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 second 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. I 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 à 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'slength 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.

Mr. WHITNEY. As I mentioned, the Investment Company Act extends the proxy regulations to the SBIC's. Rule 20a-3, also supplements the proxy regulations by requiring disclosure of the same information in respect of material transactions in which the investment adviser of an investment company is a party.

Thus, where through inadvertence or lack of familiarity with the provisions of the Investment Company Act, transactions are consummated without obtaining the required Commission order under section 17, the Federal securities acts provide a means for advising shareholders of the transaction and its terms.

Relating the foregoing aspects of the Federal securities laws to the matters under consideration here, we note that they not only impose direct regulation either by forbidding, or by requiring advance Commission approval of certain transactions, but also require disclosure through reports, proxy materials, and registration statements. As a result of our experience in the administration of these acts, we believe that a statutory pattern including both disclosure and direct. regulation is an effective and workable approach for dealing with the problem of conflicts of interest in transactions affecting publicly held SBIC's registered under the Investment Company Act. Whether this same pattern should be applied to SBIC's in which there is little, if any, public investor interest but to which Federal funds are advanced is a matter which may involve other considerations and as to which the Commission expresses no opinion.

Senator PROXMIRE. Now, do you see any reasons why small business-and small business does have a much tougher problem in many ways, particularly in financial areas and competitive areas do you see any reason why small business should be treated somewhat differently here or any way in which we can modify this to protect small business against any possible harm that might come either through prohibition or through disclosure?

Mr. WHITNEY. You could what-modify the proposed legislation? Senator PROXMIRE. That is correct. You propose, I take it, to apply the Investment Company Act procedures, which I think make an awful lot of sense, for many reasons, to the SBIC's, I take it?

is

Mr. WHITNEY. We only apply to those. The only jurisdiction

Senator PROXMIRE. But your recommendation to this committee, that we follow the Investment Company Act's provision on selfdealing?

Mr. WHITNEY. I am sorry, sir, I think I should make it very clear, we are expressing no position on that point whatever. We are confining our position to the results of our experience with the companies which are publicly held.

Senator PROXMIRE. How about the SBIC's which are publicly held, in which

Mr. WHITNEY. They are now under our jurisdiction, and these standards apply.

Senator PROXMIRE. You also provide for special treatment for the SBIC's, as I recall. You said that they are subject to, I raised that point when you came to it, they are subject to

Mr. WHITNEY. That again is a general exception for the SBIC—