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Proving Control of Your Business – Proposed Changes to Federal DBE Program August 5, 2022

Preliminary NoteThe U.S. Department of Transportation recently released a long-awaited Notice of Proposed Rulemaking to modernize the Disadvantaged Business Enterprise (DBE) program regulations. This blog is part of a series looking at some of the significant proposed changes. A copy of all of the proposed changes can be found here: https://www.federalregister.gov/documents/2022/07/21/2022-14586/disadvantaged-business-enterprise-and-airport-concession-disadvantaged-business-enterprise-program.

How does a socially and economically disadvantaged (“SED”) individual prove that they actually control their business? The proposed new DBE rules may make that a little easier.  The proposed changes simplify the analysis and make some commonsense changes that should make this a smoother process.

Company Must Be Operating

A significant change in the proposed rules is that a company must have operations in the type of business it seeks to perform as a DBE, prior to applying for certification.  Under the current rules, businesses could apply for certification without having completed any jobs or performing any work. The proposed rules seek to change that so that there is evidence of whether the SED owner is able to demonstrate their knowledge and control of the business, as well as to lighten the load on certifying agencies.

Governance

The SED owner must hold the highest officer position in the company and have voting authority over all others. The SED owner must show that they are the ultimate decision maker and that they “run the show.”  These changes put more emphasis on what the SED owner does and less on what any non-SED individuals in the company do.

Another significant change is the removal of what I consider a “gotcha” clause in 49 C.F.R § 26.71(c) that has led to many denials of unsuspecting companies.  Currently, there can be no provisions in a company’s Operating Agreement or Bylaws that require any vote greater than the percentage of SED ownership.  This includes “supermajority” clauses requiring a supermajority of votes for certain monumental changes- sale or closing of the company.  The proposed changes make an exception for “extraordinary measures” that would affect ownership. So, under the proposed rules, the presence of a supermajority clause to sell or close the business would not prevent a company from becoming certified.  

No More “Family Business” Provision

The proposed rules also seek to eliminate the “family business” provision of § 26.71(k) as it is often misused by certifiers.  The preamble to the proposed rules points out that participation of family members in a business does not mean that the SED individual does not control the firm.  The SED owner will still need to prove control over the firm, but their family’s presence and participation in the business alone should not be a barrier to certification.

No More “License Rule”

The proposed rules also seek to eliminate another rule that is misused by certifiers – §26.71(h).  Currently, if an individual is required to hold a license to operate a business in the certifying state (example- some states require an engineer’s license to own an engineering firm), then the SED owner’s lack of a license will preclude the business certification.  The rule also currently states that even if a license is not required, the certifier can take the lack of license into consideration when determining if the SED individual controls the firm.  Certifiers often used this rule to denial certification applications unnecessarily. 

Have thoughts or suggestions on the proposed PNW rules?  You can make your voice heard by offering your comment here:  https://www.regulations.gov/docket/DOT-OST-2022-0051/document.

©2022 Strassburger McKenna Gutnick & GefskyNational Law Review, Volume XII, Number 217
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About this Author

Danielle L. Dietrich SMGG Attorney Pittsburgh, PA
Shareholder

Danielle L. Dietrich, Shareholder in the Pittsburgh Office of SMGG, focuses her practice in the areas of women and diverse-owned businesses, healthcare, elder law and litigation.  She has a broad range of experience in providing legal counsel and advice to her clients (both large and small), as well as having handled a wide range of disputes and litigation in Pennsylvania, Ohio and West Virginia.

A large portion of Ms. Dietrich’s practice focuses on the representation of women and diverse-owned businesses.  That practice includes assisting these...

(412) 281-5423
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