88TH CONGRESS 1ST SESSION

S. 298

IN THE SENATE OF THE UNITED STATES

JANUARY 18 (legislative day, JANUARY 15), 1963

Mr. SPARKMAN (for himself, Mr. HUMPHREY, Mr. SMATHERS, Mr. MORSE, Mr. BIBLE, Mr. RANDOLPH, Mr. ENGLE, Mr. BARTLETT, Mr. WILLIAMS of New Jersey, Mr. Moss, Mr. SALTONSTALL, Mr. JAVITS, Mr. COOPER, Mr. SCOTT, Mr. PROUTY, and Mr. COTTON) introduced the following bill; which was read twice and referred to the Committee on Banking and Currency

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A BILL

To amend the Small Business Investment Act of 1958.

Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That this Act may be cited as the "Small Business Invest4 ment Act Amendments of 1963".

5 SEC. 2. The second sentence of section 302 (a) of the 6 Small Business Investment Act of 1958 is amended by strik7 ing out "$400,000" and inserting in lieu thereof "$1,000,8 000" and by striking out "three years" and inserting in lieu 9 thereof "seven years".

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1 SEC. 3. Section 303 (b) of the Small Business Invest

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ment Act of 1958 is amended to read as follows:

"(b) To encourage the formation and growth of small 4 business investment companies, the Administration is

5 authorized (but only to the extent that the necessary funds

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are not available to the company involved from private

sources on reasonable terms) to lend funds to such companies 8 either directly or by loans made or effected in cooperation 9 with banks or other lending institutions through agreements

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to participate on an immediate or deferred (standby) basis. 11 Such loans shall bear interest at such rate and contain such 12 other terms as the Administration may fix, and shall be 13 subject to the following restrictions and limitations:

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"(1) The total amount of the Administration's share of 15 loans made and outstanding under this subsection (b) to any

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one company at any one time (including direct loans, the 17 Administration's share of loans made hereunder pursuant to 18 agreements to participate on an immediate basis, and com19 mitments to lend directly or on an immediate participation 20 basis, but excluding loans made hereunder pursuant to agree21 ments to participate on a deferred (standby) basis and any 22 obligations acquired pursuant to such deferred participation 23 (standby) agreements) shall not exceed an amount equal to 24 50 per centum of the paid-in capital and surplus of such com25 pany or $4,000,000, whichever is less. The total amount of

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1 the Administration's share of all loans made and outstanding 2 under this subsection (b) to any one company at any one 3 time, including loans made hereunder pursuant to agreements 4 to participate on a deferred (standby) basis and any obliga5 tions acquired pursuant to such deferred participation 6 (standby) agreements, shall not exceed an amount equal to 7 the paid-in capital and surplus of such company or 8 $8,000,000, whichever is less.

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"(2) All loans made under this subsection (b) shall be 10 of such sound value as reasonably to assure repayment." SEC. 4. Section 306 of the Small Business Investment

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12 Act of 1958 is amended to read as follows:

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"SEC. 306. Without the approval of the Administration, 14 the aggregate amount of obligations and securities acquired 15 and for which commitments may be issued by any small busi16 ness investment company under the provisions of this Act 17 for any single enterprise shall not exceed 20 per centum of 18 the combined capital and surplus of such small business in19 vestment company authorized by this Act."

Senator PROXMIRE. Our first witness will be Mr. Eugene P. Foley, Administrator of the Small Business Administration.

Mr. Foley, we are glad to have you here.

I understand that you have Mr. Parris with you, who is an outstanding expert in the SBIC field.

STATEMENT OF EUGENE P. FOLEY, ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION; ACCOMPANIED BY JAMES L. PARRIS, DEPUTY ADMINISTRATOR, LAWRENCE S. CASAZZA, DIRECTOR, INVESTMENT DIVISION, GERALD S. FISHER, CHIEF, PROGRAM ADMINISTRATION AND COMPLIANCE DIVISION, INVESTMENT PROGRAM; AND LEONARD RALSTON, ASSOCIATE GENERAL COUNSEL

Mr. FOLEY. Mr. Chairman, I have a number of officials from the SBA with me. Mr. Parris, who is Deputy Administrator for the the investment program, Mr. Casazza, who is the Director of the Investment Division, and Mr. Gerald Fisher, Chief of the Program Administration and Compliance Division of the investment program and Mr. Leonard Ralston, who is the Assistant General Counsel in the investment program.

Shall I proceed?

Senator PROXMIRE. Yes, go right ahead. It take it that you have identified these gentlemen not in sequence, but you have identified everybody at the table.

Mr. FOLEY. Mr. Casazza is on my far right, Mr. Parris on my immediate right, Mr. Ralston my first left and Mr. Fisher on the far left.

Senator PROXMIRE. Do you prefer to finish your statement before I interrupt for questions?

Mr. FOLEY. I would just as soon be guided by your desire, Mr. Chairman. What I propose to do here is to read my statement. Mr. Parris is also going to make a statement, and it may be more convenient to question after the conclusion of both of our statements. Senator PROXMIRE. All right, fine. Go right ahead.

Mr. FOLEY. The primary purpose of these hearings is to determine whether further safeguards should be established against the potential dangers presented by transactions in which a small business investment company extends financial assistance to an affiliated small business concern. The problem we are considering arises where any person has material connections with both parties to the transaction. He may, for example, be an officer or director of each or he may own a significant share of each.

The unfavorable effects which such an affiliated transaction may have on the rights of those shareholders in the SBIC who have no interest in the business receiving the money are, of course, obvious. Also, these transactions may be used to divert to other uses funds appropriated by Congress for the assistance of small firms which cannot obtain long term or equity financing from private sources. Ever present, therefore, is the chance that the interests of the SBIC or of the taxpayer are being disregarded.

In view of these hazards, it is not surprising that suggestions have been made from time to time about the desirability of issuing a regulation imposing a flat ban on affiliated transactions by SBIC's. But the agency has always been stayed from such action by the force of other considerations. Mr. Parris, Deputy Administrator for the Investment Division, is much more familiar than I with the details of this matter. After I complete my brief statement on the subject, I am

going to ask him, subject to your permission, Mr. Chairman, to discuss the legal and factual background involved. My purpose here is to summarize the situation and to state the position of SBA.

The salient feature of the problem is that there are many parts of the country in which a small businessman does not have a reasonable range of choice in seeking an SBIC to assist him in meeting his long term and equity capital needs. In some communities, indeed, there may be only one company to which he can turn. If he happens to be an investor in that company, or if he serves as an officer or director of it, a ban on affiliated transactions might cut him off from all hope of assistance.

Since such relationships are by no means uncommon between a small business concern and the only available company, SBA decided that, instead of an outright prohibition, it would permit affiliated transactions under a screening procedure designed to insure against abuses. Accordingly the regulations of the agency-13 CFR 107.716require advance clearance for financial assistance extended by SBIC's to small firms wherever any person enjoys a significant degree of ownership or control in both parties to the transaction. Approval is given only to those proposals which promise to promote the purposes of the program.

The policy represented by this screening procedure is, in my opinion, entirely sound. I intend to continue it. However, I am fully aware that, unless it is administered wisely, it will be harmful to the program. We must have sufficient insight to anticipate the types of abuse most likely to be attempted. We must develop effective methods of detecting and frustrating such attempts whenever possible. I am also aware that we must be tough with persons responsible for abuses. It is imperative that such people be promptly expelled from the program and subjected to whatever punishments the law may have in store for them. You will not find me hesitant or squeamish in dealing with violators.

I am having a survey made of SBA's methods of handling the problem of affiliated transactions to determine whether they meet the standards I have just described. Although the survey has not yet been completed, it is already evident to me that two changes in our procedures would be desirable in order to provide the industry, and the public generally, with more information as to our methods of operation.

First, the criteria employed by SBA in deciding whether an affiliated transaction should be permitted are going to be published. Every proposal must meet all of these tests:

A. Are the shareholders in the SBIC who have no interest in the recipient of the financial assistance in a position to block the transaction if they wish to do so?

B. Is the proposal fair and reasonable?

C. Would the proposal serve the purpose of the program?

These criteria are of necessity so broad that they can serve merely as general guidelines for an SBIC contemplating an affiliated transaction. It is entirely a matter of judgment, for example, whether a transaction meets the test of being fair and reasonable. Nevertheless the industry should be apprised of the broad factors we consider in passing upon applications.