This would help the new issues' market, I think. I would be a little reluctant to see them getting in to being a full fledged

Mr. MITCHELL. Is this not one of the troubles right now? Both the portfolio companies and the SBIC's themselves report that they have difficulty getting proper underwriting.

Might not that be a proper answer especially under the conditions of the market now?

Mr. KELLEY. That is correct, Mr. Mitchell. Many of the small companies today are suffering from the almost complete lack of a new issues market, and I think that we could assist these small businesses that are held in SBIC's portfolios and assist the SBIC's themselves with some such arrangement.

We are presently working on the exact details now. The objective, I think, is laudable and one that we should turn our attention to. Mr. MITCHELL. There are several of the companies now concerning which the market price is quoted considerably below book-all of them I believe

Mr. KELLEY. Yes.

Mr. MITCHELL. And I believe there are quite a few of them that the market is quoted even below cash and equivalent. Is that correct? Mr. KELLEY. Nearly all of them, Mr. Mitchell, are quoted below book.

I do not believe too many of them are quoted at below cash and equivalent. I think there may be half a dozen of them.

Mr. MULTER. Mr. Chairman, may I ask one question?

The CHAIRMAN. Mr. Multer.

Mr. MULTER. Where would you draw the line between the partial underwriting and full underwriting?

Mr. KELLEY. Well, Mr. Multer, I think the full underwriting activity would be this:

If an underwriter is participating in what we call making the market for the issue, sustaining the price of the issue during the offering period, which requires him to buy and sell securities, possibly buying and selling stock rights, then he is engaged in full underwriting. It is this particular type of activity that we would not want to see the SBIC's get directly into for many reasons.

One reason is that SBIC's might get to be more underwriters than SBIC's and, second, I think we might be severely criticized for using an institution that is licensed by the Federal Government to compete with the underwriting fraternity. I do not think this would be proper.

As I would envision it, as a standby type of arrangement, the underwriters themselves should be amenable to it as well, because it would not be competing with their functions.

Mr. MULTER. It would be better to compete than having you guaranteeing them to dispose of their issue.

Mr. KELLEY. We are not guaranteeing them, sir.

Mr. MULTER. I understood you to to say that you would undertake to buy what they did not sell-whatever the public did not buy on the public offering the SBIC would pick up.

Mr. KELLEY. The SBIC would pick it up.

Mr. MULTER. This was not intended for SBIC's.

Mr. KELLEY. Well, SBIC's, Mr. Multer, were created to assist small businesses in getting funds, and this would be one means whereby they could assist the small business in getting funds. So I think it would

be within the intent of the act.

Mr. MULTER. I think you would be treading on very dangerous ground if you were permitted to get into that field or permit the SBIC's. It is just one step of underwriting and

Mr. KELLEY. Well, Mr. Multer, from a practical standpoint, only the larger SBIC's would be able to do this. In these instances there would be a minimum of Government funds involved.

Mr. MULTER. But they have all the advantages of being federally licensed and everything else that goes with it.

Mr. KELLEY. Well, as I say, there is an argument on that point, but there is also the argument that says that it would benefit the small businesses through doing this.

There is no market today for a public issue by a small business, and this is one of the problems in the SBIC industry today, because to provide venture capital an SBIC must turn over its investments from time to time.

I mean, it is not intended that it be permanently locked into that investment, and one of the reasons that they are not making more venture capital investments is because this market does not exist.

I think it would be desirable to see this market stimulated.

Mr. MULTER. As desirable as that would be, I should think that we ought not to encourage the SBIC's to become investment bankers. If you want to let them do that let them be investment bankers, but not let them be SBIC's because sooner or later they will be putting all of their efforts into that.

As I see it, they would set up to be an aid to the small businessman who otherwise could not get in there, and I think this is the way to do it.

This is one man's opinion.

The CHAIRMAN. Mr. Williams, do you have any questions?

Mr. WILLIAMS. No questions, Mr. Chairman.

The CHAIRMAN. Mr. Administrator, I am sure you are familiar with the Wall Street Journal article of July 7, 1963, on this issue of self-dealing.

They point out where one man made an investment of $50,000 and got a loan of $75,000. I think probably some answers can be made to a lot of these things and, without objection, I am going to include this in the record and ask you to give the answers for the record so that both sides may be included.

Mr. FOLEY. We appreciate that very much, Mr. Chairman. (The article follows:)

[From the Wall Street Journal, July 2, 1963]

DOUBLE STANDARD USUAL FEDERAL FROWN ON CONFLICTS OF INTEREST ABSENT IN SBIC CASES

SBA APPROVES MANY LOANS BY INVESTMENT GROUPS TO OFFICERS' OWN COMPANIESWHERE SOME TAX DOLLARS GO

(A Wall Street Journal News Roundup)

When the Government discovers what look like conflict-of-interest practices, it usually tries to stamp them out. But one adventurous Federal agency, the Small Business Administration, is taking a liberal tack: Officially, though in a shroud of secrecy, it is sponsoring intricate and interesting business arrangements which it designates as "self-dealing."

The Small Business Administration pours taxpayer money into hundreds of small business investment companies (SBIC's) scattered around the Nation, and these in turn mix it with private funds and lend to little businesses. In many instances the agency is formally authorizing these SBIC's to grant loans to enterprises in which SBIC officers themselves have a personal stake. The phrase "self-dealing" refers to such interlocking intimacy between those who grant the money and those who get it.

Here's one sample of these perfectly legal arrangements:

James C. Nichols, is vice president and secretary of Coast Small Business Investment Co., Pacific Grove, Calif. He put $50,000 into this SBIC, as did each of two other owners. The Small Business Administration put in $150,000, and guaranteed another $150,000 in funds obtained from a bank.

Mr. Nichols is also sole owner of Nichols Plumbing & Heating Co., in Monterey, Calif. This year he wanted to buy a new building for his plumbing firm, but says he found "banks aren't too free with their money." He turned to the SBIC and received $75,000, for 10 years, on terms which Coast SBIC Executive Secretary Robert W. Tuttle reports were more favorable than banks were willing to grant.

Surprised at approval

"Obviously the loan wasn't made at arm's length," remarks Mr. Tuttle, though he and the two other SBIC owners thoroughly examined its soundness. "Frankly I was not optimistic," he recalls, about getting the deal approved by Small Business Administration headquarters in Washington. He was surprised when the agency quickly OK'd it, with an exchange of letters. But like others who are fostering such arrangements, he does consider them beneficial. "If the transaction is the kind you would have made with a stranger, then why not go ahead with your own people?"

Typically, SBIC officers, when seeking SBIC loans to ventures in which they have a personal stake, absent themselves from SBIC board meetings when their requests are being considered.

A majority of the Nation's 600-plus SBIC's apparently still avoid self-dealing. But in Washington, the boss of the Small Business Administration (SBA), John Horne, heartily contends the practice is desirable, to give SBIC officials "flexibility" in investment. Deputy Administrator James Parris, who signs the letters authorizing specific SBIC self-deals, adds: “Our main concern is securing capital for small businesses. We don't want to bog small SBIC's down with too many regulations."

This view contrasts with the proclaimed attitude of other Federal agencies, notably the Securities and Exchange Commission. Though all SBIC's come under Small Business Administration jurisdiction, those selling shares to the general public are further scrutinized by the SEC and its officials declare most such SBIC's have "quit asking us to approve self-dealing because they know we won't." Privately, those SEC officials contend standards should be just as rigorous for SBIC's that escape SEC rules. Without discussing actual cases, they maintain that self-dealing SBIC officers could influence lending to their own failing enterprises or get a "free ride" for their own investments in ventures made profitable by the injection of SBIC money.

Challenging self-dealing

"It is not necessary to prove actual damage," to the lending company "or even actual profit to (an) individual" to challenge self-dealing, SEC lawyers contended

in a recent court case. "It is sufficient that the transaction be fraught with the possibility that the company might be injured by action based upon something less than disinterested motives on the part of its fiduciaries."

Of course, no sinister motive need be implied by any loan application to an SBIC. The purpose of creating these lending institutions and giving them governmental financial support is to make money available to small businesses when they can't get it from banks—or at least can't get it for so long a repayment period; or for so low interest charges. This can be motive enough, either for arm's-length borrowing or for self-dealing borrowing.

When the SEC does get requests for approval of self-dealing arrangements, it makes them public. The Small Business Administration reveals no details of self-deals submitted or approved; Mr. Horne says his lawyers advise it should not. According to its officials, self-dealing has been permitted by SBA ever since Congress created the SBIC program 5 years ago, and nobody knows how many such transactions have occurred. Only last October the staff began keeping a current count, and by May discovered they had approved 33 self-dealing applications at the rate of about one a week—while rejecting just three.

Pressed by Wall Street Journal reporters, the Small Business Administration did reveal the names of these 36 SBIC's-while refusing to state even how much taxpayer money has been handed to any of them. Deputy Administrator Parris quickly sent to each of these involved SBIC's a letter warning they might "receive inquiries" from the press and emphasizing that SBA, for its part, is keeping mum.

"It is not the present intention of SBA to release any information regarding the details of the specific transactions," he wrote. "We do not plan to provide information about the name or financial affairs" of those who got the self-dealing loans. "Nor do we plan to provide any explanation of how our general criteria in such maters were applied to specific cases. *** Should you receive an inquiry on this subject the decision as to whether or not you release additional information rests entirely within your discretion."

Not surprisingly, many of the self-dealing SBIC's decided their "discretion” should take the form of telling reporters little or nothing.

"Ethical" considerations were cited by Benjamin Burdick, president of Midwest Small Business Investment Co., which shares quarters in Detroit with his law firm of Burdick, Burdick, Silverstein & Burdick and which has no fulltime employees. He declared Midwest has engaged in two self-dealing affairs, one of them very minor and both entirely legitimate, but said revealing details about borrowers could result in "crippling companies that ought not to be hurt." "I'd rather not discuss it because I've read some of the Wall Street Journal articles about small business investment companies and they've been uncomplimentary," said A. B. Simms, president of both the First Atlanta Investment Corp. and the Southern Regional Association of Small Business Investment Companies. His own SBIC has the same address and phone number as an Atlanta real estate consulting firm, A. B. Simms & Associates.

"No phony-baloney"

G. Wayne Leslie, general manager of Judson-Murphy Capital Corp. in San Francisco, reported this SBIC made one self-dealing loan with "provisions so there was no phony-baloney." He warmly defended "internally generated situations" as "the natural result of a small company; we haven't got the money to justify the cost of finders"-but said "we have a policy not to divulge information on any of our loans." Somewhat mystifyingly, the firm's president, Philip Murphy, insisted in a separate interview that this SBIC has made no selfdealing loans whatever, though it did seek an SBA opinion on what at first seemed a borderline case.

Greater Pittsburgh Capital Corp. has a distinguished board of directors including two vice presidents of Aluminum Co. of America. Its president, Wallace Kirkpatrick, an Allegheny Ludlum Steel Corp. executive, suggested there are "probably a lot of shady goings-on" among some other SBIC's, but said his own did better by engaging in two self-deals than it could have done lending to others. Nevertheless, no details were given out. Vice President Donald Collins explained details of deals are simply private and confidential matters, and besides, information about self-dealings by SBIC's can be "bad publicity" for the industry.

But spokesmen for a number of SBIC's appear glad to disclose such dealings, and laud their benefits.

Charles M. Fairchild, who deals in real estate and other ventures in Washington, D.C., is proud of his role in Citizens Small Business Corp. It was founded 3 years ago, and he joined some 40 other stockholders to provide a total of $150,000 in private funds, while the Small Business Administration provided an equal amount of Government money. Mr. Fairchild became one of the nine directors; his wholly owned investment counseling concern, Fairchild & Co., was granted a contract to manage this SBIC. By now, Citizens has put $106,000 of loans, more than a third of its capital, into two companies in which Mr. Fairchild has himself become an investor.

Recounting this, James Olah, an official of Fairchild & Co., gives further detail: Last year Citizens loaned $60,000 to Branch Mountain Timber Farms, Inc., near Moorefield, W. Va. Before long, Mr. Fairchild had personally bought one-third ownership of the lumber company. By December, Citizens had granted another loan of $10,000.

Loans to art firm

Two years ago Citizens had put $30,000 into American Society of Fine Arts, Inc., while Mr. Fairchild was investing $5,000 of his own in this firm set up to market art replicas. Last October Mr. Fairchild became president of the art company; in January it received another $6,000 loan from Citizens.

In all its investment program, Citizens has granted second-helping loans only to these two companies.

Comments Mr. Fairchild: "Branch Mountain would be bankrupt right now if I hadn't personally gone in; Citizens would have lost money." As for American Society, he says, "its original management tried a direct mail advertising approach that didn't work, so I was made president; but then the company ran into legal problems with its franchisers and has not been able to get any merchandise to sell. This is undergoing arbitration now; if we win, we'll make money."

The Small Business Administration has put another $150,000 of Federal funds into Capital Investors Corp., of Montana, an SBIC formed last fall in Missoula, Mont., by 15 businessmen, each of whom invested $10,000. Among these was Keith Wright, who serves as director. With approval of SBA headquarters in Washington, Capital Investors made a $26,000 10-year loan to Wright Lumber Co., in which Mr. Wright then held a minority share of ownership.

The money, along with a bank loan and additional personal investment by Mr. Wright, went to buy out two of his partners, to put Mr. Wright in full control of the lumber company, and to finance its expansion-so report high officials of the lending institutions concerned. Mr. Wright himself, despite a red and yellow "Welcome" sign outside his lumber company, says he's too busy to "waste time" talking to reporters.

Montana Cars, Inc.

Another director of Capital Investors is Leonard Senechal, who holds a 40percent stock interest in Montana Cars, Inc. This auto leasing firm has received a loan of about $15,000 from the SBIC. "With 15 guys in business, at one time or another they are going to need money. It's natural to go where they have an investment," he remarks. Like Mr. Wright, he absented himself from the SBIC board meeting that approved his loan.

When Mr. Senechal helped found the SBIC, half his $10,000 share was actually money advanced by Mills Folsom, past president of the Missoula Chamber of Commerce. The SBIC subsequently granted a $20,000 loan for buying irrigating equipment to Folsom Co., Inc., a ranching enterprise owned by Mr. Folsom. More recently, Mr. Folsom says, he found he needed to get back his original indirect investment in the SBIC. Since the SBIC could not immediately buy back these shares without impairing its required capital, the problem was resolved by a further SBIC loan to Mr. Folsom of $5,200 (his original investment plus interest); meanwhile his shares, nominally owned by Mr. Senechal, are in escrow. Says Mr. Folsom: "As far as I'm concerned, the stock is gone."

Some SBIC's, after gaining formal approval from Washington for particular self-deals, have been overwhelmed by doubts.

"Cold feet"

"We got cold feet," says Gerardo Joffe, president of Science Investment Co. in San Francisco. This year the Small Business Administration had OK'd the SBIC's plan to back a company formed to produce Tar Gard, a do-it-yourself cigarette filter which smokers could fit on the tips of regular brands. Mr. Joffe 33-440-64--15