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112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     112-724

======================================================================



 
                 SMALL BUSINESS PROTECTION ACT OF 2012

                                _______
                                

 December 21, 2012.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

     Mr. Graves of Missouri, from the Committee on Small Business, 
                        submitted the following

                              R E P O R T

                        [To accompany H.R. 3987]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Small Business, to whom was referred the 
bill (H.R. 3987) to amend the Small Business Act with respect 
to small business concern size standards, and for other 
purposes, having considered the same, report favorably thereon 
with amendment and recommend that the bill, as amended, do 
pass.

                                CONTENTS

                                                                   Page
   I. Amendment.......................................................1
  II. Purpose of the Bill and Summary.................................2
 III. Background and the Need for Legislation.........................2
  IV. Hearings........................................................4
   V. Committee Consideration.........................................5
  VI. Committee Votes.................................................5
 VII. Section-by-Section Analysis of H.R. 3987........................5
VIII. Congressional Budget Cost Estimate..............................6
  IX. Unfunded Mandates...............................................7
   X. New Budget Authority, Entitlement Authority, and Tax Expenditure7
  XI. Oversight Findings..............................................8
 XII. Statement of Constitutional Authority...........................8
XIII. Congressional Accountability Act................................8
 XIV. Federal Advisory Committee Statement............................8
  XV. Statement of No Earmarks........................................8
 XVI. Performance Goals and Objectives................................8
XVII. Changes in Existing Law Made by the Bill, as Reported...........8

                              I. Amendment

    The amendment is as follows:
    The amendments (stated in terms of the page and line 
numbers of the introduced bill) are as follows:

  Page 1, strike lines 9 through 10 and insert the following:

          ``(1) by striking `Sec. 3.' and inserting the 
        following:

```SEC. 3. DEFINITIONS.'; AND'''.

  Page 3, line 1, strike ``In conducting'' and all that follows 
through ``the following'' on line 4, and insert the following: 
``In conducting rulemaking to revise, modify or establish size 
standards pursuant to this section, the Administrator shall 
consider, and address, and make publicly available as part of 
the notice of proposed rule making and notice of final rule 
each of the following''.

  Page 3, line 20, strike the closing quotation marks and the 
period and insert the following:

          ```(8) Number of size standards.--The Administrator 
        shall not limit the number of size standards it creates 
        pursuant to paragraph (2), and shall assign the 
        appropriate size standard to each North American 
        Industrial Classification System Code.'.''.

                      II. Purpose and Bill Summary

    The purpose of H.R. 3987, the ``Small Business Protection 
Act of 2012,'' is to amend the Small Business Act (the Act)\1\ 
to impose additional constraints on the ability of the 
Administrator of the Small Business Administration (SBA) to 
create size standards for small business concerns. 
Specifically, the legislation requires the Administrator to 
justify the rationale for adopting a common size standard for a 
group of industries, requires such size standards to be adopted 
after notice and comment rulemaking, and prohibits the 
Administrator from artificially limiting the number of size 
standards needed to define a small business concern for each of 
the industries enumerated in the North American Industrial 
Classification System (NAICS).
---------------------------------------------------------------------------
    \1\Originally, title II of the Act of July 30, 1953, c. 282, 67 
Stat. 232 was designated as the Small Business Act of 1953. A plethora 
of amendments in subsequent Congresses led to a rewrite in 1958. Pub. 
L. No. 85-536, Sec. 1, 72m Stat, 384 (1958). The Act is codified at 15 
U.S.C. Sec. Sec. 631-657q.
---------------------------------------------------------------------------

                       III. Need for Legislation

    Under the Small Business Jobs Act of 2010 (Jobs Act), SBA 
was tasked with reviewing all size standards for each NAICS 
code set forth in the agency's regulations, 13 C.F.R. 
Sec. 121.201, within the next 5 years.\2\ Specifically, a third 
of the standards must be reviewed every 18 months. When 
reviewing and setting size standards, Section 3(a)(1) of the 
Small Business Act provides, in pertinent part:

    \2\Small Business Jobs Act of 2010, Pub. L. No. 111-240, Sec. 1344, 
124 Stat. 2504, 2545-46 (2010).
---------------------------------------------------------------------------
          [a] small business concern . . . shall be deemed to 
        be one that is independently owned and operated and 
        which is not dominant in its field of operation.\3\
---------------------------------------------------------------------------
    \3\15 U.S.C. Sec. 632(a)(1).

    The Act does not define the terms ``independently owned and 
operated'' or ``dominant in its field of operation.'' Instead, 
---------------------------------------------------------------------------
the Administrator is authorized to:

          specify detailed definitions or standards by which a 
        business concern may be determined to be small for 
        purposes of this Act or any other Act.\4\
---------------------------------------------------------------------------
    \4\15 U.S.C. Sec. 632(a)(2)(A).
---------------------------------------------------------------------------
    The Administrator is authorized to consider number of 
employees, dollar volume of business,\5\ net worth,\6\ net 
income, other factors, or any combination of those factors. In 
short, Congress has granted the Administrator substantial 
discretion in the factors that will be utilized in calculating 
the size of a small business. The SBA's discretion is tempered 
by the fact that any size standard determined by the factors 
set forth in 3(a)(2) of the Small Business Act must meet the 
overarching principles--that the business must be independently 
owned and operated and not dominant in its field.
---------------------------------------------------------------------------
    \5\Current SBA size standards use gross revenue as a measure of 
dollar volume. Nothing in the Act requires reliance on dollar volume 
and other measures could be used.
    \6\The net worth standard is used, for among other purposes, to 
determine eligibility for investments made by small business investment 
companies, loans made pursuant to Title V of the Small Business 
Investment Act of 1958, and for participation in the program 
established by 8(a) of the Small Business Act.
---------------------------------------------------------------------------
    The SBA took the authority granted by Congress and 
developed size standards for individual categories of small 
businesses. Originally, the size standards were developed based 
on four-digit classifications of each type of business using 
Standard Industrial Classifications or SIC codes. When the 
Federal government moved to the more exact NAICS for data 
collection, the SBA modified its size standards to fit the new 
NAICS codes.
    Historically, the SBA utilized two distinct standards for 
determining whether a business was not dominant in its field. 
Manufacturers, distributors, and certain utilities were 
measured by the number of employees. All other businesses, both 
services and retail establishments, were calculated by the 
gross revenue of the firm. The two standards never overlapped. 
If the SBA determined that a particular industry was measured 
by gross revenue, the SBA also did not impose an employee 
threshold. Thus, the SBA created a bright line standard in 
which a business either was required to enumerate employees or 
tabulate gross revenue.
    SBA formalized its process for establishing size standards 
when it published a white paper entitled ``Size Standards 
Methodology'' detailing the five primary industry factors 
considered when establishing size standards.\7\ The five factor 
analysis begins by examining four economic characteristics of 
the industry: average firm size, startup costs and entry 
barriers, industry competition, and distribution of firms by 
size.\8\ SBA's fifth factor examines the impact of an existing 
size standard as well as the potential impact of a size 
standard revision on SBA's Federal contract assistance to small 
businesses. After considering the primary evaluation factors, 
SBA then will assess any industry specific factors, such as 
technological changes and industry growth trends. This 
methodology supports the Committee's longstanding view of how 
size standards should be developed: granular analysis of 
specific industry characteristics.
---------------------------------------------------------------------------
    \7\74 Fed. Reg. 53940 (October 21, 2009).
    \8\13 C.F.R Sec. 121.102(a))
---------------------------------------------------------------------------
    In some cases where industries are closely related, SBA 
will consider a common size standard, even if the underlying 
analysis would otherwise support different size standards. This 
will most often occur when many of the same businesses operate 
in the same two or more industries, so SBA believes that the 
common size standard will better reflect the industry 
marketplace. Data for this analysis is drawn from the Economic 
Census, and County Business Patterns, each published by the 
United States Census Bureau, as well as the United States 
Bureau of Labor Statistics' Quarterly Census of Employment and 
Wages and Business Employment Dynamics, the Risk Management 
Association's Annual Statement Studies, the Federal Procurement 
Data System, and SBA's own lending data. After the analysis is 
complete, SBA then proposes what it believes to be the correct 
size standard. Final size standards are selected after input 
from the public through notice and comment rulemaking.
    Currently, there are roughly 1100 industrial 
classifications for which the SBA has implemented 38 size 
separate size standards. These standards are based on either 
the number of employees, gross revenue, or other factors\9\ 
that the SBA believes reflect the correct size of the business. 
However, to simplify the size standards, SBA has proposed 
selecting future size standards from a limited number of fixed 
size standards. The eight revenue based standards will be $5.0 
million, $7.0 million, $10.0 million, $14.0 million, $19.0 
million, $25.5 million, $30.0 million, and $35.5 million, and 
the eight employee based standards will be 50 employees, 100 
employees, 150 employees, 200 employees, 250 employees, 500 
employees, 750 employees, and 1,000 employees. The SBA will 
transition to these size standards over the course of five 
years, as it conducts a systematic review of all its size 
standards required by Sec. 1344 of the Jobs Act.
---------------------------------------------------------------------------
    \9\For example, asset size is used to determine whether a bank is 
small.
---------------------------------------------------------------------------
    As SBA has begun implementing this approach, several 
industries have expressed concerns regarding the impact this 
will have and SBA's failure to properly follow its own 
methodology. Due to this, H.R. 3897 prevents the SBA from 
creating common size standards or condensing the roughly 1100 
industries into 16 size standards for the sake of convenience. 
Instead, this legislation will require the SBA to ensure that 
the size standards accurately and legitimately represent small 
businesses. Additionally, this legislation enhances small 
businesses' awareness of the size standard process during 
proposed rulemaking which is essential as the SBA continues 
reviewing its size standards. To ensure complete transparency, 
this bill requires all information regarding analysis and 
rationale to be made publicly available.

                              IV. Hearings

    The procedures used by the Administrator to create size 
standards was fully ventilated in a hearing conducted by the 
Subcommittee on Economic Growth, Capital Access and Tax 
entitled ``Professional Services: Proposed Changes to the Small 
Business Size Standards'' on May 5, 2011. This hearing reviewed 
the Small Business Administration (SBA) proposed rule 
increasing the small business size standards for 35 industries 
and one sub-industry. At the hearing, all witnesses agreed 
growth in the size standards is necessary to reflect economic 
conditions, but each disagreed with the changes proposed by 
SBA.

                       V. Committee Consideration

    The Committee on Small Business met in open session, with a 
quorum being present, on March 22, 2012, and ordered H.R. 3987 
reported, as amended, to the House by a voice vote at 10:24 am. 
During the markup, one amendment was offered and adopted. 
Disposition of the amendment is addressed below.
    Amendment Number One filed by Mr. Walsh (R-IL) clarifies 
that SBA must make the basis of its rulemakings publicly 
available, and prohibits SBA from artificially limiting the 
number of size standards. Amendment Number One was adopted by a 
voice vote at 10:24 am.

                          VI. Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the recorded 
votes on the motion to report the legislation and amendments 
thereto. No recorded votes were taken in consideration of H.R. 
3987.

        Amendment to H.R. 3987 Offered by Mr. Walsh of Illinois

    Beginning on page 3, line 1, strike ``In conducting'' and 
all that follows through ``the following'' on line 4, and 
insert the following: ``In conducting rulemaking to revise, 
modify or establish size standards pursuant to this section, 
the Administrator shall consider, and address, and make 
publicly available as part of the notice of proposed rule 
making and notice of final rule each of the following''.
    Page 3, line 20, insert before the period at the end the 
following:
          ``(8) Number of size standards.--The Administrator 
        shall not limit the number of size standards it creates 
        pursuant to paragraph (2), and shall assign the 
        appropriate size standard to each North American 
        Industrial Classification System Code.''.

             VII. Section-by-Section Analysis of H.R. 3987


          SECTION-BY-SECTION ANALYSIS OF H.R. 3987 AS AMENDED

Section 1--Short title

    This section provides that the bill may be cited as the 
``Small Business Protection Act of 2012.''

Section 2--Small business concern size standards

    This section amends section 3 of the Small Business Act to 
require that the Administrator of the SBA provide and make 
publicly available justifications prior to grouping NAICS codes 
into a single size standard in order to demonstrate that the 
size standards are appropriate for each industry placed in the 
grouping. This section also specifies items that the 
Administrator must consider and address prior to altering or 
establishing size standards. These items include a detailed 
description of the industry, an analysis of the competitive 
environment for the industry, the approach and source of all 
data used by the Administrator to develop the standard, and 
anticipated effects of the proposed rule on the industry. 
Further, this section indicates that the number of size 
standards should not be limited and rather that all NAICS codes 
should be given an appropriate size standard.

            VIII. Congressional Budget Office Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                       Washington, DC, May 8, 2012.
Hon. Sam Graves,
Chairman, Committee on Small Business,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3987, the Small 
Business Protection Act of 2012.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 3987--Small Business Protection Act of 2012

    Summary: H.R. 3987 would limit the authority of the Small 
Business Administration (SBA) to set certain size standards for 
the purpose of establishing eligibility for various federal 
assistance programs. The bill also would broaden the amount of 
information provided to the public when the SBA proposes or 
modifies a size standard.
    Based on information from the SBA, CBO estimates that 
implementing H.R. 3987 would cost $12 million over the 2013-
2017 period, assuming appropriation of the necessary amounts. 
CBO estimates that enacting H.R. 3987 would not affect direct 
spending or revenues; therefore, pay-as-you-go procedures do 
not apply.
    H.R. 3987 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 3987 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credit).

----------------------------------------------------------------------------------------------------------------
                                                                 By fiscal year, in millions of dollars--
                                                         -------------------------------------------------------
                                                            2013     2014     2015     2016     2017   2013-2017
----------------------------------------------------------------------------------------------------------------
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Estimated Authorization Level...........................        1        3        3        3        3        13
Estimated Outlays.......................................        1        2        3        3        3        12
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: Under current law, the SBA sets out 
specific criteria, referred to as size standards, that a 
business must meet to be considered a small business that is 
eligible for certain federal assistance programs. The agency 
has established 41 different size standards covering more than 
1,100 industries classified in the North American Industry 
Classification System (NAICS).
    H.R. 3987 would limit the SBA's authority to set size 
standards for groups of industries unless the agency can 
justify that the size standard is appropriate for every 
individual industry included in the grouping. The bill also 
would require the SBA to make certain information available, 
including an analysis of the competitive environment and the 
effect of the standard on the industry in question when 
proposing or modifying a size standard.
    The SBA currently has a staff of four to review and update 
the 41 established size standards. Based on information from 
the SBA, CBO expects that the agency would need to add 16 staff 
positions over time to develop size standards for more than 
1,100 individual industries in the NAICS or to provide 
justification for size standards that would apply to groups of 
industries. CBO estimates that implementing H.R. 3987 would 
cost $12 million over the 2013-2017 period, assuming 
appropriation of the necessary amounts.
    Pay-As-You-Go considerations: None.
    Intergovernmental and Private-sector impact: H.R. 3987 
contains no intergovernmental or private-sector mandates as 
defined in the UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Federal Costs: Susan Willie; Impact 
on State, Local, and Tribal Governments: Elizabeth Cove 
Delisle; Impact on the Private Sector: Vi Nguyen.
    Estimate approved by: Theresa Gullo; Deputy Assistant 
Director for Budget Analysis.

                         IX. Unfunded Mandates

    H.R. 3987 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act, Pub. 
L. No. 104-4, and would impose no costs on state, local or 
tribal governments.

  X. New Budget Authority, Entitlement Authority and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House, the Committee provides the following opinion and 
estimate with respect to new budget authority, entitlement 
authority and tax expenditures.
    The Committee does adopt as its own the estimate of new 
budget authority contained in the cost estimate prepared by the 
Director of the Congressional Budget Office pursuant to 
Sec. 402 of the Congressional Budget Act of 1974. While the 
Congressional Budget Office estimates a cost of $12 million 
over 5 years to implement H.R. 3987, the Committee estimates 
that SBA's current costs will decrease. Under SBA's current 
size standard process, SBA already calculates all the 
information required under this provision. SBA then takes that 
information, applies filters to force the size standard into 
one of SBA's preapproved size standards, and then is required 
to undertake calculations to blend related industries into a 
single size standard. It is the height of illogic to assume 
that a process the SBA currently undertakes to develop 
individual size standards will cost the agency an additional 
$2.5 million per year. H.R. 3987 will no longer require SBA to 
undertake these additional steps, which will therefore save SBA 
resources. Furthermore, H.R. 3987's requirement that SBA 
publish justifications for its size standards as part of the 
rulemaking process will not add any additional costs, as SBA 
already publishes these justifications under its current 
process and is required to do so pursuant to federal law.

                         XI. Oversight Findings

    In accordance with clause (2)(b)(1) of rule X of the Rules 
of the House, the oversight findings and recommendations of the 
Committee on Small Business with respect to the subject matter 
contained in H.R. 3987 are incorporated into the descriptive 
portions of this report.

               XII. Statement of Constitutional Authority

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
authority for this legislation in Art. I, Sec. 8, cls. 1, 3, 
and 18 and Art. IV, Sec. 3, cl. 2 of the Constitution of the 
United States.

                 XIII. Congressional Accountability Act

          H.R. 3987 does not relate to the terms and conditions 
        of employment or access to public services or 
        accommodations within the meaning of Sec. 102(b)(3) of 
        Pub. L. No. 104-1.

             XIV. Federal Advisory Committee Act Statement

    H.R. 3987 does not establish or authorize the establishment 
of any new advisory committees as that term is defined in the 
Federal Advisory Committee Act, 5 U.S.C. App. 2.

                      XV. Statement of No Earmarks

    Pursuant to clause 9 of rule XXI, H.R. 3987 does not 
contain any congressional earmarks, limited tax benefits or 
limited tariff benefits as defined in subsections (d), (e) or 
(f) of clause 9 of rule XXI of the Rules of the House.

                 XVI. Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House, the Committee establishes the following performance-
related goals and objectives for this legislation:
          H.R. 3987 includes provisions to impose additional 
        constraints on the ability of the Administrator of the 
        Small Business Administration to create and revise size 
        standards for small business concerns to ensure 
        transparency and accuracy.

      XVII. Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                           SMALL BUSINESS ACT




           *       *       *       *       *       *       *
  [Sec. 3. (a)(1) For the purposes]

SEC. 3. DEFINITIONS.

  (a) Small Business Concerns.--
          (1) In general.--For the purposes of this Act, a 
        small-business concern, including but not limited to 
        enterprises that are engaged in the business of 
        production of food and fiber, ranching and raising of 
        livestock, aquaculture, and all other farming and 
        agricultural related industries, shall be deemed to be 
        one which is independently owned and operated and which 
        is not dominant in its field of operation: Provided, 
        That notwithstanding any other provision of law, an 
        agricultural enterprise shall be deemed to be a small 
        business concern if it (including its affiliates) has 
        annual receipts not in excess of $750,000.

           *       *       *       *       *       *       *

  [(3) When establishing]
          (3) Variation by industry and consideration of other 
        factors.--When establishing or approving any size 
        standard pursuant to paragraph (2), the Administrator 
        shall ensure that the size standard varies from 
        industry to industry to the extent necessary to reflect 
        the differing characteristics of the various industries 
        and consider other factors deemed to be relevant by the 
        Administrator.

           *       *       *       *       *       *       *

          (5) Alternative size standard.--
                  (A) In general.--The Administrator shall 
                establish an alternative size standard for 
                applicants for business loans under section 
                7(a) and applicants for development company 
                loans under title V of the Small Business 
                Investment Act of 1958 (15 U.S.C. 695 et seq.), 
                that uses maximum tangible net worth and 
                average net income as an alternative to the use 
                of industry standards.
                  (B) Interim rule.--Until the date on which 
                the alternative size standard established under 
                subparagraph (A) is in effect, an applicant for 
                a business loan under section 7(a) or an 
                applicant for a development company loan under 
                title V of the Small Business Investment Act of 
                1958 may be eligible for such a loan if--
                          (i) the maximum tangible net worth of 
                        the applicant is not more than 
                        $15,000,000; and
                          (ii) the average net income after 
                        Federal income taxes (excluding any 
                        carry-over losses) of the applicant for 
                        the 2 full fiscal years before the date 
                        of the application is not more than 
                        $5,000,000.
          (6) Common size standards.--In carrying out this 
        subsection, the Administrator may establish or approve 
        a single size standard for a grouping of four digit 
        North American Industrial Classification codes only if 
        the Administrator makes publicly available, not later 
        than the date on which such size standard is 
        established or approved, a justification demonstrating 
        that such size standard is appropriate for each 
        individual industry classification included in the 
        grouping.
          (7) Proposed rule making.--In conducting rulemaking 
        to revise, modify or establish size standards pursuant 
        to this section, the Administrator shall consider, and 
        address, and make publicly available as part of the 
        notice of proposed rule making and notice of final rule 
        each of the following:
                  (A) a detailed description of the industry 
                for which the new size standard is proposed;
                  (B) an analysis of the competitive 
                environment for that industry;
                  (C) the approach the Administrator used to 
                develop the proposed standard including the 
                source of all data used to develop the proposed 
                rulemaking; and
                  (D) the anticipated effect of the proposed 
                rulemaking on the industry, including the 
                number of concerns not currently considered 
                small that would be considered small under the 
                proposed rulemaking and the number of concerns 
                currently considered small that would be deemed 
                other than small under the proposed rulemaking.
          (8) Number of size standards.--The Administrator 
        shall not limit the number of size standards it creates 
        pursuant to paragraph (2), and shall assign the 
        appropriate size standard to each North American 
        Industrial Classification System Code.

           *       *       *       *       *       *       *