community resources and carry out their self-help efforts in partnership with the business and financial community. The governing policy for CDC boards is therefore that they be composed primarily of low-income residents or their representatives, chosen through a direct or indirect election process to assure their legitimacy as spokesman for the target area residents, with additional representation from local businesses and financial institutions to strengthen the board's technical skills and involvement with the larger community.

(b) Section 1076.10-3 provides the specific requirements for the composition of CDC boards. Section 1076.10-3 outlines the representation requirements for the two basic categories of board members. § 1076.10-4 provides the specific requirements for selecting board members, including a discussion of the two different methods-direct and indirect-for electing representatives of target area residents.

§ 1076.10-3 Composition of CDC Boards.

(a) Size of Board. CDCs are free to determine the size of their boards of directors. In doing so, CDCs must strike a balance between various, sometimes conflicting, considerations. On the one hand, they must be of a sufficient size as to provide adequate representation to both the target area residents and the business community (see paragraph (c) below), to permit the formation of working committees without requiring the same individuals to serve on more than one or two, and to insure that even a minimum quorum is still large enough to represent the community and legitimately reach basic policy and program decisions. On the other hand, the board must be small enough to permit business to be conducted in an efficient and expeditious way. It has been the experience of OED that the ideal size for a CDC board is between 15 and 30 members. Generally, anything larger tends to become unwieldly, while anything smaller overtaxes the capacity of individual members and limits the board's representativeness. Where a CDC chooses to have a board larger

than 30 or smaller than 15 members, it shall explain its choice to OED.

(b) Residency Requirements. (1) Members of CDC boards of directors should be residents of the special impact area, except in those instances where it is necessary to choose nonresidents to insure effective representation of the business and financial community. In almost all rural CDCs (with the possible exception of Indian reservations) where the special impact area is a sizable land mass including middle class and affluent residential areas as well as high levels of lowincome population, there will seldom be a need to have non-residents on the board even to represent the business sector. In urban CDCs, where the special impact area is usually a lowincome neighborhood of a large city, effective spokesmen for the business and financial community may not reside within the special impact area, even if their businesses or financial institutions are located there. In most urban CDCs it will be necessary to reach out to the larger community to find adequate representation of the business sector.

(2) Nevertheless, as provided in paragraph (c) below, representatives of the special impact area residents must always constitute a controlling interest on the CDC board. Accordingly, even in a CDC where every representative of the business and financial community is a non-resident, a clear majority of the board members will be residents of the area served.

(c) Representation Requirements. There are two categories of members on CDC boards of directors: representatives of the low-income community to be served and representatives of the business, financial, and general community.

(1) Low-Income Community. (i) In order to comply with the policy requirements that CDCS be responsive to the low-income residents of the special impact area, representatives of the low-income community must have a controlling interest on any CDC board of directors. This means that at a minimum representatives of the lowincome community shall hold more than half of the seats on the board of directors. OED experience has indicat

ed that an even larger proportion, generally around two-thirds, is preferable, since a bare majority is often not enough, given the relative inexperience of some community representatives, for representatives of the lowincome community to maintain effective control.

(ii) Often, the total size of the board will determine the proportion of community representatives. The smaller the board, the greater the likelihood that community representatives will constitute less than the preferable two-thirds, so that a sufficient number of business sector representatives may be included on the board. On the other hand, on a larger board of, for example, 25 members, there is no reason why community representatives could not constitute at least twothirds of the board and still allow sufficient seats for effective representation of the business sector.

(iii) Representatives of the lowincome community need not themselves be low-income, provided they have been selected in a democratic fashion in accordance with § 1076.10-4. If appropriate selection procedures have been followed, however, it would normally be anticipated that many of the representatives of the low-income community will themselves be lowincome. If only a small proportion of the community representatives are themselves low-income the CDC must demonstrate why this is not an indication of inadequate representation of the community to be served.

(2) Business and Financial Community. (i) The purpose of this category of board membership is twofold: to bring to the board individuals with specialized skills and experience which are crucial if the board is to be able to effectively make policy on business and community development programs; and to provide effective bridges between the CDC and other private financial and leadership resources in the larger community. While such representatives must be willing to make a personal commitment to the CDC program and its basic objectives, their selection to the board may not be based primarily on their prior interest and involvement in the problems of the low-income community, but rather on

their technical expertise and institutional contacts.

(ii) This category of board members normally includes businesspeople, accountants, officials of banks and other financial institutions, management representatives of local industrial firms, attorneys, and others exhibiting a positive interest in the Special Impact Program and the concept of community controlled economic development. This category might also include individuals who are not technically businesspeople but who hold leadership positions of prominence in the community, including public elected officials or their representatives, and directors or senior officials of public agencies or of related private non-profit agencies (e.g. local housing agencies, community action agencies, employment services, foundations, etc.).

(iii) To the extent the duly selected representatives of the low-income community may possess some of these skills, the effectiveness of the entire board will be improved. However, it is highly unlikely the community representatives will themselves bring to the board the total range and depth of business and leadership expertise needed to carry out an effective CDC program. Representatives of the business and financial community must be selected specifically because of their specialized skills.

§ 1076.10-4 Selection of CDC Board Members.

Because of the different purposes of the two categories of board membership, the selection process for each must necessarily be different.

(a) Low-Income Community. (1) Two methods of selecting representatives of the low-income community are generally used by CDCs and are acceptable to OED: direct election by the members (if the CDC is a non-profit corporation) or stockholders (if the CDC is a for-profit corporation) of the CDC; or indirect election by constituent community organizations within the special impact area which themselves use an acceptable democratic selection process. Often a mix of the two methods is used, with some, or most, community representatives chosen by

direct election, and others by indirect election. While both methods are acceptable to OED, the direct election method is preferable. Even where it is demonstrated that the indirect election method is justified, it is preferred that a mix of the two methods be used so that at least some representatives are elected directly.

(2) The selection method used will depend primarily on whether or not the CDC has a broad membership base. Where the CDC has a large membership the direct election method is normally used. Where the CDC does not have a large membership the indirect method is often the only alternative. A broad well-informed, and active membership base is an important ingredient in building an effective and responsive CDC. Such a membership base-provided it is truly representative of the low-income residents and not only of one segment or faction-is concrete evidence of the CDC's legitimacy and support in the community to be served. A broadbased membership also helps to define who the program's beneficiaries are. Moreover, it is a way to insure that the CDC does not become an expression of a small group of self-appointed spokesmen, however well intentioried they might be.

(3) On the other hand, there may be circumstances where it would not be feasible to establish a broad-based membership, particularly in a large and diverse community where it would be hard to determine basic eligibility for membership. In such cases, where there are other well-established organizations which are clearly legitimate and effective spokesmen for the lowincome residents, and which themselves have broad-based memberships, it may be preferable to have such organizations in turn select representatives to the CDC board. The burden is on the CDC, however, to demonstrate to OED why a direct membership base is not practical or advantageous and why the indirect election method would more effectively meet the community representation objectives of the Special Impact Program.

(4) Where the direct election method is used, the representatives of the low-income community may be

elected by the CDC membership at an annual meeting or at a series of area meetings of members, preceded by some acceptably democratic nomination procedure. The actual procedure should be one that is adapted to the specific CDC. It should be spelled out in the CDC's by-laws. All representatives of the low-income community may be elected at large. However, many CDCs, particularly rural CDCS serving multicounty target areas, prefer to divide their community representative board seats on an area basis (for example, in a six-county program, to apportion two seats to each county), with the members from each area electing their own representatives. In some instances, a combination of these methods is used with some representatives elected on an area basis and some on an at-large basis (or some by indirect election).

(5) Where the indirect election method is used, the CDC must first identify the organizations which will elect representatives to the board, justifying to OED why those organizations are representative of all or portions of the community and why the number of seats allocated to each organization is appropriate. The CDC must then establish procedures to insure that the constituent organizations elect their representatives to the CDC board through democratic means.

(b) Business and Financial Community. (1) Normally, the most effective selection procedure is for the community representatives on the CDC board, once themselves elected, to meet and select the remaining members of the board. This provides for a process whereby the representatives of the business sector will not be self-appointed individuals unwelcomed by the community representatives, but properly motivated representatives who come to the board at the invitation of the target area residents to be served.

(2) In choosing representatives of the business and financial community, the other members of the board should seek the advice and counsel of CDC staff, community leaders, and the organizations or institutions to be represented. In doing so, it is essential

that no one be unilaterally selected to represent an organization or institution without the blessing of that organization or institution and its willingness to commit the individual's time and services. It is also essential that the community representatives put aside personal preferences and seek to find individuals with the desired skills and institutional contacts, rather than simply choose individuals who share the same backgrounds and experiences of the community representatives themselves.

(3) CDCs should avoid identifying by name in their by-laws the specific community institutions from which they may select representatives for their boards, since often over time community interests may change and different institutions may become preferable sources of board representatives. Where CDC by-laws already specify such institutions by name such bylaws should be periodically reviewed for change to allow for the substitution or addition of other institutions whose participation may be more relevant to the CDC's goals.

81076.10-5 Compliance Procedures and Waivers.

(a) All CDCs funded by OED for the first time in Fiscal Year 1975 or in succeeding fiscal years must be in compliance with this Instruction as of the effective date of their initial OED grant, unless the conditions of their initial grant provide for a planned phase-in period for compliance during the initial grant period. All such CDCs, however, must be in complete compliance within a year of the effective date of their initial OED grant. In no case shall any such CDC be granted a waiver of any provisions of this subpart.

(b) All CDCs funded by OED for the first time in Fiscal Year 1974 or in prior fiscal years must be in compliance with this subpart within one year of the effective date of this subpart, unless granted a waiver of certain provisions of this subpart. Waivers will normally not be granted by OED, and only upon a finding that (1) despite the noncompliance with particular provisions of this subpart the CDC's

board composition and selection procedures have been demonstrated in actual practice to have substantially satisfied the intent to Title VII, and (2) the disruption and dislocation that would be caused by changing long-established CDC procedures would outweigh the advantages to be gained by such changes. In no event will OED consider requests for waivers submitted (1) after one year from the effective date of this subpart, or (2) from CDCs now in compliance with this subpart who wish to change their board composition and selection procedures in such a way as to not comply with this subpart.

Subpart 1076.20—Non-Equity Busi

ness Programs Funded by CDC's (CSA Instruction 6158-2)

AUTHORITY: Sec. 602, 78 Stat. 530, 42 U.S.C. 2942.

SOURCE: 44 FR 55012, Sept. 24, 1979, unless otherwise noted.

§ 1076.20-1 Applicability.

This subpart applies to all nonequity business programs financially assisted by community development corporations (CDCs) with CSA funds under Section 712 of the Economic Opportunity Act of 1964, as amended.

81076.20-2 Definitions.

(a) Business and Commercial Development Program. Any venture, organized for profit or on a cooperative basis, financed in whole or in part by a CDC out of CSA section 712(a)(1) grant funds under budget cost category 2.5, Investment Capital.

(b) Non-Equity Business Program. A business and commercial development program which is not a venture operating on a cooperative basis and in which the CDC has no equity interest.

(c) Equity Interest. Current ownership, in whole or in part of a venture. Specifically excluded from the meaning of this term are those forms of debt financing which involve an option or right to purchase or convert to ownership at some future time or upon some future contingency.

§ 1076.20-3 Policy.

(a) Financial assistance for business and commercial development programs under section 712(a)(1) shall be used predominantly for equity investment (either alone or in combination with other forms of financial assistance) and for cooperatives. This priority on equity investment and support for cooperatives derives from two factors: (1) The emphasis in Title VII on programs which will promote community-based ownership opportunities, an objective that can be best attained through either direct CDC investment in special impact area businesses or in development of cooperatives; and (2) the availability from other Federal funding sources of financial assistance for technical assistance, loans, or loan guarantees, whereas Title VII is the only Federal funding authority for equity capital.

(b) In addition, insofar as section 712 funds are used for financial assistance to non-equity business programs, it is OED policy that such financial assistance be generally limited to loan guarantees, rather than be in the form of direct loans. This policy derives from three factors: (1) The availability of direct loan funds from non-Title VII funding sources, including commercial lending institutions; (2) the "leveraging" effect of loan guarantees in attracting outside debt capital into the special impact area; and (3) direct loan programs impose a significant administrative burden on the CDC and require substantial staff resources to service the loans once they are approved.

(c) Finally, since the primary thrust of Title VII is community economic development for low-income residents, rather than support to individual entrepreneurs, non-equity business programs assisted with section 712 funds should also further the Title VII objective of promoting ownership or employment opportunities for low-income special impact area residents.

(d) Accordingly, CDC use of financial assistance under Section 712 for non-equity business programs is subject to three basic policy limitations: (1) Such assistance shall be accorded a lower priority than, and shall not sup