VA Proposes Expanded “Good Character” SDVOSB Exclusions

The VA has proposed expanding its definition of the “good character” required to own or control an SDVOSB or VOSB.

The VA’s proposed rule would exclude many people convicted of felonies (including felonies unrelated to business integrity), which may raise questions about the rule’s fairness.  And I have to wonder–is the VA’s proposal consistent with the Congressional directive requiring the VA to use the SBA’s SDVOSB eligibility rules?

As I wrote earlier this week, the VA recently issued a proposed rule to eliminate its SDVOSB and VOSB ownership and control rules.  Instead, as directed by Congress in the 2017 National Defense Authorization Act, the VA would defer to the SBA’s regulatory criteria when it comes to small business size, ownership, and control.

Well, mostly.

The VA’s proposed rule doesn’t seem to eliminate every SDVOSB and VOSB eligibility requirement.  Instead, when it comes to two unique VA requirements, regarding “good character” and federal financial obligations, the VA’s proposed rule would actually expand the list of veterans ineligible for VA SDVOSB/VOSB verification, even though many of those same veterans would be able to self-certify their SDVOSBs under the SBA’s rules.  Today, I want to focus on the good character piece of the proposal.

Under current VA law, SDVOSB and VOSB owners must have good character.  The regulation, 38 C.F.R. 74.2(b), says:

(b) Good character. Veterans, service-disabled veterans, and surviving spouses with ownership interests in VetBiz verified businesses must have good character. Debarred or suspended concerns or concerns owned or controlled by debarred or suspended persons are ineligible for VetBiz VIP Verification.

Clearly, the existing rule prohibits debarred or suspended individuals from owning or controlling verified SDVOSBs and VOSBs.  Fair enough.  The existing rule doesn’t provide any additional guidance on what “good character” means.

The VA’s proposed rule, though, would significantly expand the current definition of good character.  Here’s what the VA proposes:

(b) Good character and exclusions in System for Award Management (SAM). Individuals having an ownership or control interest in verified businesses must have good character. Debarred or suspended concerns or concerns owned or controlled by debarred or suspended persons are ineligible for VIP Verification. Concerns owned or controlled by a person(s) who is currently incarcerated, or on parole or probation (pursuant to a pre-trial diversion or following conviction for a felony or any crime involving business integrity) are ineligible for VIP Verification. Concerns owned or controlled by a person(s) who is formally convicted of a crime set forth in 48 C.F.R. 9.406-2(b)(3) are ineligible for VIP Verification during the pendency of any subsequent legal proceedings. If, after verifying a participant’s eligibility, the person(s) controlling the participant is found to lack good character, CVE will immediately remove the participant from the VIP database, notwithstanding the provisions of § 74.22 of this part.

It’s worth noting that the VA’s proposal goes beyond the FAR’s responsibility-related certifications.  FAR 52.209-5 (Certification Regarding Responsibility Matters) and FAR 52.209-7 (Information Regarding Responsibility Matters) don’t require a contractor’s “principal” to disclose all crimes, but rather those directly related to government contracts, or those that are directly relevant to business integrity–such as embezzlement, theft, forgery, bribery, and tax evasion.  In contrast, the VA’s proposal would seem to apply to all felonies, regardless of the nature or circumstances.

The SBA also has a “good character” component in the 8(a) Program.  But the SBA doesn’t apply a one-size-fits-all test.  Instead, the SBA’s regulations say that the SBA will “consider the nature and severity of the violation in making an eligibility determination.”  The VA’s proposal doesn’t seem to allow for consideration of the nature and severity of the violation (other than considering whether it was a felony).

Speaking of the SBA, I also wonder whether the VA’s proposal complies with the 2017 NDAA, which says that the VA must apply the SBA’s SDVOSB/VOSB eligibility rules.  Specifically, the 2017 NDAA says that the VA must verify SDVOSBs and VOSBs using Sections 632(q)(2) and (3) of the Small Business Act, which don’t say a darn thing about good character (and still won’t following the ultimate insertion of the 2017 NDAA’s amended language into the statute).  The 2017 NDAA directs the VA to apply the SBA’s regulations implementing the Small Business Act, and then says that the VA “may not issue regulations related to the status of a concern as a small business concern and the ownership and control of such small business concern.”

Now, it’s true that this prohibition isn’t supposed to take effect until the VA and SBA issue their consolidated regulation, which of course hasn’t happened yet.  But as I read the VA’s proposal, it intends its new good character restriction to apply after the joint rule is issued.  After all, the main point of the VA’s proposed rule is to pave the way for the consolidation of the two programs’ eligibility requirements by deleting most of the VA’s language relating to SDVOSB ownership and control.  It appears, then, that the VA doesn’t think that its new good character proposal is contrary to the Small Business Act’s definitions or the restrictions placed on the VA in the 2017 NDAA.

Hmm.

I’m curious to see how the VA supports its restriction in light of the Small Business Act’s definitions of SDVOSB and VOSB.  Beyond that, I’ll be interested to see how the VA explains its power to issue the regulation.  In its decisions, the Supreme Court has written that “the key phrase ‘related to’ expresses a ‘broad pre-emptive purpose.'”  Here, the VA is proposing a rule to restrict who can own or control a verified SDVOSB or VOSB.  From my vantage point, it certainly seems like the VA is proposing a rule “related to . . . the ownership and control” of SDVOSBs and VOSBs, which would be contrary to the “broad pre-emptive purpose” set forth in the 2017 NDAA.

Congress’s goal was to require the VA and SBA to apply uniform, government-wide SDVOSB/VOSB eligibility criteria.  (I’m not making a wild guess here–Section 1832 of the 2017 NDAA is titled “Uniformity in Service-Disabled Veteran Definitions.”)  But if the VA proposal becomes law, we could be right back in a world of “separate programs, separate requirements.”  Under the VA’s proposal, a veteran with (for example) a felony DUI on his or her record couldn’t own or control a VA-verified SDVOSB.  However, because the current SBA SDVOSB rules don’t impose a good character requirement, that same individual would be able to self-certify the company as SDVOSB for non-VA purposes.  Such a result doesn’t seem to reflect Congress’s intent.

No one wants unscrupulous felons to take advantage of government contracting set-aside programs.  That said, it’s an open question in my mind whether the VA has legal authority to adopt the restriction it’s proposing.  Moving forward, I hope the VA takes a close look at whether its proposed rule complies with the 2017 NDAA.  And if it decides that the proposal is compliant, I hope the VA will consider a more nuanced, case-by-case approach to evaluating good character, like the one that’s been used in the 8(a) program for many years.