[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 1784 Introduced in Senate (IS)]







104th CONGRESS
  2d Session
                                S. 1784

   To amend the Small Business Investment Act of 1958, and for other 
                               purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                              May 20, 1996

   Mr. Bond introduced the following bill; which was read twice and 
              referred to the Committee on Small Business

_______________________________________________________________________

                                 A BILL


 
   To amend the Small Business Investment Act of 1958, and for other 
                               purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; INCORPORATED DEFINITIONS.

    This Act may be cited as the ``Small Business Investment Company 
Improvement Act of 1996''.

 SEC. 2. DEFINITIONS.

    (a) Small Business Concern.--Section 103(5) of the Small Business 
Investment Act of 1958 (15 U.S.C. 662(5)) is amended by inserting 
before the semicolon the following: ``, except that, for purposes of 
this Act, an investment by a venture capital firm, investment company 
(including a small business investment company) employee welfare 
benefit plan or pension plan, or trust, foundation, or endowment that 
is exempt from Federal income taxation--
            ``(A) shall not cause a business concern to be deemed not 
        independently owned and operated;
            ``(B) shall be disregarded in determining whether a 
        business concern satisfies size standards established pursuant 
        to section 3(a)(2) of the Small Business Act; and
            ``(C) shall be disregarded in determining whether a small 
        business concern is a smaller enterprise''.
    (b) Private Capital.--Section 103(9) of the Small Business 
Investment Act of 1958 (15 U.S.C. 662(9)) is amended to read as 
follows:
            ``(9) the term `private capital'--
                    ``(A) means the sum of--
                            ``(i) the paid-in capital and paid-in 
                        surplus of a corporate licensee, the 
                        contributed capital of the partners of a 
                        partnership licensee, or the equity investment 
                        of the members of a limited liability company 
                        licensee; and
                            ``(ii) unfunded binding commitments, from 
                        investors that meet criteria established by the 
                        Administrator, to contribute capital to the 
                        licensee; provided that such unfunded 
                        commitments may be counted as private capital 
                        for purposes of approval by the Administrator 
                        of any request for leverage, but leverage shall 
                        not be funded based on such commitments; and
                    ``(B) does not include any--
                            ``(i) funds borrowed by a licensee from any 
                        source;
                            ``(ii) funds obtained through the issuance 
                        of leverage; or
                            ``(iii) funds obtained directly or 
                        indirectly from any Federal, State, or local 
                        government, or any government agency or 
                        instrumentality, except for--
                                    ``(I) funds invested by an employee 
                                welfare benefit plan or pension plan; 
                                and
                                    ``(II) any qualified nonprivate 
                                funds (if the investors of the 
                                qualified nonprivate funds do not 
                                control, directly or indirectly, the 
                                management, board of directors, general 
                                partners, or members of the 
                                licensee);''.
    (c) New Definitions.--Section 103 of the Small Business Investment 
Act of 1958 (15 U.S.C. 662) is amended by striking paragraph (10) and 
inserting the following:
            ``(10) the term `leverage' includes--
                    ``(A) debentures purchased or guaranteed by the 
                Administration;
                    ``(B) participating securities purchased or 
                guaranteed by the Administration; and
                    ``(C) preferred securities outstanding as of 
                October 1, 1995;
            ``(11) the term `third party debt' means any indebtedness 
        for borrowed money, other than indebtedness owed to the 
        Administration;
            ``(12) the term `smaller enterprise' means any small 
        business concern that, together with its affiliates--
                    ``(A) has--
                            ``(i) a net financial worth of not more 
                        than $6,000,000, as of the date on which 
                        assistance is provided under this Act to that 
                        business concern; and
                            ``(ii) an average net income for the 2-year 
                        period preceding the date on which assistance 
                        is provided under this Act to that business 
                        concern, of not more than $2,000,000, after 
                        Federal income taxes (excluding any carryover 
                        losses); or
                    ``(B) satisfies the standard industrial 
                classification size standards established by the 
                Administration for the industry in which the small 
                business concern is primarily engaged;
            ``(13) the term `qualified nonprivate funds' means any--
                    ``(A) funds directly or indirectly invested in any 
                applicant or licensee on or before August 16, 1982, by 
                any Federal agency, other than the Administration, 
                under a provision of law explicitly mandating the 
                inclusion of those funds in the definition of the term 
                `private capital';
                    ``(B) funds directly or indirectly invested in any 
                applicant or licensee by any Federal agency under a 
                provision of law enacted after September 4, 1992, 
                explicitly mandating the inclusion of those funds in 
                the definition of the term `private capital'; and
                    ``(C) funds invested in any applicant or licensee 
                by one or more State or local government entities 
                (including any guarantee extended by those entities) in 
                an aggregate amount that does not exceed--
                            ``(i) 33 percent of the private capital of 
                        the applicant or licensee if such funds were 
                        invested before June 30, 1996; or
                            ``(ii) 20 percent of the private capital of 
                        the applicant or licensee if such funds were 
                        invested on or after June 30, 1996;
            ``(14) the terms `employee welfare benefit plan' and 
        `pension plan' have the same meanings as in section 3 of the 
        Employee Retirement Income Security Act of 1974, and are 
        intended to include--
                    ``(A) public and private pension or retirement 
                plans subject to such Act; and
                    ``(B) similar plans not covered by such Act that 
                have been established and that are maintained by the 
                Federal Government or any State or political 
                subdivision, or any agency or instrumentality thereof, 
                for the benefit of employees;
            ``(15) the term `member' means, with respect to a licensee 
        that is a limited liability company, a holder of an ownership 
        interest or a person otherwise admitted to membership in the 
        limited liability company; and
            ``(16) the term `limited liability company' means a 
        business entity that is organized and operating in accordance 
        with a State limited liability company statute approved by the 
        Administration.''.

 SEC. 3. ORGANIZATION OF SMALL BUSINESS INVESTMENT COMPANIES.

    (a) Limited Liability Companies.--Section 301(a) of the Small 
Business Investment Act of 1958 (15 U.S.C. 681(a)) is amended in the 
first sentence, by striking ``body or'' and inserting ``body, a limited 
liability company, or''.
    (b) Issuance of License.--Section 301(c) of the Small Business 
Investment Act of 1958 (15 U.S.C. 681(c)) is amended to read as 
follows:
    ``(c) Issuance of License.--
            ``(1) Submission of application.--Each applicant for a 
        license to operate as a small business investment company under 
        this Act shall submit to the Administrator an application, in a 
        form and including such documentation as may be prescribed by 
        the Administrator.
            ``(2) Procedures.--
                    ``(A) Status.--Not later than 90 days after the 
                initial receipt by the Administrator of an application 
                under this subsection, the Administrator shall provide 
                the applicant with a written report detailing the 
                status of the application and any requirements 
                remaining for completion of the application.
                    ``(B) Approval or disapproval.--Within a reasonable 
                time after receiving a completed application submitted 
                in accordance with this subsection and in accordance 
                with such requirements as the Administrator may 
                prescribe by regulation, the Administrator shall--
                            ``(i) approve the application and issue a 
                        license for such operation to the applicant if 
                        the requirements of this section are satisfied; 
                        or
                            ``(ii) disapprove the application and 
                        notify the applicant in writing of the 
                        disapproval.
            ``(3) Matters considered.--In reviewing and processing any 
        application under this subsection, the Administrator--
                    ``(A) shall determine whether--
                            ``(i) the applicant meets the requirements 
                        of subsections (a) and (c) of section 302; and
                            ``(ii) the management of the applicant is 
                        qualified and has the knowledge, experience, 
                        and capability necessary to comply with this 
                        Act;
                    ``(B) shall take into consideration--
                            ``(i) the need for and availability of 
                        financing for small business concerns in the 
                        geographic area in which the applicant is to 
                        commence business;
                            ``(ii) the general business reputation of 
                        the owners and management of the applicant; and
                            ``(iii) the probability of successful 
                        operations of the applicant, including adequate 
                        profitability and financial soundness; and
                    ``(C) shall not take into consideration any 
                projected shortage or unavailability of leverage.
            ``(4) Exception.--
                    ``(A) In general.--Notwithstanding any other 
                provision of this Act, the Administrator may, in the 
                discretion of the Administrator and based on a showing 
                of special circumstances and good cause, approve an 
                application and issue a license under this subsection 
                with respect to any applicant that--
                            ``(i) has private capital of not less than 
                        $3,000,000;
                            ``(ii) would otherwise be issued a license 
                        under this subsection, except that the 
                        applicant does not satisfy the requirements of 
                        section 302(a); and
                            ``(iii) has a viable business plan 
                        reasonably projecting profitable operations and 
                        a reasonable timetable for achieving a level of 
                        private capital that satisfies the requirements 
                        of section 302(a).
                    ``(B) Leverage.--An applicant licensed pursuant to 
                the exception provided in this paragraph shall not be 
                eligible to receive leverage as a licensee until the 
                applicant satisfies the requirements of section 
                302(a).''.
    (c) Specialized Small Business Investment Companies.--Section 
301(d) of the Small Business Investment Act of 1958 (15 U.S.C. 681(d)) 
is repealed.

SEC. 4. CAPITAL REQUIREMENTS.

    (a) Increased Minimum Capital Requirements.--Section 302(a) of the 
Small Business Investment Act of 1958 (15 U.S.C. 682(a)) is amended by 
striking ``(a)'' and all that follows through ``The Administration 
shall also determine the ability of the company,'' and inserting the 
following:
    ``(a) Amount.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        private capital of each licensee shall be not less than--
                    ``(A) $5,000,000; or
                    ``(B) $10,000,000, with respect to each licensee 
                authorized or seeking authority to issue participating 
                securities to be purchased or guaranteed by the 
                Administration under this Act.
            ``(2) Exception.--The Administrator may, in the discretion 
        of the Administrator and based on a showing of special 
        circumstances and good cause, permit the private capital of a 
        licensee authorized or seeking authorization to issue 
        participating securities to be purchased or guaranteed by the 
        Administration to be less than $10,000,000, but not less than 
        $5,000,000, if the Administrator determines that such action 
        would not create or otherwise contribute to an unreasonable 
        risk of default or loss to the Federal Government.
            ``(3) Adequacy.--In addition to the requirements of 
        paragraph (1), the Administrator shall--
                    ``(A) determine whether the private capital of each 
                licensee is adequate to assure a reasonable prospect 
                that the licensee will be operated soundly and 
                profitably, and managed actively and prudently in 
                accordance with its articles; and
                    ``(B) determine that the licensee will be able''.
    (b) Exemption for Certain Licensees.--Section 302(a) of the Small 
Business Investment Act of 1958 (15 U.S.C. 682(a)) is amended by adding 
at the end the following new paragraph:
            ``(4) Exemption from capital requirements.--
                    ``(A) Authority to exempt.--The Administrator may, 
                in the discretion of the Administrator, exempt from the 
                capital requirements in paragraph (1) any licensee 
                licensed under subsection (c) or (d) of section 301 
                before the date of enactment of the Small Business 
                Investment Company Improvement Act of 1996, if--
                            ``(i) the private capital of the licensee 
                        is not less than $2,500,000;
                            ``(ii) the licensee certifies in writing 
                        that not less than 50 percent of the aggregate 
                        dollar amount of its financings after the date 
                        of enactment of the Small Business Investment 
                        Company Improvement Act of 1996 will be 
                        provided to smaller enterprises; and
                            ``(iii) the Administrator determines that 
                        the licensee--
                                    ``(I) has a record of profitable 
                                operations; and
                                    ``(II) has not committed any 
                                serious or continuing violation of any 
                                applicable provision of Federal or 
                                State law or regulation.
                    ``(B) Reduction of private capital requirement.--If 
                the Administrator determines that such action would not 
                create or otherwise contribute to an unreasonable risk 
                of default or loss to the United States Government, the 
                Administrator, in the discretion of the Administrator 
                and based on a showing of special circumstances and 
                good cause, may reduce the private capital requirement 
                under subparagraph (A)(i) with respect to any 
                licensee.''.
    (c) Diversification of Ownership.--Section 302(c) of the Small 
Business Investment Act of 1958 (15 U.S.C. 682(c)) is amended to read 
as follows:
    ``(c) Diversification of Ownership.--The Administrator shall ensure 
that the management of each licensee licensed after the date of 
enactment of the Small Business Investment Company Improvement Act of 
1996 is sufficiently diversified from and unaffiliated with the 
ownership of the licensee in a manner that ensures independence and 
objectivity in the financial management and oversight of the 
investments and operations of the licensee.''.

SEC. 5. BORROWING.

    (a) Debentures.--Section 303(b) of the Small Business Investment 
Act of 1958 (15 U.S.C. 683(b)) is amended in the first sentence, by 
striking ``(but only'' and all that follows through ``terms)''.
    (b) Third Party Debt.--Section 303(c) of the Small Business 
Investment Act of 1958 (15 U.S.C. 683(c)) is amended to read as 
follows:
    ``(c) Third Party Debt.--The Administrator--
            ``(1) shall not permit a licensee having outstanding 
        leverage to incur third party debt that would create or 
        contribute to an unreasonable risk of default or loss to the 
        Federal Government; and
            ``(2) shall permit such licensees to incur third party debt 
        only on such terms and subject to such conditions as may be 
        established by the Administrator, by regulation or 
        otherwise.''.
    (c) Requirement To Finance Smaller Enterprises.--Section 303(d) of 
the Small Business Investment Act of 1958 (15 U.S.C. 683(d)) is amended 
to read as follows:
    ``(d) Requirement To Finance Smaller Enterprises.--The 
Administrator shall require each licensee, as a condition of approval 
of an application for leverage, to certify in writing that not less 
than 20 percent of the aggregate dollar amount of the financings of the 
licensee will be provided to smaller enterprises.''.
    (d) Capital Impairment Requirements.--Section 303(e) of the Small 
Business Investment Act of 1958 (15 U.S.C. 683(e)) is amended to read 
as follows:
    ``(e) Capital Impairment.--Before approving any application for 
leverage submitted by a licensee under this Act, the Administrator--
            ``(1) shall determine that the private capital of the 
        licensee meets the requirements of section 302(a); and
            ``(2) shall determine, taking into account the nature of 
        the assets of the licensee, the amount and terms of any third 
        party debt owed by such licensee, and any other factors 
        determined to be relevant by the Administrator, that the 
        private capital of the licensee has not been impaired to such 
        an extent that the issuance of additional leverage would create 
        or otherwise contribute to an unreasonable risk of default or 
        loss to the Federal Government.''.
    (e) Equity Investment Requirement.--Section 303(g)(4) of the Small 
Business Investment Act of 1958 (15 U.S.C. 683(g)(4)) is amended by 
striking ``and maintain''.
    (f) Fees.--Section 303 of the Small Business Investment Act of 1958 
(15 U.S.C. 683) is amended--
            (1) in subsection (b), in the fifth sentence, by striking 
        ``1 per centum,'' and all that follows before the period at the 
        end of the sentence and inserting the following: ``1 percent, 
        plus an additional charge of .50 percent per annum which shall 
        be paid to and retained by the Administration'';
            (2) in subsection (g)(2), by striking ``1 per centum,'' and 
        all that follows before the period at the end of the paragraph 
        and inserting the following: ``1 percent, plus an additional 
        charge of .50 percent per annum which shall be paid to and 
        retained by the Administration''; and
            (3) by adding at the end the following new subsections:
    ``(i) Leverage Fee.--With respect to leverage granted by the 
Administration to a licensee, the Administration shall collect from the 
licensee a nonrefundable fee in an amount equal to 3 percent of the 
face amount of leverage granted to the licensee, payable upon the 
earlier of the date of entry into any commitment for such leverage or 
the date on which the leverage is drawn by the licensee.
    ``(j) Calculation of Subsidy Rate.--All fees, interest, and profits 
received and retained by the Administration under this section shall be 
included in the calculations made by the Director of the Office of 
Management and Budget to offset the cost (as that term is defined in 
section 502 of the Federal Credit Reform Act of 1990) to the 
Administration of purchasing and guaranteeing debentures and 
participating securities under this Act.''.

SEC. 6. LIABILITY OF THE UNITED STATES.

    Section 308(e) of the Small Business Investment Act of 1958 (15 
U.S.C. 687(e)) is amended by striking ``Nothing'' and inserting 
``Except as expressly provided otherwise in this Act, nothing''.

SEC. 7. EXAMINATIONS; VALUATIONS.

    (a) Examinations.--Section 310(b) of the Small Business Investment 
Act of 1958 (15 U.S.C. 687b(b)) is amended in the first sentence by 
inserting ``which may be conducted with the assistance of a private 
sector entity that has both the qualifications to conduct and expertise 
in conducting such examinations,'' after ``Investment Division of the 
Administration,''.
    (b) Valuations.--Section 310(d) of the Small Business Investment 
Act of 1958 (15 U.S.C. 687b(d)) is amended to read as follows:
    ``(d) Valuations.--
            ``(1) Frequency of valuations.--
                    ``(A) In general.--Each licensee shall submit to 
                the Administrator a written valuation of the loans and 
                investments of the licensee not less often than 
                semiannually or otherwise upon the request of the 
                Administrator, except that any licensee with no 
                leverage outstanding shall submit such valuations 
                annually, unless the Administrator determines 
                otherwise.
                    ``(B) Material adverse changes.--Not later than 30 
                days after the end of a fiscal quarter of a licensee 
                during which a material adverse change in the aggregate 
                valuation of the loans and investments or operations of 
                the licensee occurs, the licensee shall notify the 
                Administrator in writing of the nature and extent of 
                that change.
                    ``(C) Independent certification.--
                            ``(i) In general.--Not less than once 
                        during each fiscal year, each licensee shall 
                        submit to the Administrator the financial 
                        statements of the licensee, audited by an 
                        independent certified public accountant 
                        approved by the Administrator.
                            ``(ii) Audit requirements.--Each audit 
                        conducted under clause (i) shall include--
                                    ``(I) a review of the procedures 
                                and documentation used by the licensee 
                                in preparing the valuations required by 
                                this section; and
                                    ``(II) a statement by the 
                                independent certified public accountant 
                                that such valuations were prepared in 
                                conformity with the valuation criteria 
                                applicable to the licensee established 
                                in accordance with paragraph (2).
            ``(2) Valuation criteria.--Each valuation submitted under 
        this subsection shall be prepared by the licensee in accordance 
        with valuation criteria, which shall--
                    ``(A) be established or approved by the 
                Administrator; and
                    ``(B) include appropriate safeguards to ensure that 
                the noncash assets of a licensee are not overvalued.''.

SEC. 8. TRUSTEE OR RECEIVERSHIP OVER LICENSEES.

    (a) In General.--Section 311 of the Small Business Investment Act 
of 1958 (15 U.S.C. 687c) is amended by adding at the end the following 
new subsection:
    ``(d) Appointment of Principal Receivers and Agents.--
            ``(1) In general.--Upon appointment as a receiver, as 
        described in subsection (c), the Administrator may appoint 
        principal receivers and receiver's agents.
            ``(2) Compensation.--A receiver's agent appointed under 
        paragraph (1) may be paid--
                    ``(A) at any time from salaries and expense amounts 
                appropriated for the Administration, and the 
                Administration may be reimbursed for such amounts from 
                amounts recovered from the liquidation of any assets of 
                the licensee at the conclusion of the receivership; or
                    ``(B) from amounts recovered from the liquidation 
                of any assets of the licensee, but only at the 
                conclusion of the receivership.''.
    (b) Contracts With Private Sector Entities.--
            (1) In general.--Not later than June 30, 1997, the Small 
        Business Administration shall enter into one or more contracts 
        or arrangements with private sector entities to provide for the 
        orderly liquidation of all licensee assets in liquidation, 
        including assets of licensees in receivership or in trust with 
        respect to which the court has appointed the Administration as 
        receiver or trustee under section 311 of the Small Business 
        Investment Act of 1958.
            (2) Definition.--For purposes of this subsection, the term 
        ``licensee'' has the same meaning as in section 103 of the 
        Small Business Investment Act of 1958.

SEC. 9. BOOK ENTRY REGISTRATION.

    Subsection 321(f) of the Small Business Investment Act of 1958 (15 
U.S.C. 687l) is amended by adding at the end the following new 
paragraph:
    ``(5) Nothing in this subsection shall prohibit the utilization of 
a book entry or other electronic form of registration for trust 
certificates.''.

 SEC. 10. TECHNICAL AND CONFORMING AMENDMENTS.

    The Small Business Investment Act of 1958 (15 U.S.C. 661 et seq.) 
is amended--
            (1) in section 303--
                    (A) in subsection (a), by striking ``debenture 
                bonds,'' and inserting ``securities,'';
                    (B) by striking subsection (f) and inserting the 
                following:
    ``(f) Redemption or Repurchase of Preferred Stock.--Notwithstanding 
any other provision of law--
            ``(1) the Administrator may allow the issuer of any 
        preferred stock sold to the Administration before November 1, 
        1989 to redeem or repurchase such stock, upon the payment to 
        the Administration of an amount less than the par value of such 
        stock, for a repurchase price determined by the Administrator 
        after consideration of all relevant factors, including--
                    ``(A) the market value of the stock;
                    ``(B) the value of benefits provided and 
                anticipated to accrue to the issuer;
                    ``(C) the amount of dividends paid, accrued, and 
                anticipated; and
                    ``(D) the Administrator's estimate of any 
                anticipated redemption; and
            ``(2) any moneys received by the Administration from the 
        repurchase of preferred stock shall be available solely to 
        provide debenture leverage to licensees having 50 percent or 
        more in aggregate dollar amount of their financings invested in 
        smaller enterprises.''; and
                    (C) in subsection (g)(8)--
                            (i) by striking ``partners or 
                        shareholders'' and inserting ``partners, 
                        shareholders, or members'';
                            (ii) by striking ``partner's or 
                        shareholder's'' and inserting ``partner's, 
                        shareholder's, or member's''; and
                            (iii) by striking ``partner or 
                        shareholder'' and inserting ``partner, 
                        shareholder, or member'';
            (2) in section 308(h), by striking ``subsection (c) or (d) 
        of section 301'' each place that term appears and inserting 
        ``section 301'';
            (3) in section 310(c)(4), by striking ``not less than four 
        years in the case of section 301(d) licensees and in all other 
        cases,'';
            (4) in section 312--
                    (A) by striking ``shareholders or partners'' and 
                inserting ``shareholders, partners, or members''; and
                    (B) by striking ``shareholder, or partner'' each 
                place that term appears and inserting ``shareholder, 
                partner, or member'';
            (5) by striking sections 317 and 318, and redesignating 
        sections 319 through 322 as sections 317 through 320, 
        respectively;
            (6) in section 319, as redesignated--
                    (A) in subsection (a), by striking ``, including 
                companies operating under the authority of section 
                301(d),''; and
                    (B) in subsection (f)(2), by inserting ``or 
                investments in obligations of the United States'' after 
                ``accounts'';
            (7) in section 320, as redesignated, by striking ``section 
        321'' and inserting ``section 319''; and
            (8) in section 509--
                    (A) in subsection (a)(1), by striking the second 
                sentence; and
                    (B) in subsection (e)(1)(B), by striking 
                ``subsection (c) or (d) of section 301'' and inserting 
                ``section 301''.

SEC. 11. AUTHORIZATION OF APPROPRIATIONS.

    Section 20(p)(3) of the Small Business Act (15 U.S.C. 631 note) is 
amended by striking subparagraph (B) and inserting the following:
                    ``(B) $300,000,000 in guarantees of debentures; 
                and''.

SEC. 12. EFFECTIVE DATE.

    This Act and the amendments made by this Act shall become effective 
on the date of enactment of this Act.
                                 <all>