(1) through (3)--that the
disadvantaged owner must control the firm by holding the highest
officer position and having voting authority over other directors,
partners, or members. We believe the proposal would resolve confusion
and clarify that the rule is about the disadvantaged owner's governance
of the firm.
We also propose to clarify the requirement that ``disadvantaged
owners must control the board of directors.'' Our proposal outlines
voting and quorum provisions that would prevent a disadvantaged owner
from controlling the board of directors. The proposal also clarifies
that disadvantaged individual(s) must have present control of the board
of directors, meaning they cannot prove eligibility under Sec.
26.71(c) based on a disadvantaged owner's power as a

[[Page 43644]]

majority shareholder to later change the composition of the board of
directors. See Sec. 26.73(b) (certifier must evaluate eligibility
based on present circumstances). The Department affirms many
certification denials each year because of disqualifying voting and
quorum provisions in the firm's bylaws. We believe that adding more
explicit language to the rule would encourage firms to amend bylaw
provisions that do not conform with the rule before applying for DBE
certification.
The only exception proposed under Sec. 26.71(c) is for
extraordinary actions detailed within proposed Sec. 26.71(c)(4). The
Department believes that non-SEDOs should have the power to block
extraordinary measures that would affect their ownership rights. We
believe that protecting minority ownerships through governing
provisions is generally permissible and consistent with standard
business practices.

Expertise

The Department proposes revisions to Sec. 26.71(d), to incorporate
a portion of the current Sec. 26.71(g) with minor adjustments. The
proposed rule would clarify that the SEDO must have an overall
understanding of the firm's business operations to the extent necessary
to make managerial decisions. Administrative decisions made by the
disadvantaged owner do not prove control unless the firm primarily
performs administrative business services for its customers.
The owner of a DBE does not need to be an expert in every aspect of
the firm's operations, as we explained in the 1997 supplemental notice
of proposed rulemaking (SNPRM): ``with respect to expertise, the
disadvantaged owners must, in our view, generally understand and be
competent with respect to the substance of the firm's business.'' (62
FR 29548, 29568 (May 30, 1997))
The understanding that the owner should have varies by the nature
and complexity of the firm's operations. For example, a disadvantaged
owner of a large electrical firm may not be an electrician but would
need to know enough about the firm's electrical work and processes to
make managerial decisions. In contrast, an owner of a three-employee
firm that provides lawn services may only need general managerial
expertise to control the firm.

SEDO Decisions

Proposed rule Sec. 26.71(e) incorporates a portion of the current
Sec. 26.71(g) with minor amendments. Based on several appeal
decisions, the Department believes that this rule is too subjective,
since it requires that the owner must have ``the ability to'' make
decisions. To correct this issue, the proposed rule would direct the
inquiry to whether the SEDO makes major decisions that affect the
firm's prospects. The proposed rule would have three requirements.
First, the firm would be required to show that the SEDO receives
pertinent information from subordinates to demonstrate that other
participants are not making important decisions without the owner's
knowledge. Second, the firm the firm would be required to show that the
SEDO critically analyzes the pertinent information, based on the SEDO's
knowledge demonstrated in Sec. 26.71(d). Failure to prove this means
that the owner simply ``rubber-stamps'' what another participant has to
say about an issue. The proposed rule, however, would not preclude the
owner from asking questions and consulting other participants as the
owner analyzes the information. Finally, the SEDO would need to make
independent decisions after receiving and analyzing the pertinent
information.

Delegation

The Department proposes to simplify and restructure the current
delegation rule. As we stated in the 1997 SNPRM, ``[t]he more
successful or complex a firm becomes; the more inevitable delegation
becomes. It is fanciful to imagine that one or a few owners can or
should do, or be prepared to do, everything that a firm does. As long
as the owners can take back authority they have delegated, retain
hiring and firing authority, and continue to `run the show' for the
company, they control it, notwithstanding delegation of some authority
and functions.'' (62 FR 29548, 29568 (May 2, 1997))
The proposal makes clear that the disadvantaged owner must have the
power to revoke the delegated authority, but also emphasizes that the
firm must show that an obvious chain-of-command exists within the
company, which is recognized by all employees and associates of the
business.
Finally, the proposed paragraphs describe what delegated actions by
non-disadvantaged individuals are permissible under Sec. 26.71.

Independent Business

The Department proposes to make minor amendments to current Sec.
26.71(b) and redesignate the provision as Sec. 26.71(g). The proposed
rule would clarify that a firm must prove that it is independently
viable, notwithstanding a relationship with another firm from which it
receives or shares essential resources. A pattern of regular dealings
with a single or small number of firms does not necessarily make a firm
ineligible for certification so long as it is not acting as a ``front''
or ``pass-through'' for another firm or individual. For example, the
fact that a trucking firm in a rural part of a state provides services
to the only prime contractor in town does not necessarily make the firm
ineligible under the proposed rule, unless the certifier determines
that the applicant firm is set up as a conduit for another firm or
person who is not eligible to participate in the DBE Program. The
proposal also clarifies that relationships and transactions between
firms of which the SEDO has 51 percent ownership and control does not
violate the rule, although the relationship may raise a business size/
affiliation issue.

Franchises

The Department proposes redesignating the current provision Sec.
26.71(o), which is commonly referred to as the franchise rule, to Sec.
26.71(h).

NAICS Codes

The Department proposes redesignating the current provision Sec.
26.71(n), which is commonly referred to as NAICS rule, to Sec. 26.73
with minor technical corrections.

Removed Provisions (Sec. 26.71 (i), (j), (k), (l), (m), (p), and (q))

The current language of Sec. 26.71(i), (j), (k), (l), (m), (p),
and (q) relates to the concept that non-disadvantaged individuals can
participate in any DBE firm, as long as disadvantaged individuals
control the firm. The Department's proposed rules offer more than
adequate means to decide whether an owner controls his or her firm,
with or without the involvement of non-disadvantaged participants. The
proposal would eliminate redundancy but also remove the tendency of
certifiers to rely in accurately on these provision as catch-all
grounds for ineligibility whenever a non-disadvantaged participant is
involved or present in the firm's operations. The Department has
stressed for decades that this is inappropriate, and that the proper
inquiry is whether the disadvantaged owner controls the firm
notwithstanding the participation of other employees, family members,
or non-disadvantaged owners.
For example, the Department proposes to remove Sec. 26.71(k),
commonly known as the ``family business'' provision, to eliminate an
eligibility criterion that is often misused by certifiers. Family-owned
firms have long been a concern in the program. The December 1992 NPRM
proposed that certifiers treat non-disadvantaged family

[[Page 43645]]

members the same as other non-disadvantaged participants in DBEs. The
participation of family members in a firm should not be viewed as
meaning that a disadvantaged individual fails to control a firm, as
stated in the December 1992 NPRM. The May 1997 SNPRM provided
explicitly that if the threads of control in a family-run business
cannot be disentangled, such that the certifier can specifically find
that a woman or other disadvantaged individual independently controls
the business, the certifier may not certify the firm. The 1999 final
rule maintained this line of thinking--a business that is controlled by
the family as a group, as distinct from controlled individually by
disadvantaged individuals, is ineligible.
The current language of Sec. 26.71(k) stresses that non-
disadvantaged individuals can participate in any DBE firm, as long as
disadvantaged individuals control the firm. This is duplicative of
revisions proposed in this NPRM. The Department believes that the
proposed provisions offer more than adequate means to determine whether
a SEDO controls his or her firm, with or without the involvement of
non-disadvantaged or disadvantaged individuals and relatives.
The Department recommends removing current Sec. 26.71(h), commonly
referred to as the ``license rule,'' to eliminate redundancy with
proposed rules Sec. 26.71(d) and (e) and to eliminate state law
requirements from the rule as we propose in revisions to the personal
net worth and ownership provisions.
The current Sec. 26.71(h) directs the certifier to deny
certification if the SEDO does not hold a license or credentials that a
state or local law requires to own and control the firm. The Department
believes that the UCP is the proper authority on state or local license
requirements since it is more familiar with the law within its state,
and Departmental personnel are not experts in state and local law. For
example, appeal cases often provide two opposing interpretations of a
state or local law, with no citation to the law at issue, and fail to
explain how the law does, or does not, apply to the SEDO. The
Department remands in these circumstances for the certifier to decide
and interpret which license state or local law requires the SEDO to
hold under the rule.
More often however, a state or local law(s) only require that
someone employed at the firm hold a license to perform specific work.
In the preamble to the 1999 final rule, the Department explained that
when ``State law allows someone to run a certain type of business
(e.g., electrical contractors, engineers) without personally having a
license in that occupation, then we do not think it is appropriate for
the certifier to refuse to consider that someone without a license may
be able to control the business.'' (64 FR 5096, 5119-20 (Feb. 2, 1999))
The current language of Sec. 26.71(h) adopts the view that the
Department expressed in the preamble and allows the certifier to
consider the SEDO's lack of a license as ``one factor'' in determining
control.
The Department reversed many appeal decisions where the ``one
factor'' rule is either misapplied or not considered in context with
the firm's overall operations. For example, the rule does not
disqualify trucking firms if the SEDO does not have a commercial
driver's license.\29\ The Department believes proposed rules Sec.
26.71(d) and (e) better describe the proper control inquiry than the
current ``one factor'' rule, making Sec. 26.71(h) therefore redundant.
The pertinent questions, which exist regardless of licensing, are
whether the SEDO has enough of an overall understanding of the business
to run the firm and whether the SEDO makes independent decisions.\30\
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\29\ See e.g., 18-0003 Clear Creek of Salisbury, Inc. (May 29,
2018) (owner did not need own commercial driver's license (CDL) to
control hauling firm); see also 18-0007 K-Kap, Inc. (May 15, 2018).
\30\ See 13-0064 J&L Steel, Inc.

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