From last June 30th to March 15th we received 22 requests for waiver of our self-dealing provisions. That is section 107.716(b) of the regulations that presently deals with self-dealing. Of that number, it was determined that this section did not apply to five of the requests. Of the remaining 17, 10 were approved and 7 were denied. So we are talking basically about 17 instances in just a little short of a year's time. The reasons for the seven denials were these: It was judged to be the use of the licensee by those who controlled it as the financing medium for their own undertaking. This applied to a portion of the denials. In another instance there was no disinterested person in the licensee who could have prevented the investment. Those were the basic two reasons. The CHAIRMAN. Do you make any check or any investigation of instances that are not submitted to you for waiver? Mr. KELLEY. Yes, sir. We have a very active compliance program which is auditing these-I shouldn't put it that way. We actually have three steps in our examination process. The first step is that semiannually the companies issue reports to us.. These are carefully examined by our accounting and compliance sections. Then once a year we require an audit by an outside public accountant, an independent public accountant. He fills out a form called a compliance report which requires him to answer, in his professional capacity, many questions on this particular subject. Thirdly, we have a group of examiners who conduct a regular program of examinations, as well as spot checks, to determine whether our regulations are being complied with, including the self-dealing regulation. The CHAIRMAN. To some of my colleagues who have just come in I will state that Mr. Foley and Mr. Kelley have testified earlier that there are 706 licensed SBIC's, that they are working exceptionally well in the main, that they have more than $447 million in investments with capital assets of more than a half a billion dollars. Mr. Multer? Mr. MULTER. Thank you, Mr. Chairman. Mr. Foley, you referred to the over-the-counter situation with reference to the publicly owned SBIC's and you told us about how the stock had dropped down in many instances to less than book value. Has your office made any inquiry or any compilation or made any attempt to get any statistics on the number of SBIC's that went public and whose stock was sold on the market shortly after they went public for many times the book value and subsequently fell down to book value or less? Mr. FOLEY. Mr. Multer, if you do not mind, I would like to defer that question to Mr. Kelley inasmuch as he is a little bit closer to the information and intelligence of our compliance unit than I am. Mr. Kelley could answer that and, if not, we could perhaps supply the information for you subsequent to the hearing. Mr. MULTER. Well, if you cannot do it now-I referred it to you because you made the comment in your statement. Mr. Kelley did not, but it does not matter to us as long as we get the information. If you do not have it available now you might get it for us. I am particularly interested in knowing whether or not you have made any inquiries or will make any inquiries to find out who made the killings in connection with these public offers. In many instances, particularly those that were controlled by financial institutions or organized by financial institutions, are the ones we are interested in. The stocks after they went to the market skyrocketed after they went to the public and now, in almost every instance, they are down very low. I would like to know how many insiders sold out. I would like to know how many people in those financial institutions, and those who organized those public companies, still have their stock at the low, how many disposed of them at the high and on the way down, as going from the high to the low. Mr. FOLEY. I am making a note on this, Mr. Multer, and I will do my very best to try to get the information you are looking for. Mr. MULTER. And also, in getting those figures together, if you can, find out for us how many of them sold out to take a tax loss and are now back in the picture. In other words, if you just find out whether or not the original stockholder is still in the picture you will probably find out he is still there. You will probably also find out, if the inquiry is directed to him, that he was in and out, and I think we ought to find out to what extent there has been this kind of, I call it, manipulation and if it has an invidious connotation to some of these people I would like to know whether or not it is justified. Mr. FOLEY. Very good. Mr. MULTER. I think we ought to know that, too. My original idea, and I do not know how many of the other members of the committee would agree with it, was that in permitting the banking institutions to invest in SBIC's we thought that they would make some of their money available to them. I never, for 1 minute, contemplated that the SBIC's would be organized, owned, and operated and controlled by the financial institutions. I think this is wrong. I think this leads to entirely too much doubledealing and selfdealing, and I think this requires very close inquiry by you and then a submission of the facts to this committee. Whether the rest of the committee will then agree with me as to whether we ought to do something to take the financial institutions out of the SBIC business or not is a matter for appraisal and evaluation after we get the facts. The CHAIRMAN. Without objection, the information requested will be received into the record at this point. (The information referred to follows:) Hon. JOE L. EVINS, SMALL BUSINESS ADMINISTRATION, OFFICE OF THE ADMINISTRATOR, Chairman, Select Committee on Small Business, DEAR MR. CHAIRMAN: Attached is the draft of the testimony taken at the committee hearing on the small business investment company program, held on March 18, 1964, with corrections as noted thereon. The committee or its members asked for additional information. These requests covered the following items: 1. Information on the price movements of publicly held SBIC's shares and insider trading activity, with particular emphasis on those that were formed or partially owned by financial institutions. Information was also requested on the insider trading for the purpose of taking the tax benefits afforded by the act; 2. Information on the effective cost of money to small business concerns charged by the small business investment companies; 3. Information concerning the expected effect and the current status of the Securities and Exchange Commission's proposed rule 17(a)(6); 4. Our response to the Wall Street Journal article relating to affiliated transactions; and 5. A list of all small business investment companies, indicating company name, location, and capitalization. The attached exhibits deal specifically with each of these questions. If any additional information is desired, we will be happy to comply. Sincerely, RICHARD E. KELLEY, Deputy Administrator for Investment. EXHIBIT 1 INSIDER TRADING Virtually all publicly held SBIC stocks followed the same general pattern of movement from January 1961 to May 1962 and thereafter. Beginning in January 1961 SBIC shares started to increase sharply in market price reaching a peak in April 1961. A steady and at times sharp decline followed. By April 1962 SBIC shares were selling well under their offering prices, and by May 1962 they were selling at about 70 percent of book value. Within the past few months there has been some recovery, but for the most part SBIC shares have been trading below their offering prices for the past 2 years. Twenty publicly held SBIC's are affiliated with or were organized by banks. In order to determine insider trading activity from the time the SBIC shares neared their peaks to the time they were selling below the offering prices, we analyzed insider trading activity from the period beginning March 1961 to April 1962. We were thus able to determine the extent of insider profit taking before the market became severely depressed. Our survey showed there was very little if any profit taking during this period, and virtually no such activity by any financial institution. On the other hand there was extensive accumulation of shares during this period, and many of the individuals and institutions which purchased shares while they were near their peak or above book value continue to hold these shares today. There is no indication that there has been any pattern of profit taking by individuals or institutions associated with these companies. Insider transactions also were analyzed for these companies from the time the market declined to the present date to determine the extent of selling and repurchasing of shares by individuals and institutions. There appears to have been only a modest amount of tax-loss selling by individuals who later repurchased SBIC shares. There was virtually no selling by financial institutions. It is clear from our analysis that there has been relatively little in and out trading activity by insiders with these SBIC's, and virtually no such activity by financial institutions. The following breakdown of insider trading activity in the 20 bank-related, publicly held SBIC's was taken from the Securities and Exchange Commission's monthly report of insider trading activity. Business Capital Corp. There was no significant profit taking by insiders when the shares were selling above offering price. One individual reported selling 200 shares in March 1961, but this represented only about 10 percent of that individual's total holdings. No other sales were reported until June 1962. After June 1962 seven individuals reported the sale of shares, some or all of which were later repurchased by those same individuals. Business Funds, Inc. No insider sales were reported until February and March 1962 when 1,800 shares were purchased and sold for the account of a brokerage firm. Four individuals who purchased shares in 1963 had disposed of some shares prior to these purchases. Capital Southwest Corp. No insider sales were reported before the SBIC shares fell below their offering price. Four individuals later sold shares which subsequently were repurchased. Central Investment Corp. of Denver Between February and October 1962, Life Assurance of the West disposed of all of its 7,500 shares-75 percent of them while the SBIC market was severely depressed. No repurchases were made. Five individuals sold shares between December 1962 and December 1963 and later repurchased a portion or all of these shares. Citizens & Southern Capital Corp. One individual sold 900 shares in April 1961. He also purchased 1,000 shares and sold 900 shares later that year. No other selling was reported before the market became depressed, and only one other insider transaction-the sale of 800 shares-was reported thereafter. First Midwest Capital Corp. Three individuals reported purchases in 1963 of shares sold the previous year. First SBIC of New Jersey One individual reported sales of 100 shares-which represented about 2 percent of his total holdings-before the SBIC market became depressed. One other individual reported selling and repurchasing in 1962 and 1963. Franklin Corp. No sales reported before the SBIC market became depressed. One individual reported some selling in 1962 and repurchasing in 1963, but his transactions involved only about 10 percent of his total holdings. Greater Washington Industrial Investments No insider sales were reported while the shares were selling above offering price. One individual reported selling 100 shares while the market was severely depressed and repurchasing after more than a year later. Gulf Southwest No insider sales were reported until July 1962 after the SBIC market dropped. Seven individuals reported sales and repurchases during 1962 and 1963. A number of these repurchases were made while the SBIC was engaged in a proxy fight. Illinois Capital No insider sales were reported before the market fell below offering price, and the only insider sale reported after that time did not involve a repurchase. Marine Capital Corp. No insider sales were reported until after the market became severely depressed. One individual reported the sale and repurchase of 100 shares in 1962 and another reported the sale of 400 shares in December 1962 and the purchase of 200 shares in December 1963, but these represented a small percentage of his total holdings. Midland Capital Corp. No insider sales were reported while the market was above offering price, and the two individuals who reported sales of their shares following that time reported no buying. Midstates Business Capital Corp. Two accounts reported sales totaling 6,332 shares in 1961 and early 1962, but one of these accounts is known to have invested in another SBIC at a time when SBIC shares were trading near their peak. One company reported selling and repurchasing about 25 percent of its holdings in 1962–63. Monmouth Capital Corp. No insider sales were reported until after the SBIC market became depressed. Three individuals later reported selling and repurchasing shares. Narragansett Capital Corp. No insider sales were reported until after the market became severely depressed. Some selling and repurchasing was reported by five individuals in 1962, 1963, and 1964, but in most of these cases a minor portion of the reporting individual's total holdings was involved. Science Capital Corp. No insider transactions were reported until after the market became severely depressed. Three individuals later reported the sale and repurchase of shares, but in two of these cases only a small portion of the total holdings of the individuals was involved. SBIC of New York No insider transactions were reported until late in 1962 when one individual sold and repurchased 500 shares. Southeastern Capital Corp. Three individuals reported selling several hundred shares each in December 1961 and two of these individuals had made purchases the previous month. One person reported selling 400 shares in November 1961 and repurchasing them in December 1961. One individual reported the sale and repurchase of 3,900 shares early in 1963. Westland Capital Corp. No insider sales reported while the stock was selling above its offering price. Five individuals reported selling and later purchasing of shares in 1962, 1963, and 1964. (The remaining exhibits referred to in Mr. Foley's letter of transmittal will be found in other parts of the record at the appropriate places.) The CHAIRMAN. Will you yield? Mr. MULTER. Surely. The CHAIRMAN. Off the record. (Discussion off the record.) The CHAIRMAN. Back on the record. Mr. MULTER. And, Mr. Chairman, I cannot be too proud of the fact that the record shows that these smaller companies, the SBIC's, have done a much better job than the SBIC's in the larger communities. I think they have done an excellent job, from the testimony adduced. They have done an excellent job. The CHAIRMAN. I think it will also show that the medium-sized and smaller companies have done better jobs than the larger ones. When they get to be the larger ones and get in orbit they get into difficulty, if I assess the testimony properly. Mr. MULTER. I think that is a fair statement, Mr. Chairman. Now, then, Mr. Kelley referred to self-dealing, and I think you referred to 17 instances where you asked to pass upon the question. I assume, and correct me if I am wrong, that that does not include those situations where an SBIC obtained 50 percent or more of the ownership of the business in connection with its lending activities and its investment activities? Mr. KELLEY. No, sir; not unless there was another corollary problem involved in it. In other words, if it was just a control problem and no affiliation it would not fall under this instance. Mr. MULTER. Here, too, I think we ought to have some additional facts developed by you for the committee, again voicing only one man's opinion, but I think it is just as much self-dealing for an SBIC to deal with a company in connection with which it takes back at least |