The VA has formally proposed to eliminate its SDVOSB and VOSB ownership and control regulations.

Once the proposed change is finalized, the VA will use the SBA’s regulations to evaluate SDVOSB and VOSB eligibility, as required by the 2017 National Defense Authorization Act.

As regular SmallGovCon readers know, the differences between the government’s two SDVOSB programs have caused major headaches for veterans.  As demonstrated in the recent Veterans Contracting Group saga, the SBA and VA have different SDVOSB eligibility requirements.  That means, as was the case in Veterans Contracting Group, that a company can be a valid SDVOSB for VA contracts but not for non-VA contracts, or vice versa.

In 2016, Congress addressed the problem.  As part of the 2017 NDAA, Congress directed the VA to verify SDVOSBs and VOSBs using the SBA’s regulatory definitions regarding small business status, ownership, and control.  Congress told the SBA and VA to work together to develop joint regulations governing SDVOSB and VOSB eligibility.  However, a proposed consolidated regulation has yet to be published.

Now the VA has proposed to eliminate its separate SDVOSB and VOSB ownership and control requirements, which are found primarily in 38 C.F.R. 74.1,  38 C.F.R. 74.3 and 38 C.F.R. 74.4.  In a proposed rule published in the Federal Register last week, the VA notes that “regulations relating to and clarifying ownership and control are no longer the responsibility of VA.”  The proposed rule wouldn’t entirely repeal the VA’s existing regulations, but, with respect to the eligibility requirements for size, ownership and control, those regulations would simply refer to the SBA’s rules in 13 C.F.R. part 125.

The VA is accepting public comments on the proposal until March 12, 2018.  The VA doesn’t say when it expects the rule to become final, but if it follows the ordinary rulemaking process, it will likely be summer at the very earliest.

My biggest concern is whether the VA intends to finalize this rule before the consolidated SBA/VA eligibility rules take effect.  If that happens, verified SDVOSBs and VOSBs will be stuck with the current SBA ownership and control regulations.  And, as we recently saw in Veterans Contracting Group, those rules aren’t always veteran-friendly.

In Veterans Contracting Group, a VA-verified SDVOSB wasn’t eligible for a non-VA contract because the company’s governing documents allowed the company to repurchase the veteran’s shares in the event of the veteran’s death, incapacity, or insolvency.  This provision was just fine with the VA, which verified the company.  But the SBA found that this restriction interfered with “unconditional ownership” under the SBA’s separate SDVOSB regulations.  Although the Court of Federal Claims memorably called the SBA’s harsh interpretation “draconian and perverse,” the Court held that the SBA was within its legal rights to impose such strict eligibility requirements.

If the VA’s rule “goes final” before a consolidated SBA/VA rule takes effect, every firm in the VA’s VIP database will be subjected to these strict SBA requirements, even when bidding on VA contracts.  Undoubtedly, many companies with provisions like those at issue in Veterans Contracting Group have been verified by the VA and rely on their verifications to bid VA work.  These companies could be vulnerable to successful SDVOSB status protests if they don’t update their governing documents to reflect the SBA’s stricter rules.

Of course, there’s no guarantee that the consolidated SBA/VA rule will fix the problem.  The consolidated rule (which, again, has yet to be proposed) could be every bit as strict as the current SBA interpretation of “unconditional ownership.”  It’s anybody’s guess what the consolidated rule ultimately will say.  But if the VA eliminates its ownership and control requirements before the consolidated rule is finalized, no guesswork is needed: a lot of verified SDVOSBs and VOSBs will suddenly become ineligible for VA set-aside contracts.

Stay tuned.

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