May 27, 2015

Best Practices: The Rules Used To Make The Rules

by Norman E. Greenspan

To toil in the vineyards of the SBA means having to understand and abide by all sorts of rules and regulations. Although at times the rules may seem to be arbitrary, the rules are the result of a process that gives the public, including the SBA lending industry, the opportunity to participate in the promulgation of these rules.

Like every federal administrative agency, the SBA was created by an act of Congress signed into law by the President of the United States. As stated in the Small Business Act, “It is declared to be the policy of the Congress and the purpose of this Act to improve and stimulate the national economy in general and the small-business segment thereof in particular by establishing a program to stimulate and supplement the flow of private equity capital and long-term loan funds which small-business concerns need for the sound financing of their business operations.” 15 U.S.C. § 661. However, the statute that created the SBA does not contain the rules and regulations needed to effectuate the Act’s lofty purpose.

In addition to creating federal agencies, Congress recognized there was a need for well-defined, uniform standards for agency rulemaking procedures and adjudication. This resulted in the enactment of the Administrative Procedures Act, 5 U.S.C. §§ 551-59, 701-06, 1305, 3105, 3344, 5372, 7521 (the “APA”), which regulates and standardizes federal agency procedures for both rulemaking and the enforcement of these rules. “[T]he Administrative Procedure Act was adopted to provide, inter alia, that administrative policies affecting individual rights and obligations be promulgated pursuant to certain stated procedures so as to avoid the inherently arbitrary nature of unpublished ad hoc determinations.” DIA Navigation Co., Ltd. v. Pomeroy, 34 F.3d 1255, 1265 (3d Cir. 1994) (citing Morton v. Ruiz, 415 U.S. 199, 232, 39 L. Ed. 2d 270, 94 S. Ct. 1055 (1974)). The SBA’s rule making process is subject to the APA.

Most agency rulemaking is governed by section 553 of the APA, which has several procedural requirements, including: (1) a notice of proposed rulemaking must be published by the agency in the Federal Register containing certain specified information; (2) interested persons must be given an opportunity to submit written responses to the proposal; (3) a concise general statement of the basis and purpose must accompany the final rule; and (4) subject to certain exceptions, publication of the final rule must take place not less than 30 days before its effective date. See generally 5 U.S.C. § 553. This is the process that the SBA followed most recently in its proposed rules for agent revocation and suspension procedures and the franchise review process.

Unfortunately, when practically applied, despite the best efforts of the agency, the rules that are promulgated through formal rulemaking are not always completely clear as to their meaning or scope. Under these circumstances, the SBA may provide interpretations of its rules which are “controlling unless plainly erroneous or inconsistent with the regulation,” or beyond the SBA’s statutory authority. Auer v. Robbins, 519 U.S. 452, 137 L. Ed. 2d 79, 117 S. Ct. 905 (1997). These interpretations are delivered to the public in the form of the SBA’s Standard Operating Procedures. However, notwithstanding the issuance and revisions of the SOP’s, the right to interpret a rule does not give the SBA the right to make new rules without following the requirements of the APA.

The SBA has the authority to take action to enforce its rules. The APA sets forth the basic due process and procedural requirements that the SBA must follow, 5 U.S.C § 554, and the Code of Federal Regulations sets forth the specific rules that govern enforcement actions taken by the SBA. 13 C.F.R. § 120.1600. The APA also provides for the courts of the United States to review agency decisions. “A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof.” 5 U.S.C § 702.

So, although some of the SBA’s rules may, at times, seem somewhat unpredictable, they are the result of a process that gives the public the opportunity to participate, and provides for judicial review of whether an agency’s actions are within the scope of these rules.

For more information about how the SBA creates its rules, please contact Norman at 215-390-1025 or at