An affiliated person is defined to include (a) an officer, director, employee, or partner of such other person, (b) a person holding 5 percent or more of the voting securities of the other person, (c) a person 5 percent or more of the securities of which is held by the other person, or (d) a person who directly or indirectly controls or is controlled by or is under common control with the other person.

Senator PROXMIRE. This exemptive order is of the same nature as what the SBA now requires of SBIC's who engage in self-dealing? Mr. WHITNEY. What you have, sir, is this situation.

In the case of a publicly held SBIC, which is registered with us, at the same time that they would be applying to the SBA for permission under the SBA's regulation 716, they would be applying to us for an exemptive order under section 17(b). The standards in our statute are not the same as the regulation. I am coming to those standards at this point.

Senator PROXMIRE. All right.

Mr. WHITNEY. Section 17(b) of the act provides that the Commission shall, upon application, and after notice and opportunity for public hearing, grant an exemption from the prohibitions of section 17 (a) if it finds that (1) the terms of a proposed transaction, including the consideration to be paid, or received, are reasonable and fair and do not involve overreaching on the part of any person concerned, (2) the proposed transaction is consistent with the investment policy of the investment company, and (3) the proposed transaction is consistent with the general purpose of the act.

Senator PROXMIRE. You say nothing about disinterested persons having the power to block

Mr. WHITNEY. There is nothing in the statute on that subject.

In addition to the provisions of section 17(b), which permit the Commission to exempt individual transactions, the act confers upon the Commission the authority to grant exemptions by rule, regulation or order for certain categories of transactions and persons.

Pursuant to this authority the Commission has adopted rules to exempt from the prohibitions of section 17(a) certain banking transactions made in the ordinary course of business rather than as investments; transactions between the investment company and its wholly owned subsidiaries; consummation of contractual commitments of the investment company where certain conditions are satisfied; and certain pro rata distributions made by the investment company. As I previously pointed out, under section 17(a) an investment company may not lend money to a portfolio company if the investment company owns 5 percent or more of the portfolio company's stock. As an accommodation to the nature of an SBIC's relationship with its portfolio companies, the Commission adopted a rule permitting investments in and loans to a small business concern by an SBIC notwithstanding SBIC's ownership of 5 percent or more of the voting securities of the small business concern.

Senator PROXMIRE. That means you made a special exception for SBIC's?

Mr. WHITNEY. Generally.

Senator PROXMIRE. Not available to others?

Mr. WHITNEY. In other words, it was recognized that one of the functions of the SBIC was to make equity investments. I think the

record indicates that it was expected they would make rather large investments in any particular small business concern.

The 5-percent rule would therefore have operated as quite a handicap on their ability to do exactly what they were supposed to do..

Senator PROXMIRE. Is this also done because the SBA supervises the self-dealing provision and requires permission before the self-dealing loan is approved?

Mr. WHITNEY. I don't recall that was considered.

Mr. Worthy?

Mr. WORTHY. As I understand it, Senator Proxmire, I think that at the time that the rule was adopted, that it was taken up and considered with the officials of the SBA.

Senator PROXMIRE. I presume that would be a consideration, after all, if the other Government agency has its own rules, it is particularly. subject to SBA supervision, why duplicate it?

Mr. WHITNEY. Correct.

Section 17 (d) makes unlawful any transaction in which the investment company, or a company controlled by it, is a joint or joint and several participant with its principal underwriter, or an affiliate of the principal underwriter, or an affiliate of the investment company or an affiliate of such affiliate when entered into in contravention of rules and regulations adopted by the Commission for the purpose of limiting or preventing participation by a registered investment company or a controlled company thereof on a basis different from or less. advantageous than that of the affiliated participant.

Pursuant to section 17(d) the Commission has adopted rule 17d-1 which in general prohibits transactions within the scope of section 17 (d) of the act unless an application with respect to such transaction has been filed and the Commission has entered an order granting the application.

Rule 17d-1 provides that in passing upon such applications the Commission will consider whether the participation of the investment company or its controlled company in the joint enterprise on the basis proposed is consistent with the provisions, policies, and purposes of the act and the extent to which such participation is on a basis different from or less advantageous than that of other participants. Sneator PROXMIRE. What does that mean?

Mr. WHITNEY. That means that if the investment company and I as an affiliate, are going into a deal together, the investment company's terms are just as good as mine and that I haven't taken advantage of my position to get more favorable terms in the joint venture than I would have gotten absent my relationship.

Senator PROXMIRE. You determine that on the basis of just analyzing a particular company?

Mr. WHITNEY. The particular transaction. We will have a record in which the main thrust is to determine that the transaction bears the earmarks of an arms-length transaction so far as the affiliate and its joint venturer, the investment company, are concerned.

Senator DOMINICK. Mr. Whitney, just commenting on the language here on page 7, you say in here:

Section 17 (d) makes unlawful any transaction in which the investment company

and then you skip down a little

is an affiliate of the investment company. What in the world does that mean?

Mr. WHITNEY. Is a joint participant with the affiliate. In the seoond line, sir, of that paragraph.

Senator DOMINICK. Thank you.

Mr. WHITNEY. I grant you, this is part of our trouble, just to follow the language of the statute.

Section 17(e) of the act provides that no affiliated person of a registered investment company, or affiliate of such affiliated person may receive any compensation for acting as an agent for the investment company, except in the course of such person's business as an underwriter or a securities broker. Section 17(e) also places a specified limitation on the permissible underwriting or brokerage commission. Thus, as I have outlined here, in summary, section 17 specifies prohibited transactions and the persons who are disqualified from entering into such transactions, sets forth the standards for exemption and provides a mechanism for obtaining such exemption.

In the administration of the act, the staff of the Commission, represented here today by the two heads of the principal divisions concerned, often has informal conferences with managers of, and persons affiliated with, registered investment companies regarding applications under section 17 (b) or rule 17d-1. The investment company officials advise the staff of their intentions and the staff expresses its views in light of its experience and applicable administrative precedents as to whether the proposals meet the statutory standards.

These conferences sometimes result in proposals being abandoned without the filing of a formal application, or if a formal application has been filed, either the withdrawal or material modification of the application. Because of these informal procedures, Commission rejection of an application is the execption rather than the rule.

The general technique of informal communication has always been employed in the Commission's administration of the Securities Act of 1933. The few denials of requests for acceleration of registration statements and the small number of stop order and other administrative enforcement proceedings necessarily instituted demonstrate the convenience and workability of the system, both to the agency and to the industry. The practice here described logically follows in the Commission's administration of the Investment Company Act.

Quite apart from the provisions of section 17, the Investment Company Act, the Securities Act and the Securities Exchange Act of 1934 provide for the disclosure of material transactions with affiliated persons. These disclosures arise in three ways: (1) in reports filed with the Commission under the Investment Company Act; (2) in proxy statements filed pursuant to Commission rules and furnished to shareholders; and (3) in registration statements under the Securities Act. Basically, the disclosure requirements are the same as to each. If the company during its last fiscal year has had a material transaction or if it proposes to have any material transaction in which affiliated persons have a material interest, the transaction and the interest must be disclosed.

Senator PROXMIRE. Disclosed to whom?

Mr. WHITNEY. To the persons receiving one or another of these documents. The proxy statements would go to shareholders of the SBIC, for example. The prospectus would go to the purchaser of stock of the SBIC in a public offering.

The reports to the Commission are a public record and are available in our public reference room.

Senator PROXMIRE. This would be public disclosure in the event the affiliate would be able to get self-approval.

Mr. WHITNEY. Precisely so. As a matter of fact, the proxy statements, quite apart from going to the stockholders in connection with a meeting, are again a part of our public file for anyone else who wants to see them.

The principal item which provides this disclosure, which is common to all of these documents, reads as follows:

Describe briefly, and where practicable state the approximate amount of, any material interest, direct or indirect, of any of the following persons in any material transactions since the beginning of the issuer's last fiscal year, or in any material proposed transactions, to which the issuer or any of its subsidiaries was or is to be a party. "Those persons include (3) any director or officer of the issuer; (2) any nominee for election as a director; (3) any security holder (holding 10 percent or more of the issuer's voting securities); (4) any associate of any of the foregoing persons.

Senator PROXMIRE. Do you publicly disclose the amount involved and terms of the investment?

Mr. WHITNEY. Yes, sir.

Senator PROXMIRE. That is a matter of public record.

Mr. WHITNEY. Yes, sir.

Senator PROXMIRE. I imagine the SEC has done this for how long, this goes back to 1940?

Mr. WHITNEY. This is conventional. It arose even prior to the 1940 act, under the 1933 act, in connection with prospectus and subsequently under our proxy rules and, finally, when the Investment Company Act came along, it required similar disclosures filed with us. and also required the investment companies to observe the proxy rules that are in the 1934 act.

Senator PROXMIRE. So you have had disclosure experience now for 30 years?

Mr. WHITNEY. Yes, sir.

Senator PROXMIRE. Í realize you haven't personally been with them for 30 years

Mr. WHITNEY. I am beginning to think I feel as though I have. Senator PROXMIRE. From what you know about the agency and from your own experience, has there been any feeling that this is a competitive disadvantage or that this involves any kind of difficulty from the standpoint of those who have disclosed the information, those who are involved, it handicaps them in any serious or significant way?

Mr. WHITNEY. We don't consider that so. There is this factor to be mentioned, which was not mentioned in my prepared statement, and I should add to it at this point.

Both in the applications for the transactions under the 1940 act, for an exemptive order, and also as a general matter, in the disclosure field, we consider and act upon requests for confidential treatment, but

I don't believe it has been the position of the Commission generally that the competitive factor weighs too heavily in that scale.

Senator PROXMIRE. How common is this confidential treatment? I take it that means there is no disclosure?

Mr. WHITNEY. You would have limitations. You might not disclose the particular aspect which the applicant would consider harmful to it. You might have a great part of the transaction disclosed without a particular

Senator PROXMIRE. Can you give us an example of what would not be disclosed? You would not disclose the term or relationship of the affiliate? What aspect of this is often or occasionally at least considered to be appropriate to conceal?

Mr. CONWILL. We had a recent application by an investment company, which was not an SBIC, where two affiliates were entering into a contractual transaction which provided for a long-term production contract with respect to a certain mineral.

They requested confidential treatment as to the composition of the mineral that they were taking. The mineral was generic, but theSenator PROXMIRE. That would be required to be publicly disclosed anyway?

Mr. CONWILL. We require a lot of information, Mr. Chairman. Senator PROXMIRE. What I am driving at is this, in your experience is the confidential treatment ever given to the relationship of the affiliate to the lending concern or the terms of the loan, that is, the financial terms, the interest rate, whatever is involved?

Mr. CONWILL. No, sir.

Senator PROXMIRE. It is not; and it is not a problem of confidentiality. You don't get protests saying that if this is disclosed, it is likely to be harmful in some way?

Mr. CONWILL. We hear protests from time to time, Mr. Chairman, We are inclined to dismiss them as not appropriate.

Senator DOMINICK. If I may say for the record on that, every lawyer who is advising his client is told by his client that every bit of information is going to be almost ruinous to his company, and you therefore will have to fight with your own client so you can get something through the SEC.

Otherwise, it doesn't get passed on, and as a matter of fact, it usually is not harmful, but sometimes I suspect that it could be.

Mr. WHITNEY. I can conceive of a situation; I would be surprised if it had arisen under the 1940 act, but we have had cases where under the 1933 act, where confidential treatment of something that was a financing term, that is to say, let's say a lessee of a large piece of equipment, might be getting, for very good business reasons, in an arm's-length transaction, a certain financial benefit in terms of the lease from the manufacturer of that item of equipment, and they would consider that it would be disadvantageous to have that known generally, because for example, the manufacturer might not wish to make those terms generally available. It would not involve the kind of thing you are talking about.

Senator PROXMIRE. The SBIC, which is a financial institution, not a manufacturing institution

Mr. WHITNEY. I don't conceive this sort of thing would arise there. Senator PROXMIRE. Very good.