# Disadvantaged Business Enterprise: Program Implementation Modifications

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2012-21231

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** September 6, 2012
- **Citation:** 77 FR 54952

## Text

DEPARTMENT OF TRANSPORTATION
Office of the Secretary
49 CFR Part 26
[Docket No. OST-2012-0147]
RIN 2105-AE08
Disadvantaged Business Enterprise: Program Implementation Modifications

AGENCY:

Office of the Secretary (OST), DOT.

ACTION:

Notice of Proposed Rulemaking (NPRM).

SUMMARY:

This notice of proposed rulemaking (NPRM) proposes three categories of changes to improve implementation of the Department of Transportation's disadvantaged business enterprise (DBE) rule. First, the NPRM proposes revisions to personal net worth, application, and reporting forms. Second, the NPRM proposes modifications to certification-related provisions of the rule. Third, the NPRM would modify several other provisions of the rule, concerning such subjects as good faith efforts, transit vehicle manufacturers and counting of trucking companies.

DATES:

Comments on this proposed rule must be received by November 5, 2012.

ADDRESSES:

You may submit comments (identified by the agency name and DOT Docket ID Number OST-2012-0147) by any of the following methods:

•
Federal Rulemaking Portal:
Go to
www.regulations.gov
and follow the online instructions for submitting comments.

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

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

•
Fax:
202-493-2251.

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

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

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

Forms

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

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

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

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

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

For instance, if an applicant reports other business interests in section 5 of the new form, recipients should ascertain the value of these entities by obtaining financial statements, balance sheets, and federal/state tax returns. With this information, recipients will be able to verify the applicant's valuation of their ownership interests in these other firms. Similarly, an applicant

reporting stock and bond holdings should be asked to provide quarterly account statements. Also, directly written on the form in section 2 (Real Estate Owner) is the requirement that applicants submit copies of real estate deeds, mortgage notes, and instruments of conveyance. In short, recipients are encouraged, during their review of the firm's eligibility, to look behind the statement and these submissions, and request additional information if necessary. Firms must cooperate with these requests pursuant to § 26.73(c) and § 26.109(c), and a failure or refusal to provide such information is a ground for a denial or removal of certification.

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

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

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

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

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

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

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

In addition, we seek comment on whether the Department should adopt a provision similar to SBA language which considers a spouse's financial situation in determining an individual's access to credit and capital where the spouse has a role in the business (e.g. an officer, employee, director) or has lent money to, provided credit support to, or guaranteed a loan of the business. Although the Department does not use

“access to credit and capital” as criteria for certification, should the involvement of a spouse in the firm trigger further consideration of their net worth and should the recipient collect the personal financial statement from this person? Are there other circumstances that would warrant this?

Application Form

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

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

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

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

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

DBE Commitments/Awards and Payment Reporting Form

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

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

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

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

Actual Payments to DBEs for Completed Contracts

Year contract awarded

Number of
contracts completed that were let in each year

Total $ value of contracts completed

DBE participation needed to meet $
committed

Total $ paid to DBEs
Total % of $ committed paid to DBEs

2012

2011

2010
4
$10m
$1m
$900k
90%

2009

2008

2007

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

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

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

Certification Provisions

§ 26.65 What rules govern business size determinations?

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

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

§ 26.69 What rules govern determinations of ownership?

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

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

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

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

• A situation in which 51% disadvantaged owner and a 49% non-disadvantaged owner who contribute $100 and $10,000, respectively, to

acquire a firm grossing $1 million, may be indicative of a pro forma arrangement.

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

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

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

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

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

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

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

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

reasons other than obtaining certification as a DBE.

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

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

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

§ 26.71 What rules govern determinations concerning control?

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

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

§ 26.73 What are other rules affecting certification?

Under the current 26.73(g), a recipient must not require an applicant firm to be prequalified as a condition for certification “unless the recipient requires all firms that participate in its contracts and subcontracts to be prequalified.” We propose to delete this part of this statement, with the result that prequalification could no longer be used as a criterion for certification in any case. While the Department believes that prequalification requirements may be an unnecessary barrier to DBE

participation, this provision would not prohibit prequalification as a condition for receiving certain sorts of contracts. However, whether a firm is prequalified is irrelevant to certification concerns such as size, disadvantage, ownership and control. It is important for certifiers to analyze only the factors relevant to DBE eligibility and not incorporate other recipient business requirements in decisions pertaining to an applicant's qualification for the program. Further, while prequalification may be a requirement for doing business in one mode (e.g., highway) it may not be a requirement for doing business in other modes (e.g., transit).

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

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

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

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

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

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

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

§ 26.83(h) and (j)

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

The Department is not changing the long-standing practice of annual affidavits of no change, and we believe that this requirement is crucial to keep

recipients current on the status of certified firms. The NPRM would strengthen this process by directing certified firms to submit additional items with their affidavits. The additional information would include updated PNW statements and a record from each individual claiming disadvantaged status regarding the transfer of assets for less than fair market value to any immediate family member, or to a trust any beneficiary of which is an immediate family member, within two years of the date of the annual review. In addition, the firm would have to submit a record of all payments, compensation, and distributions (including loans, advances, salaries and dividends) made by the DBE firm to each of its owners, officers or directors, as well as the firm's (and its affiliates') and owners' most recent completed IRS tax returns, IRS Form 4506 (Request for Copy or Transcript of Tax Return). Recipients would also have the discretion, on a case-by-case basis, to obtain other information relevant to determinations about the firm's size and its ownership and control by disadvantaged individuals.

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

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

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

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

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

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

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

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

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

§ 26.88 Summary Suspension of Certification

As noted above, a certified firm remains certified until and unless it is decertified. But what happens if there is a significant change in the business, such as the death of its owner or the sale of the firm? Current guidance properly tells recipients to look at the changed firm and determine whether the firm should be decertified and initiate a section 26.87 proceeding if appropriate. In this situation, the recipient has the burden of proof to demonstrate that the firm should lose its eligibility.

Meanwhile, the firm continues to be certified and can obtain new contracts as a DBE. Many people in the certification community have urged, to the contrary, that the firm should lose its eligibility when a dramatic change of this kind occurs, and should have to reapply for certification as if it were a new firm. Meanwhile, it would not be eligible for new contracts as a DBE.

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

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

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

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

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

Other Provisions

§ 26.1 What are the objectives of this part?

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

§ 26.5 Definitions

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

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

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

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

§ 26.11 What records do recipients keep and report?

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

Second, to implement a longstanding provision in the DBE authorization legislation, the Department proposes adding a new reporting requirement. Under section 1101(b)(4)9B) of MAP-21, states are required to notify the Secretary, in writing, of the percentage of the small business concerns that are controlled by (i) Women; (ii) socially and economically disadvantaged individuals (other than women); and (iii) individuals who are women and are otherwise socially and economically disadvantaged individuals. To carry out this requirement, UCPs would go through their statewide Directories and count the number of firms controlled, respectively, by white women, minority or other men, and minority women. They would then convert the numbers to percentages and send the result to the Departmental Office of Civil Rights, with which they already have a working relationship in certification appeals matters. We realize that some firms may be controlled by persons in more than one of these three categories. In this case, we propose that UCPs include a firm in the category applicable to the owner with the largest stake in the firm who is also involved in controlling the firm.

We note that the commitments and achievements reporting form already captures information broken down by gender and ethnicity concerning contracts and contracting dollars going to DBEs. This is not the same thing as the report on the percentages of certified firms, but we seek comment on whether it would be easier to include the percentage information on this reporting form in some fashion rather than having a separate report submitted.

§ 26.21 Who must have a DBE program?

It appears that there is some confusion in the recipient community as to precisely who must have a DBE program with the FTA and FAA. For example, section 26.21 requires all entities that receive FTA federally assisted funds over $250,000 used in contracts (except for transit vehicle purchases) in a federal fiscal year for planning, capital, and/or operating assistance purposes to have a DBE program. However, despite this clear mandate, many of FTA's recipients still mistakenly believe only individual prime contracts valued above $250,000 are eligible for the DBE program, and thus improperly exclude prime contracts valued below $250,000 from both their determination as to whether they are required to submit a goal and from actual goals submitted to FTA. The Department has long maintained the $250,000 threshold applies to contracts in the aggregate, meaning all DBE program-eligible contracts, regardless of value, must be considered for both threshold and goal setting purposes. For example, if a recipient were to receive several small grants within a fiscal year (e.g. $1000 to $200,000) for planning, capital, or operating assistance) their combined value, if over $250,000, would trigger the requirement that the entity have a DBE program. The same point applies with respect to FAA-assisted contracts. The proposed amendment modifies the language to reflect this long held position, and should resolve any lingering misconceptions with regard to the issue.

Section 26.21(a)(1), as currently written, requires all FHWA recipients receiving funds authorized by a statute to which this part applies to have a DBE program. “Recipient,” as defined in section 26.5, is “any entity, public or private, to which DOT financial assistance is extended, whether directly or through another recipient. * * *” FHWA, however, expects that each subrecipient will operate under its direct recipient's approved DBE program. Therefore, FHWA will not allow subrecipients to operate under their own DBE programs, separate from the program of the direct recipient. If an entity that is an FHWA subrecipient is also a direct recipient of FAA or FTA funds, then the entity would have its own DBE program and goal for its FAA- or FTA-assisted contracts, while operating under the State DOT's goal for FHWA-assisted contracts. Where funds are comingled, recipients should consult with the DOT agencies involved to determine how to proceed.

§ 26.45 How do recipients set overall goals?

Establishing the overall goal is a critical component of administering the DBE program. We propose several changes to the rules governing overall goal setting to ensure that recipients employ sound goal setting practices consistent with the remedial purpose of the program.

There are two analytical steps to establishing an overall goal. The first step is to determine the relative availability of DBEs in the recipient's transportation contracting market. We propose to codify the elements of a bidders list that must be documented and supported when this approach is used to establish DBE availability. Those elements include capturing data on successful and unsuccessful firms (DBEs and non-DBEs, prime contractors and subcontractors) that have bid on federally assisted contracts during the past three-year period. We also propose to disallow the use of prequalified contractors lists to establish availability and seek your views on whether this prohibition should be extended to the use of bidders list and other such lists (registered subcontractors lists, plan holders list, etc.) relied upon exclusively as a source to identify ready, willing, and able firms.

We know from numerous disparity studies that have been conducted across the nation that discriminatory practices affecting minority and women owned small businesses continue to create barriers to accessing capital and bonding that in turn affect their ability to form, grow, and compete with other firms for contracting opportunities. Looking only to bidders lists, lists of prequalified contractors, or similar lists to determine availability may serve only to perpetuate the effects of discrimination rather than attempt to remedy those effects. Given this concern about the use of bidders lists in goal-setting, and what we understand to be difficulties that recipients have had in collecting all the bidders list information called for in section 26.11, we also seek comment on whether the bidders list approach to goal-setting should be deleted from the rule.

The focus of the second step in the overall goal setting process is to consider other available evidence of discrimination or its effects that may impact availability, and based on that evidence consider making an appropriate adjustment to set an overall goal that reflects the level of participation one would expect in the absence of discrimination. We have seen many recipients routinely adjust downward the step one availability figure based on past DBE utilization, without regard to whether an adjustment is warranted by the evidence. Under the rules, past DBE utilization is defined as a proxy for DBE capacity. However, we know that in many instances, low levels of past DBE utilization does not represent DBE capacity in a given contracting market and may simply reflect the continuing effects of discrimination, the failure of a recipient to implement a robust program, or the existence of circumstances similar to those mentioned in Departmental guidance (e.g., the effect of past or current noncompliance with DBE program requirements). Adjusting availability downward under these or similar circumstances would not be appropriate or required. Consequently, we propose to expressly state in the rule that step two adjustments are not appropriate

unless clearly warranted by the evidence.

In reviewing overall goal submissions made by recipients, operating administrations currently are authorized to adjust the overall goal or require the recipient to do so if in the opinion of the operating administration the overall goal has not been correctly calculated or the method for calculating the goal is inadequate. In making that assessment, we propose to clarify that the operating administrations are to be guided by the goal setting principles and best practices announced by the Department pursuant to section 26.9. While the “Tips on Goal Setting” posted on the OSDBU Web site offer recipients a lot of flexibility in developing a methodology, the Tips also represent the Department's view of practices recipients should follow to produce a sound methodology that in turn will likely produce a sound overall goal that is required by the rules. Recipients are not at liberty to employ practices that serve no purpose other than to drive down the overall goal without risking disapproval by the appropriate operating administration.

We are also proposing a clarifying change to 26.45(e)(3) concerning project goals. The language would note that a project goal may be a percentage of the value of the entire project as determined by the recipient or a percentage of the federal share.

We propose to modify the public participation requirements for goal setting to strengthen the consultation component, to eliminate the public comment period associated with publication of the proposed goal, and to require posting proposed goals on recipient Web sites—a less costly alternative to the current requirement for publication in general circulation and other media. These changes are designed to reduce the administrative burden and expense associated with requirements that have added little, if any, value to the goal setting process. We recognize the importance of affording those who are likely to be affected by the proposed goal (i.e., stakeholders) an opportunity to present their views, data, or analysis to recipients in the development of an appropriate goal setting methodology. For that reason, we believe consultation, to be meaningful, should involve a dialogue between a recipient and stakeholders in its contracting market. Based on our experience, the most meaningful participation by the public in goal setting occurs during the consultation phase when genuine efforts are made to engage interested individuals or groups in the process. Few comments are received from the public during the 45 day comment periods that have not been provided during consultation. This change also would be consistent with the requirement for stakeholder involvement currently applicable to the DBE concessions program in Part 23.

§ 26.49 How are overall goals established for transit vehicle manufacturers?

The Department has been concerned for some time about confusion among program participants concerning the implementation of the transit vehicle manufacturer (TVM) provisions of Part 26. Because a large portion of FTA's federal financial assistance is used by its recipients for transit vehicle purchases, the Department's intent was to require similar DBE goal setting provisions to their operations, and under the current rule, such entities were required to submit their goal setting methodologies to FTA and report to FTA their awards to women and minority owned firms. In practice, however, the Department has seen irregularities in how TVMs perform in submitting goal setting methodologies, and how TVMs report DBE awards and achievements. As a result, the Department believes additional clarification is needed to ensure meaningful application of the DBE rule's requirements within the transit vehicle manufacturing industry. The proposed rule changes are intended to clarify TVM requirements by providing additional information as to how the Department expects TVMs to determine their DBE goals, when and in what instances TVMs must report DBE awards and achievements data, and by specifying which portions of the DBE regulations apply to TVMs.

With respect to goal setting, the proposed rule seeks to clarify what must—and what must not—be included in a transit vehicle manufacturer's goal methodology submission. Specifically, it codifies the Department's long-held position that for goal setting purposes, transit vehicle manufacturers may not selectively choose which contracting opportunities will and will not be included. Rather, when setting a DBE goal, all contracting opportunities made available to non-DBEs must also be made available to DBEs, and thus must be included in the submitted methodology. It is important to note that this requirement is not intended to “solicit” DBE participation for any specific contracting opportunity or task, nor is it intended to dictate contractual relationships between transit vehicle manufacturers and any specific type of firm. Instead, the sole purpose is to “level the playing field” and ensure DBE firms have the opportunity to fairly compete for all contracts non-DBEs have access to. To provide appropriate flexibility in the implementation of this provision, we believe that this clarification must also be accompanied by a strong statement, to FTA recipients in particular, that overly prescriptive contract specifications on transit vehicle procurements that in effect eliminate opportunities for DBEs in the manufacture of transit vehicles is counter to the intent of the DBE Program and unduly restricts competition which is prohibited by 49 U.S.C. 5325(h). Violation of rules that support competition in the marketplace may result in the loss of FTA financial assistance.

In addition to clarifying which opportunities must be included, the proposed rule also contemplates which opportunities must not be included in the goal setting methodology. While the provision pertaining to work and materials performed outside the jurisdiction of the United States remains intact, the Department proposes the current practice of including the entire Federal share of any given vehicle procurement be amended to include only the portion of the Federal share available via contracts to outside firms. Because such a large portion of work required when manufacturing and assembling a transit vehicle is performed “in house,” the Department does not believe it is appropriate to use the entire Federal share of a transit vehicle contract as the base figure for the DBE goal, as it skews the final goal relative to the contracting opportunities actually available. Instead, the Department proposes that the base figure be derived from the total value of contracts available to firms outside of the manufacturer itself. For example, if a particular transit vehicle manufacturer is awarded a $10 million contract to manufacture buses, and the transit vehicle manufacturer performs 70% of the work with its own forces while contracting out the remaining 30%, then the amount from which the base figure and goal should be derived would be $3 million. Since work performed “in house” is not truly a contracting opportunity available to either DBEs or non-DBEs, the Department believes this approach will lead to more accurate and responsible overall DBE goals, improved overall implementation of the DBE program by transit vehicle manufacturers and simpler, better targeted oversight by FTA. While proposing this approach, however, the Department also seeks comment on whether there should be regulatory

provisions designed to encourage TVMs to make more parts of their manufacturing processes available to DBEs and other small businesses. If so, what should they be?

The proposed rule also clarifies the Department's stance on when transit vehicle manufacturers must report DBE information to FTA. Because submission of a DBE goal to FTA does not guarantee a transit vehicle manufacturer will be awarded a contract, confusion exists as to when DBE reports should be submitted. The Department believes the best approach is to require transit vehicle manufacturers to continuously report their contracting activity in the Uniform Report of DBE Awards/Commitments and Payments, since the administrative burden to submit reports with no activity is negligible in comparison to making a yearly assessment of those transit vehicle manufacturers who are still performing on contracts underway.

Finally, the proposed rule seeks to reiterate and clarify the existing requirement that TVMs are subject to all of the applicable provisions of the DBE regulation and responsible for their implementation. It has been the Department's experience that in many cases, compliance with the DBE regulation has been reduced to the submission of a DBE goal and both of the semi-annual DBE reports each year. This was never the Department's intention, and the proposed rule seeks to correct this issue by reaffirming that transit vehicle manufacturers are equally as responsible for implementing the other areas of the regulation as other DOT recipients. However, recognizing that transit vehicle manufacturers do not participate in the DBE certification process, the Department has exempted them from those portions of the rule, with one notable exception: In order to obtain credit for DBE participation, the manufacturer must still ensure that the DBE firm is certified in the state where it performs the work. In addition the Department also proposes that the other post-award requirements of the DBE regulation need not be followed or reported on in those years where a transit vehicle manufacturer is not either awarded or performing on a transit vehicle procurement. The Department believes these proposed changes will both strengthen the oversight functions for those portions of the rule applicable to transit vehicle manufacturers, while exempting manufacturers from those portions of the regulation that do not specifically apply to their businesses.

§ 26.51 What means do recipients use to meet overall goals?

The current regulation 26.51(a) states that race-neutral DBE participation can include when a DBE wins a subcontract from a prime contractor that did not consider DBE status in making the award (e.g., a prime contractor that uses a strict low bid system to award sub-contracts). We propose removing this as an example of race-neutral DBE participation since it is impossible for recipients to determine if a prime uses a strict low bid system, and, more importantly, it conflicts with Appendix A, which states prime should not reject a DBE quote over a non-DBE quote if the price difference is not unreasonable.

§ 26.53 What are the good faith efforts procedures recipients follow in situations where there are contract goals?

When a recipient sets a goal for DBE participation on a DOT-assisted contract, it must award the contract only to a bidder/offeror that makes good faith efforts to meet it. Bidders can meet the goal in one of two ways. They can obtain commitments for enough DBE participation to meet the goal. If they do not meet the goal, they can also document that they have made good faith efforts to do so. The existing provisions of § 26.53 and Appendix A discuss the kinds of good faith efforts bidders are expected to make, with the Department taking the approach that a showing of adequate good faith efforts in a particular procurement is necessarily a fact-specific judgment recipients must make. The unique circumstances of procurements vary widely and the Appendix spells out factors recipients should take into account when assessing the behavior of bidders in making a good faith effort showing. We do not believe that a template or checklist approach, or some quantitative formula, could ever adequately respond to the circumstances that recipients have to evaluate in determining whether a bidder has made good faith efforts to meet a goal.

The current rule requires bidders/offerors to submit: The names and addresses of DBE firms that will participate on the contract; a description of the work that each DBE will perform; the proposed dollar amount for each DBE firm; written documentation of the bidder's commitment to use the DBE; and the DBE's confirmation that it is participating. We believe the information reporting requirements can be strengthened by requiring that bidders, in addition to these submissions, provide the recipient with information showing that each DBE signed up by the bidder is certified in the NAICS code(s) for the work it will be performing. This provision will help to reduce the possibility that bidders, in trying to obtain a contract, could list firms that cannot qualify for DBE credit in the work area involved in the contract. This information would have to be submitted with the bidder's initial good faith effort submission. To help implement the NAICS code provision, we recommend that recipients make available (e.g., on their Web sites) the most important and frequently-used NAICS codes relevant to the recipients' operations.

The current rule distinguishes between situations in which contracts are let on the basis of “responsiveness” or “responsibility.” In the former case, all DBE participation information must be submitted at the time of bid submission. In the latter case, as long as a bidder promised to meet the goal, the bidder could identify DBEs after the bid submission but before the recipient commits itself to using a particular contractor. The Department has noticed an unfortunate trend in which, in procurements that otherwise use a traditional low-bid procurement mechanism, recipients sometimes give the apparent successful bidder a period of several days or weeks after bid opening to submit DBE information, sometimes justifying the practice by labeling the action as a “responsibility” procurement. This has the potential to facilitate bid-shopping or other questionable activities by prime contractors. The section's “responsibility/responsiveness” terminology has also caused some degree of confusion.

To clarify this situation, the NPRM proposes eliminating the “responsiveness/responsibility” distinction. The proposed language would simply say that, with one exception, competitors for a contract having a DBE contract goal would have to submit all information about DBEs that have been engaged for the project with their original submission. There could be no additional grace period after this point during which competitors could subsequently submit this information. The exception to this requirement would be in a negotiated procurement, where the initial submission would contain a binding commitment to meet the goal or document good faith efforts, and specific DBE information could be submitted in the same time frame as price and other terms of the negotiated contract were made final.

If a bidder/offeror does not meet the contract goal on a contract, it must, in order to remain eligible for contract award, submit documentation showing that it made sufficient good faith efforts to meet the contract goal. As noted above, Appendix A describes the kind of information that recipients would use to determine whether a bidder/offeror has made sufficient good faith efforts. In addition, this NPRM proposes that, as part of a good faith efforts showing, a bidder/offeror would have to provide copies of each DBE and non-DBE subcontractor quote it had received, in situations where it picked a non-DBE firm to do work that a DBE had sought. This information will help the recipient determine whether there is validity to any claims by a bidder/offer that a DBE was rejected because its quote was unreasonably high.

The NPRM would give recipients two options with respect to the timing of the provision of good faith efforts documentation from bidders/offers who do not meet the contract goal. First, recipients could require that all bidders/offerors who do not meet the contract goal submit good faith efforts documentation with their original bids/offers. Bidders/offerors have to amass a great deal of information to compete for a contract (e.g., with respect to price, materials, schedules, etc.). DBE-related information is no different and no less an integral part of the bidding process. DBE information is not some separate, foreign intrusion into the procurement process that needs to be handled at a different time from anything else that determines who wins a contract. Consequently, we believe that recipients can justifiably seek good faith efforts information at the same time they receive everything else concerning the competition for a contract.

However, we recognize that some recipients may wish to reduce administrative burdens on unsuccessful bidders/offerors. Consequently, the second option the proposed rule offers is for recipients to require good faith efforts documentation only from an apparent successful bidder/offeror that does not meet the contract goal. In this option, no one would be required to submit good faith efforts documentation with their original submissions. The apparent successful bidder/offer would have one day after the recipient notified it to submit the documentation. The documentation would have to relate to pre-bid/offer submission efforts; no post-bid/offer submission efforts would be acceptable. The Department seeks comment on whether, in this option, one day is an appropriate time frame, or whether a longer period (e.g., three days) would be acceptable.

A related provision, added to Appendix A, seeks to remedy a practice involving the awarding of contracts to offerors who pledge to name DBEs after they are awarded the contract, but do not actually provide specific DBE information at the time required. This language explicitly states that a promise by the prime contractor bidder to include DBEs after the award is not to be considered as part of a good faith efforts evaluation.

We also propose to add a new paragraph (f)(1)(ii) that would create additional safeguards for DBEs. It requires a recipient to include in each prime contract a provision stating that, as a condition of the award, the contractor must use those DBEs listed to perform the specific work items or supply the materials as committed and that the contractor is not entitled to any payment for work or materials performed by its own or any other forces if the work or supplies were committed to a DBE, unless it receives prior written consent of the recipient for a replacement of the DBE for good cause.

In the event that it is necessary to replace a listed DBE, proposed paragraph (g) specifies good faith efforts that a prime contractor would have to make to find DBE participation in place of the original DBE. These include such things as (1) A statement of efforts made to negotiate with DBEs for specific work or supplies, including the names, addresses, telephone numbers, and emails of those DBEs that were contacted; (2) the time and date each DBE was contacted; (3) a description of the information provided to DBEs regarding the plans and specifications for portions of the work to be performed or the materials supplied; and (4) an explanation of why an agreement between the prime contractor and a DBE was not reached. The Department would expect prime contractors to look throughout the contract or project to find opportunities for DBE participation in this situation. This effort would not be limited to the same type of work the original DBE would have performed, but would extend to other types of work as well, including work the prime contractor may originally have planned to self-perform. The prime contractor would have to submit the documentation within 7 days of the recipient's agreement to permit the original DBE to be replaced, and the recipient would provide a written determination to the contractor stating whether or not good faith efforts have been demonstrated.

Under a new paragraph (h), recipients would be required to include in each prime contract a provision stating that failure by the contractor to carry out the requirements of this regulation, or meet its corrective plan as described above, is a material breach of the contract, and may result in the termination of the contract, use of the remedies set forth in proposed paragraph (i), and other remedies available to the recipient under law. The proposed remedies include provisions regarding (i) The withholding of monthly progress payments; (ii) declaring the contractor in default and terminating the contract; (iii) assessing sanctions in the amount of the difference in the DBE contract committal and the actual payments made to each certified DBEs; (iv) liquidated damages; and/or (v) disqualifying the contractor from future bidding as non-responsible.

In an effort to enhance the recipient's ability to review prime and subcontractor participation on DOT-assisted contracts, we are proposing in a new paragraph (k) to require the prime contractor to provide all subcontracts for all DBEs participating on a contract (including first and lower tier subcontractors). Lastly, the good faith efforts provisions of the current rule apply when a procurement involves a race-conscious DBE contract goal. However, DBEs also participate, as a race-neutral matter, on contracts that do not have DBE contract goals. The Department seeks comment on whether some of the provisions of this rule (e.g., concerning termination of DBEs and good faith efforts to replace DBEs that are dropped from a project) should apply to DBEs on contracts that did not have a contract goal.

§ 26.55 How is DBE participation counted toward goals?

We propose to modify the factors in determining whether a DBE trucking company is performing a commercially useful function to include the ability to count 100% of a DBE's trucking services when it uses its own employees as drivers, but leases trucks from a non-DBE truck leasing company. This change would allow DBE haulers to lease trucks from non-DBE leasing companies in instances in which they employ sufficient drivers yet lack sufficient trucks to fulfill their contractual obligations. This change is designed to allow DBEs the same ability as non-DBEs to use their own drivers and supplement their fleets with leased trucks without sacrificing any loss of DBE credit due to the fact that the trucks may be leased from a non-DBE leasing company. Credit would not be given,

however, in instances in which the DBE leases trucks from the prime contractor. The regulations pertaining to counting DBE trucking in which a DBE subcontracts with a non-DBE owner-operator or leases trucks
and
drivers from a non-DBE would remain unchanged. We also note that there could be situations in which close relationships between DBEs and non-DBE companies from which they lease trucks (e.g., a non-DBE mentor company) or difficulties in documentation of arms-length lease relationships (e.g., no proof of payment, assertions of payment in kind) could raise certification or fraud issues. The proposed amendment would change only counting rules; it would not immunize companies involved from scrutiny of potentially improper relationships.

The NPRM would also add language emphasizing that counting decisions concerning whether a firm's participation is best understood as a regular dealer or as a transaction expediter must be made on a contract-by-contract basis, not on a generic basis.

On December 9, 2011, the Department issued a new guidance Question and Answer (Q&A) to clarify the counting rules with respect to credit for suppliers, discussing the application of the “regular dealer” and “transaction expediter/broker” concepts. The Department seeks comment on whether any provisions of the Q&A should be made part of the rule itself. More broadly, the Department wants to open a discussion of the regular dealer concept itself. As defined in the rule, a “regular dealer” occupies something like the traditional “middleman” role in commerce. Conversations with a variety of firms and state and local agencies have raised the question of whether changes in the way business is conducted has made the middleman role itself somewhat obsolete in the kinds of work (e.g., construction, professional services) most frequently involved in the DBE program. We seek comment on this question and on 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.

The Department's key principle in counting DBE participation in any situation is to ensure that only work the DBE does itself, only the value that the DBE adds to the transaction, should count. When a DBE is involved in supplying goods manufactured by a non-DBE, and the DBE does not play a traditional regular dealer/middleman role, what is the appropriate measure of the value it adds to the transaction? Is it ever more than the fees or commissions the DBE gets? If so, what is the rationale for counting more than this (e.g., some percentage of the product that is provided to the ultimate user)?

One policy consideration that has influenced the Department's thinking over the years is that allowing too-generous credit for supplies provided by a DBE middleman or transaction expediter would work to the disadvantage of DBEs who are contractors in construction or other fields. That is, if a prime contractor can get all or most of the DBE credit it needs to meet a goal from buying steel or petroleum products or other items through a DBE middleman, then the prime contractor's incentive to use other DBE contractors on a project is diminished. The Department seeks comment on how this policy consideration interacts with the way the counting provisions of the rule work in practice.

§ 26.109 What are the rules governing information, confidentiality, cooperation, and intimidation or retaliation?

One of the concerns the Department has with the implementation of the program is that certifiers and other state and local program officials can be subject to pressures to take actions inconsistent with the intent and language of the Department's rules. It is crucial that recipients' personnel objectively discharge their professional responsibilities under this part. Objectivity includes being independent in fact and appearance when making certification decisions, maintaining an attitude of impartiality, and being free of conflicts of interest. We believe that the ethical administration of the program means that no public official at any level of state or local government should make, participate in making or in any way attempt to use their official position to influence a certification or other program decision. No employee, officer or agent of the recipient should participate in selection, or in the award or administration of a contract supported by Federal funds if a conflict of interest, real or apparent, would be involved.

Recipients and their staffs are, of course, obligated to follow their jurisdiction's written codes of ethics. Beyond that, the Department seeks comment on whether Part 26 should be amended (or guidance issued) to add provisions concerning ethics and conflicts of interest that could perhaps play a constructive role in empowering DBE officials to resist inappropriate pressures. Would such provisions be effectual? Could the Department effectively develop provisions that provided appropriate guidance but did not become overly detailed? The Department welcomes suggestions about this subject.

Appendix A—Good Faith Efforts

Appendix A provides guidance for recipients that establish a contract goal for DBE participation on a DOT-assisted contract. The Appendix is mentioned in the regulation text § 26.53, which the Department is proposing (as described above) to revise. The Appendix lists the specific types of actions recipients should consider as part of bidders' good faith efforts to obtain DBE participation. This list was never intended to be a mandatory checklist nor to be exclusive or exhaustive. We clearly indicate that other factors or types of efforts may be relevant in appropriate cases. There has been no revision to the stated good faith efforts examples specified in the Appendix since the original issuance of the rule, but over time we have learned of several possible improvements that we hope to make now. These significant examples we propose to add are in the areas of market research (item A) and establishing flexible timeframes for performance and delivery schedules in a manner that encourages and facilitates DBE participation (item B). We further propose adding language specifying that the rejection of the DBE simply because its quotation for the work was not the lowest received is not a practice considered to be good faith effort. We propose to add language saying that “determinations should not be made using quantitative formulas.” There is an understandable desire to permit good faith efforts decisions to be made on a neat, bright-line basis (e.g., if a prime contractor has contacted a given number or given percentage of DBEs, it has made sufficient good faith efforts). To accomplish their purpose, however, good faith efforts decisions must be a judgment based on the entire set of factors concerning a particular contracting action, and cannot be reduced to a formula or checklist without distorting the process.

When a DBE must be replaced on a contract, the prime contractor's inability to find a replacement DBE at the original price is not alone sufficient to support a finding that good faith efforts have been made to replace the original DBE. The fact that the bidder has the ability and/or desire to perform the contract work with its own forces is not a sound basis for rejecting a prospective replacement DBE's reasonable quote. Section V of the Appendix addresses

various techniques recipients employ in determining whether a bidder has made good faith efforts. We propose adding language that recommends that recipients scrutinize the documented efforts and at a minimum, review the performance of other bidders in meeting the contract goal (e.g., to see if the success of other bidders in meeting a goal suggests that good faith efforts could have resulted in the bidder meeting the goal). We propose mirroring language we have added in § 26.53 revisions that recipients require contractors to submit all subcontractor quotes in order to review whether DBE prices were substantially higher. Recipients would also contact the DBEs listed on a contractor's solicitation to inquire as to whether they were, in fact, contacted by the prime. The added language also states that pro forma mailings to DBEs requesting bids are not alone sufficient to satisfy good faith efforts under the rule.

Regulatory Analyses and Notices

Executive Orders 12866 and 13563 (Regulatory Planning and Review)

This proposed rule is not a “significant regulatory action” under section 3(f) of Executive Order 12866, Regulatory Planning and Review, and does not require an assessment of potential costs and benefits under section 6(a)(3) of the Order. It does not create significant cost burdens, does not affect the economy adversely, does not interfere or cause a serious inconsistency with any action or plan of another agency, does not materially alter the impact of entitlements, grants, user fees or loan programs; and does not raise novel legal or policy issues. The rule is essentially a streamlining of the provisions for implementing an existing program, clarifying existing provisions and improving existing forms. To the extent that clearer certification requirements and improved documentation can forestall DBE fraud, the rule will result in significant savings to state and local governments. This NPRM does not contain significant policy-level initiatives, but rather focuses on administrative changes to improve program implementation.

Executive Order 12372 (Intergovernmental Review)

The NPRM is a product of a process, going back to 2007, of stakeholder meetings and written comment that generated significant input from state and local officials and agencies involved with the DBE program in transit, highway, and airport programs.

Regulatory Flexibility Act

The underlying DBE rule does deal with small entities: all DBEs are, by definition, small businesses. Also, some FAA and FTA recipients that implement the program are small entities. However, the changes proposed to the rule are primarily technical modifications to existing requirements (e.g., improved forms, refinements of certification provisions) that will have little to no economic impact on program participants. Therefore, the proposed changes will not create significant economic effects on anyone. In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-612), I certify that this rule will not have a significant economic impact on a substantial number of small entities.

Executive Order 13132 (Federalism)

A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on State or local governments and would either preempt State law or impose a substantial direct cost of compliance on them. As noted above, there is no substantial compliance cost imposed on state and local agencies, who will continue to implement the underlying program with administrative improvements proposed in the rule. The proposed rule does not involve preemption of state law. Consequently, we have analyzed this proposed rule under the Order and have determined that it does not have implications for federalism.

Paperwork Reduction Act

As required by the Paperwork Reduction Act of 1995, DOT is submitting Information Collection Requests (ICRs) to the Office of Management and Budget (OMB). Before OMB decides whether to approve these proposed collections of information and issue a control number, the public must be an opportunity to comment. Organizations and individuals desiring to submit comments on the collection of information should direct them to the Office of Management and Budget, Attention: Desk Officer for the Office of the Secretary of Transportation, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy their comments to the docket for this rulemaking at regulations.gov. Given the time frames for DOT and OMB consideration of comments, a comment is best assured of having its full effect if OMB receives it within 30 days of publication.

We will respond to any OMB or public comments on the information collection requirements contained in this rule. OST may not impose a penalty on persons for violating information collection requirements which do not display a current OMB control number, if required. OST intends to obtain current OMB control numbers for the new information collection requirements resulting from this rulemaking action. The OMB control number, when assigned, will be announced either in the final rule or by separate notice in the
Federal Register
.

The Department invited interested persons to submit comments on any aspect of these ICRs, including: (1) Whether the proposed collection is necessary for OST's performance; (2) the accuracy of the estimated burdens; (3) ways for OST to enhance the quality, usefulness, and clarity of the collected information; and (4) ways that the burden could be minimized without reducing the quality of the collected information.

For each of these information collections, the title, a description of the entity to which it applies, and an estimate of the annual recordkeeping and periodic reporting burden are set forth below.

1. Application Form

Based on discussions with DBEs, it is estimated that the total burden hours per applicant to complete its DBE or ACDBE certification application with supporting documentation to be approximately 8 hours. In addition, new applicants will have to submit a personal net worth (PNW) statement (see below).

The number of new applications received each year by Unified Certification Program members is difficult to estimate. There is no central repository for DBE certification applications and we predict that the frequency of submissions at times vary according to construction season (high applications when the season is over), the contracting opportunities available in the marketplace, and the number of new transportation related business formations or expansions. To get some estimate however, the Department contacted recipients in during the process of this NPRM. The agencies we contacted reported receiving between 1-2 per month, 5-10 per month, or on the high end 80-100. There are likely several reasons for the variance. Jurisdictions that are geographically contiguous to other states (such as Maryland) and/or have a high DBE applicant pool may receive a higher number whereas jurisdictions in remote areas of the country with smaller numbers of firms may have lower

applicant requests for DBE certification. These rough numbers likely do not include requests for expansion of work categories from existing firms that are already certified.

Frequency:
Once during initial DBE or ACDBE certification.

Estimated Average Burden per Response:
8 hours.

Estimated Total Annual Burden Hours:
72-76 thousand hours per year.

2. PNW Form

A small business seeking to participate in the DBE and ACDBE programs must be owned and controlled by a socially and economically disadvantaged individual. When a recipient determines that an individual's net worth exceeds $1.32 million, the individual's presumption of economic disadvantage is said to have been conclusively rebutted. In order to make this determination, the current rule requires recipients to obtain a signed and notarized statement of personal net worth from all persons who claim to own and control a firm applying for DBE or ACDBE certification and whose ownership and control are relied upon for the certification. These personal net worth statements must be accompanied by appropriate supporting documentation (e.g., tax returns). The form proposed in this rule would replace use of an SBA form suggested in current regulations.

Based on discussion with DBE firms, we estimate that compiling information for and filling out this form would take approximately 10 hours.

The number of respondents is significantly higher than the number of applications received due to annual submissions of the form by owners of DBE or ACDBE certified firms.

Frequency:
Once during initial DBE certification and each year thereafter during annual update process. For the DBE/ACDBE programs, information regarding the assets and liabilities of individual owners is necessary for recipients of Federal Transit Administration, Federal Aviation Administration, and Federal Highway Administration, to make responsible decisions concerning an applicant's economic disadvantage under the rule. All persons who claim to own and control a firm applying for DBE or ACDBE certification and whose ownership and control are relied upon for the certification will complete the form. Once a firm is certified as a DBE or ACDBE, these same owners will complete the form each year.

Estimated Average Burden per Response:
8 hours for the initial statement; 4 hours for future updates.

Number of Respondents:
9000-9500 applicants each year. Assuming approximately 30,000 certified firms nationally, there would be that number of updates annually.

Estimated Burden:
72-76 thousand hours per year for applications; 120,000 hours for annual updates. Total estimated burden would be 192-196 thousand hours per year.

3. Material With Annual Affidavits of No Change

Each year, a certified firm must submit an affidavit of no change. In addition to an updated PNW statement (see above), the affidavit must be accompanied by (1) A record from each individual claiming disadvantaged status regarding the transfer of assets for less than fair market value to any immediate family member, or to a trust any beneficiary of which is an immediate family member, within two years of the date of the annual review; (2) a record of all payments, compensation, and distributions (including loans, advances, salaries and dividends) made by the DBE firm to each of its owners, officers or directors, or to any person or entity affiliated with such individuals; and (3) the owner and the firm's (including affiliates) most recent completed IRS tax return, IRS Form 4506 (Request for Copy or Transcript of Tax Return). Collection and submission of these items during the annual affidavit is estimated to take approximately 1.5 hours (realizing that not all firms will have to submit items (1) and (2), and that item 3 will already have been prepared for IRS purposes.

Respondents:
The approximately 30,000 certified DBE firms.

Burden:
Approximately 45, 000 hours per year.

4. Reporting Requirement for Percentages of DBEs in Various Categories

The NPRM would implement a statutory requirement calling on UCPs to report the percentages of white women, minority men, and minority women who control DBE firms. To carry out this requirement, the 52 UCPs would read their existing Directories, noting which firms fell into each of these three categories. The UCPs would then calculate the percentages and email the results off to the Departmental Office of Civil Rights. It would take each UCP an estimated three hours to comb through their Directories, and another three minutes to operate their calculators to do the percentages and send an email.

Respondents:
52.

Burden:
Approximately 158.5 hours.

List of Subjects in 49 CFR Part 26

Administrative practice and procedure, Airports, Civil Rights, Government contracts, Grant-programs—transportation; Mass transportation, Minority Businesses, Reporting and record keeping requirements.

Issued this 22nd day of August 2012, at Washington, DC.
Robert S. Rivkin,
General Counsel.

For the reasons set forth in the preamble, the Department of Transportation proposes to amend 49 CFR part 26 as follows:

PART 26—[AMENDED]

1. The authority citation for 49 CFR part 26 continues to read as follows:

Authority:

23 U.S.C. 304 and 324; 42 U.S.C. 2000d,
et seq.
; 49 U.S.C. 47107, 47113, 47123; Sec. 1101(b), Pub. L. 105-178, 112 Stat. 107, 113.

2. In § 26.1, redesignate paragraphs (f) and (g) as paragraphs (g) and (h), and add new paragraph (f),to read as follows:

§ 26.1
What are the objectives of this part?

(f) To promote the use of DBEs in all types of Federally-assisted contracts and procurement activities conducted by recipients.

3. Amend § 26.5 by removing the definition “DOT/SBA Memorandum of Understanding or MOU” and by adding the following definitions “Assets”, “Business, business concern or business enterprise”, “Contingent Liability”, “Days”, “Immediate family member”, “Liabilities”, “Principal place of business”, “Transit vehicle manufacturer (TVM)”, in the proper alphabetical order to read as follows:

§ 26.5
What do the terms used in this part mean?

Assets
mean all the property of a person available for paying debts or for distribution, including one's respective share of jointly held assets. This includes, but is not limited to, cash on hand and in banks, savings accounts, IRA or other retirement accounts, accounts receivable, life insurance, stocks and bonds, real estate, and personal property.

Business, business concern or business enterprise
means an entity organized for profit with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the United States economy through payment of

taxes or use of American products, materials, or labor.

Contingent Liability
means a liability that depends on the occurrence of a future and uncertain event. This includes, but is not limited to, guaranty for debts owed by the applicant concern, legal claims and judgments, and provisions for federal income tax.

Days
mean calendar days. In computing any period of time described in this part, the day from which the period begins to run is not counted, and when the last day of the period is a Saturday, Sunday, or Federal holiday, the period extends to the next day that is not a Saturday, Sunday, or Federal holiday. Similarly, in circumstances where the recipient's offices are closed for all or part of the last day, the period extends to the next day on which the agency is open.

Immediate family member
means father, mother, husband, wife, son, daughter, brother, sister, grandfather, grandmother, father-in-law, and mother-in-law.

Liabilities
mean financial or pecuniary obligations. This includes, but is not limited to, accounts payable, notes payable to bank or others, installment accounts, mortgages on real estate, and unpaid taxes.

Principal place of business
means the business location where the individuals who manage the applicant's day-to-day operations spend most working hours. If the offices from which management is directed and where the business records are kept are in different locations, the recipient will determine the principal place of business.

Transit vehicle manufacturer (TVM)
means any manufacturer whose primary business purpose is to manufacture vehicles specifically built for public mass transportation. Such vehicles include, but are not limited to: buses, rail cars, trolleys, ferries, and vehicles manufactured specifically for paratransit purposes. Businesses that manufacture, mass-produce, or distribute vehicles solely for personal use and for sale “off the lot” are not considered transit vehicle manufacturers.

4. In § 26.5, revise the definitions of “Primary industry classification” and “Socially and economically disadvantaged individual” to read as follows:

§ 26.5
What do the terms used in this part mean?

Primary industry classification
means the most current North American Industrial Classification System (NAICS) designation which best describes the primary business of a firm. The NAICS is described in the North American Industry Classification Manual—United States, which is available from the National Technical Information Service, 5301 Shawnee Road, Alexandria, VA, 22312 by calling 1-800-553-6847; TDD: (703) 487-4639, on the Internet at:
http://www.ntis.gov/products/naics.aspx.
or through the U.S. Census Bureau
http://www.census.gov/eos/www/naics/
.

Socially and economically disadvantaged individual
means 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 his or her identity as a members of groups and without regard to his or her individual qualities. The social disadvantage must stem from circumstances beyond the individual's control.

(1) Any individual who a recipient finds to be a socially and economically disadvantaged individual on a case-by-case basis. An individual must demonstrate that he or she has held himself or herself out, as a member of a designated group if you require it.

(2) Any individual in the following groups, members of which are rebuttably presumed to be socially and economically disadvantaged:

(i) “Black Americans,” which includes persons having origins in any of the Black racial groups of Africa;

(ii) “Hispanic Americans,” which includes persons of Mexican, Puerto Rican, Cuban, Dominican, Central or South American, or other Spanish or Portuguese culture or origin, regardless of race;

(iii) “Native Americans,” which includes persons who are enrolled members of a federally or state recognized Indian tribe, Alaska Natives, or Native Hawaiians;

(iv) “Asian-Pacific Americans,” which includes persons whose origins are from Japan, China, Taiwan, Korea, Burma (Myanmar), Vietnam, Laos, Cambodia (Kampuchea), Thailand, Malaysia, Indonesia, the Philippines, Brunei, Samoa, Guam, the U.S. Trust Territories of the Pacific Islands (Republic of Palau), Republic of the Northern M

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2012-21231. Public record. Not legal advice.