The SBA’s regulations regarding affiliation between companies controlled by close family members would be clarified under a proposed rule introduced on December 29.

Under the SBA’s current affiliation regulations, companies controlled by family members may be presumed to be affiliated, but the regulation leaves it to the SBA Office of Hearings and Appeals to determine how close the family relationship must be for the presumption to apply.  The proposed rule would clarify exactly when the presumption applies.

The SBA’s affiliation regulations currently include a rule regarding affiliation based on an “identity of interest.”  In its current form, 13 C.F.R. § 121.103(f), states:

Affiliation may arise among two or more persons with an identity of interest. Individuals or firms that have identical or substantially identical business or economic interests (such as family members, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships) may be treated as one party with such interests aggregated. Where SBA determines that such interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.

The regulation does not specify which “family members” are subject to the presumption of affiliation.  In its size appeal decisions, OHA often has held that the presumption of affiliation applies to companies controlled by spouses, parents, children, and/or siblings.  OHA precedent has been less definitive when it comes to grandparents, grandchildren, and cousins.

The proposed regulation would specify exactly when the presumption applies.  Under the SBA’s proposal, the revised regulation would state, in relevant part:

Firms owned or controlled by married couples, parties to a civil union, parents and children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns. Other types of familial relationships are not grounds for affiliation on family relationships.

The proposed rule includes a presumption of affiliation for companies controlled by parties to a civil union.  To my knowledge, OHA has never addressed this matter, although I suspect that OHA would have applied the presumption in such a case.  The proposed regulation codifies longstanding OHA precedent regarding spouses, parents and children, and siblings, and clarifies that the presumption only applies if the companies conduct business with each other.  The proposed regulation also definitively states that the presumption does not apply to any other family relationships.

In my mind, the proposed rule would be very helpful to small contractors, who cannot reasonably be expected to research OHA precedent to determine whether a presumption of affiliation exists.  The clarification should help small contractors better understand (and avoid) affiliation problems based on family relationships.

It is important to note that this is merely a proposed rule.  The proposed rule is not yet effective, and the final rule may vary from this proposal.

The SBA is accepting public comments on the proposed rule on or before February 27, 2015.  Instructions for submitting comments can be found in the proposed rule itself.  After the SBA receives comments, it will publish a final version of the rule, which will ultimately have the force of law.