[Congressional Record Volume 142, Number 111 (Thursday, July 25, 1996)]
[Senate]
[Pages S8931-S8938]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




       SMALL BUSINESS INVESTMENT COMPANY IMPROVEMENT ACT OF 1996

  Mr. MURKOWSKI. Mr. President, I ask unanimous consent that the Senate 
proceed to the immediate consideration of calendar No. 455, S. 1784.
  The PRESIDING OFFICER. The clerk will report.
  The legislative clerk read as follows:

       A bill (S. 1784) to amend the Small Business Investment Act 
     of 1958, and for other purposes.

  The PRESIDING OFFICER. Is there objection to the immediate 
consideration of the bill?
  There being no objection, the Senate proceeded to consider the bill, 
which had been reported from the Committee on Small Business with an 
amendment to strike all after the enacting clause and insert in lieu 
thereof the following:

     SECTION 1. SHORT TITLE.

       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 committed for investment before 
     the date of enactment of the Small Business Investment 
     Company Improvement Act of 1996; or
       ``(ii) 20 percent of the private capital of the applicant 
     or licensee, if such funds were committed for investment on 
     or after the date of enactment of the Small Business 
     Investment Company Improvement Act of 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

[[Page S8932]]

       ``(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.--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--
       ``(A) 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
       ``(B) the Administrator determines that--
       ``(i) the licensee has a record of profitable operations;
       ``(ii) the licensee has not committed any serious or 
     continuing violation of any applicable provision of Federal 
     or State law or regulation; and
       ``(iii) such action would not create or otherwise 
     contribute to an unreasonable risk of default or loss to the 
     United States Government.''.
       (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.''.

[[Page S8933]]

     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) Finding.--It is the finding of the Congress that 
     increased recoveries on assets in liquidation under the Small 
     Business Investment Act of 1958 are in the best interests of 
     the Federal Government.
       (b) Definitions.--For purposes of this section--
       (1) the term ``Administrator'' means the Administrator of 
     the Small Business Administration;
       (2) the term ``Administration'' means the Small Business 
     Administration; and
       (3) the term ``licensee'' has the same meaning as in 
     section 103 of the Small Business Investment Act of 1958.
       (c) Liquidation Plan.--
       (1) In general.--Not later than October 15, 1996, the 
     Administrator shall submit to the Committees on Small 
     Business of the Senate and the House of Representatives a 
     detailed plan to expedite the orderly liquidation of all 
     licensee assets in liquidation, including assets of licensees 
     in receivership or in trust held by or under the control of 
     the Administration or its agents.
       (2) Contents.--The plan submitted under paragraph (1) shall 
     include a timetable for liquidating the liquidation portfolio 
     of small business investment company assets owned by the 
     Administration, and shall contain the Administrator's 
     findings and recommendations on various options providing for 
     the fair and expeditious liquidation of such assets within a 
     reasonable period of time, giving due consideration to the 
     option of entering into one or more contracts with private 
     sector entities having the capability to carry out the 
     orderly liquidation of similar assets.

     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.

       (a) Small Business Investment Act of 1958.--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''.
       (b) Amendment in Other Law.--Section 11(h) of the Federal 
     Home Loan Bank Act (12 U.S.C. 1431(h)) is amended by striking 
     ``301(d)'' and inserting ``301''.

     SEC. 11. AMENDMENTS TO THE SMALL BUSINESS ACT.

       (a) Powers of the Administrator.--Section 5(b)(7) of the 
     Small Business Act (15 U.S.C. 634(b)(7)) is amended by 
     striking the colon and all that follows before the semicolon 
     at the end of the paragraph and inserting the following: ``: 
     Provided, That with respect to deferred participation loans, 
     the Administrator may, in the discretion of and pursuant to 
     regulations promulgated by the Administrator, authorize 
     participating lending institutions to take actions relating 
     to loan servicing on behalf of the Administrator, including 
     determining eligibility and creditworthiness and loan 
     monitoring, collection, and liquidation''.
       (b) 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.

  Mr. BOND. Mr. President, I rise today in support of S. 1784, The 
Small Business Investment Company Improvement Act of 1996. This bill 
proposes numerous changes to the Small Business Investment Act of 1958 
designed to improve, strengthen, and expand the availability of 
investment capital under the Small Business Administrations's Small 
Business Investment Company (SBIC) program.
  S. 1784 builds on the improvements of the SBIC program contained in 
the law passed by Congress in 1992 by making the following changes to 
reduce the risk of SBIC defaults and losses to the Federal government:
  1. Increases the level of private capital needed to obtain an SBIC 
license from SBA.
  2. Requires experienced and qualified management for all SBICs.
  3. Requires diversification between investors and the management 
team.
  In addition, S. 1784 makes these important changes to the Small 
Business Investment Act to increase the availability of investment 
capital to small businesses:
  1. Increases fees paid by SBICs which reduces the credit subsidy 
rate.
  2. Eliminates the distinction between SBICs and SSBICs, while 
grandfathering'' successful SSBICs into the new program.
  3. Places a greater emphasis on SBIC investments in smaller 
enterprises or smaller small businesses.
  In 1958, Congress first approved the Small Business Investment Act 
creating Small Business Investment Companies, which are private 
investment companies licensed by SBA, whose sole activity is to make 
investments in small businesses. An SBIC raises private capital which 
is matched by additional funds guaranteed by SBA. The

[[Page S8934]]

private capital and SBA-guaranteed funds are invested by SBICs in small 
businesses.
  SBICs fill a void that is not addressed by private venture capital 
firms, most of which are so large they are usually unwilling to make 
investments in smaller firms, which generally seek investments in the 
range of $500,000 to $2.5 million each. Since the beginning of the SBIC 
program, nearly $12 billion has been invested in approximately 77,000 
small businesses. Some SBICs make equity investments in small 
businesses, while others make long-term loans, which are frequently 
coupled with rights to purchase an equity interest in the company, 
sometimes called warrants''. The lending-type'' or debenture SBICs 
provide long-term financing that is generally not available from banks 
or private venture capital firms.
  Today, there are 185 active regular SBICs and 89 Specialized SBICs 
(SSBICs) in the SBIC program. SSBICs invest only in minority owned and 
controlled businesses. Together, these SBICs and SSBICs have raised 
nearly $4 billion in private capital and have received $1.02 billion in 
SBA-guaranteed funds.
  Today's SBIC program has been shaped in large part by the Small 
Business Equity Enhancement Act of 1992. The genesis of this important 
legislation resulted from the hard work of SBA's Investment Capital 
Advisory Council, a public-private working group formed in 1991 to 
address the problems confronting the SBIC program. The 1992 Act 
produced the first major change in the SBIC program since it's 
formation in 1958. It created the Participating Security program, which 
incorporates some of the best practices of the private venture capital 
industry. The 1992 act came about in response to the persistence of my 
good friend and colleague from Arkansas, Senator Bumpers, who as 
chairman of the Committee on Small Business held a series of hearings 
focusing attention on the problems under the program. The result of the 
Act was to strengthen the SBIC program and to correct serious 
weaknesses that had been exposed by well publicized problems of the 
past.

  Since the 1992 Act became law, more than 30 new participating 
security SBICs with nearly $500 million in private capital have been 
licensed by SBA, and 17 new SBICs with over $200 million of private 
capital have been licensed as debenture SBICs.
  There is a significant difference between the SBICs licensed before 
the 1992 Act and the SBICs licensed under the more strict guidelines 
set forth under the 1992 Act. While the 1992 Act increased the minimum 
private capital threshold for licensing to $2.5 million for each 
debenture SBIC and $5 million for each new participating security SBIC, 
SBA has imposed even more strict standards in its regulations. Under 
the SBA rules, debenture SBICs must have a minimum of $5 million in 
private capital and participating security SBICs must have $10 million 
in private capital.
  Since the 1992 Act has created two distinct types of SBICs, it allows 
for investments to be tailored to meet the needs of small businesses. 
For example, when a small business needs a loan and can meet projected 
interest payments, the traditional lending-type or debenture SBICs are 
available to make debt investments. For small businesses that need non-
interest bearing investment capital, the participating security SBICs 
can offer an equity-type investment which anticipates an extended 
period of time, such as two to three years, before the small business 
is expected to begin repayment of this investment. In this latter case, 
interest payments are deferred until the investments begin to generate 
a positive return. Under the Participating Security program, the 
Federal government's return is not limited to repayment of principal 
and interest--it can also share in the profits of the SBIC.
  During this Congress, I have chaired three hearings investigating the 
success and problems associated with the SBIC program. Testimony before 
the Senate Committee on Small Business has been supportive and 
positive. Numerous small business entrepreneurs have testified about 
their inability to obtain investment capital from banks and other 
traditional investment sources, and SBICs are frequently their only 
source of investment capital. Last year, Jerry Johnson, the Chief 
Executive Officer of Williams Brothers Lumber Co. located near Atlanta, 
testified that not one bank in the Atlanta area would speak with him 
about asset-based lending. After a lengthy search, he and his partner 
turned to Allied Capital Corp., a Washington, D.C.-based SBIC. Within 
60 days of their first contact with Allied Capital Corp., Mr. Johnson 
was able to conclude his financing arrangement. Being able to clear 
this financing hurdle with the help of an SBIC, Mr. Johnson's company 
has grown significantly, adding many new employees and increasing its 
tax base.
  Often, we hear about major success stories like Federal Express and 
the Callaway golf club co. that received SBIC funding at critical times 
in their early growth stages. It is, however, far more likely that 
businesses like the Williams Brothers Lumber Co. will be the typical 
beneficiaries of the SBIC program. These are ``Main Street'' 
enterprises located across America who have looked to traditional money 
sources and been turned away. The SBIC program is filling this niche--a 
large niche to say the least--that picks up where banks fear to tread 
and Wall Street is not interested because the investment size is too 
small. There are thousands of companies like Williams Brothers Lumber 
Company across the country that need investment financing to support 
growth and new jobs and have nowhere to turn but to the SBIC program to 
meet their demand for capital.

  During the past year, the Committee on Small Business has received a 
great deal of information about the need to strengthen the SBIC 
program. In July 1995, Patricia Cloherty, Chair of SBA's private sector 
SBIC Reinvention Council, testified on the Council's recommendations to 
strengthen and expand the program. In addition, last summer the 
National Association of Investment Companies forwarded to the Committee 
on Small Business a copy of their recommendations to improve the SSBIC 
program, which was also submitted to SBA's SSBIC Advisory Council.
  The involvement of the private sector in analyzing the performance of 
the SBIC program and the insight provided by these recommendations are 
commendable - and very helpful to this Committee. In 1995, the SBIC 
Reinvention Council recommended that new fees be imposed to lower the 
credit subsidy rate so that the program can provide a significant 
increase in leverage to licensed SBICs. It also recommended certain 
administrative changes to improve the management and operations of the 
SBIC program.
  The National Association of Investment Companies (NAIC), which 
represents SSBICs, also recommended in 1995 that all statutory and 
regulatory distinctions between SBICs and SSBICs be eliminated, 
including the deletion of all references to social or economic 
disadvantage'' from the Small Business Investment Act. NAIC proposed 
creating a single, combined SBIC program that would retain an important 
focus on investments in small business at the smaller end of the 
eligible size standards. They recommended sensible improvements to make 
more investment capital available to more small businesses and proposed 
to remove the current restrictions that prohibit Specialized SBICs from 
investing in companies not owned by socially or economically 
disadvantaged persons. S. 1784 includes many of their recommendations.


                           NEW FEES FOR SBICs

  The President's FY 1997 budget request included a recommendation that 
fees paid by SBICs be increased to finance a significant reduction in 
the credit subsidy rate. The Office of Management and Budget, 
recognizing the positive effect of some of the regulatory changes 
already implemented by SBA, now is using a lower projected default 
rate, thereby reducing the credit subsidy rate for debenture and 
participating security licensees under the SBIC program.
  The Administration's recommendation to lower the credit subsidy rate 
by increasing fees is similar to one made last year in their amended FY 
1996 budget request for the 7(a) Guaranteed Business Loan Program. 
Accompanying their request for a fee increase were statements by SBA 
about how well the 7(a) program was performing.
  What happened following SBA's positive predictions for the 7(a) 
program

[[Page S8935]]

has been alarming. Based in part on SBA's glowing report card on the 
7(a) program, Congress passed legislation to raise fees and lower the 
subsidy rates of the program. The changes became law in October 1995, 
which is about the same time SBA and OMB were beginning to work on 
their most recent budget request which raises the 7(a) credit subsidy 
rate by 150% and the cost of the program by $180 million. This higher 
cost is the direct result of greater losses from loan defaults and 
lower recoveries from liquidations.
  As Chairman of the Committee on Small Business, I believe it 
is prudent for Congress to take steps so that we do not allow a repeat 
of the 7(a) problem with the SBIC program. Based on our experience last 
year, Congress should not approve any decrease in the credit subsidy 
rate through the increase of fees without taking some corresponding 
steps to strengthen the safety and soundness of the SBIC program.


                          SBICs IN LIQUIDATION

  In addition, evidence before the Committee on Small Business about 
the failure of SBA to maximize its recoveries from failed SBICs is 
alarming. SBA acknowledges there are assets with a value of 
approximately $500 million tied up with SBICs in liquidation. To make 
this situation even more alarming, many of these failed SBICs have been 
in liquidation for over ten years, including one that was transferred 
into liquidation on January 5, 1967.
  S. 1784 directs SBA to submit to the Senate and House Committees on 
Small Business, no later than October 15, 1996, a detailed plan to 
expedite the orderly liquidation of all licensee assets in liquidation. 
This plan should include a timetable for liquidating the liquidation 
portfolio of assets owned by SBA.
  In addition, SBA needs to take a hard look at how it manages failed 
SBICs that are in receivership. It is not a sufficient explanation for 
SBA to claim it is at the mercy of the court system in winding up the 
affairs of SBICs in receivership. In each case, the court acts in 
response to SBA's petition, has named SBA the receiver, and SBA has 
retained independent contractors to act as principal agents for the 
receivership. These principal agents are paid hourly and appear to have 
little or no incentive to wind up the affairs of an SBIC. In fact, the 
opposite is true, and the real incentive appears to be to drag out the 
receivership as long as possible. Based on SBA replies to requests for 
information from the Committee on Small Business, we have learned that 
these principal receivers agents bill significant hours each year. In 
FY 1995, one principal agent billed over 3,200 hours for one year, the 
equivalent of over 8 hours per day for 365 days. Other principal agents 
billed over 2,500 hours each for FY 1995.
  At the time of the Committee's inquiry into these billing practices, 
SBA gave no indication that it felt they were unusual. It is clear to 
me that without incentives to complete action on these SBICs in 
receivership, the current system used by SBA will allow these abuses to 
continue. Although the Committee did not reach a consensus on my 
proposal to create an incentive based system to improve recoveries from 
SBICs in receivership, we will continue to monitor SBA's performance 
closely in this area.
  For several months starting late last year, the Committee worked on 
draft legislation to strengthen and enhance the SBIC program. S. 1784, 
the Small Business Investment Company Improvement Act of 1996, is the 
result. It incorporates recommendations from SBA's SBIC Reinvention 
Council, the National Association of Investment Companies, the National 
Association of Small Business Investment Companies, and the President's 
FY 1997 budget request.
  S. 1784 was approved by the Senate Committee on Small Business by a 
unanimous 18-0 vote. It makes substantial progress toward our goal of 
strengthening the SBIC program, while allowing the program to expand, 
providing more investment capital to small businesses as the cost and 
risk to the government declines. It was only after nearly 18 months of 
study and investigation that we were able to produce such a bill. S. 
1784 is sound legislation that improves the safety and soundness of the 
SBIC program and makes more investment capital available to small 
businesses. And it accomplishes all of these goals while reducing the 
risk of loss to the government. It is for these reasons that I 
recommend to my colleagues that they vote in favor of S. 1784.
  Mr. President, I ask unanimous consent that a section-by-section 
analysis of this bill be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                      Section-By-Section Analysis


                         section 1. short title

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


                         section 2. definitions

       The definition of ``small business concern'' is amended to 
     make clear that investments from venture capital firms or 
     pension plans in small businesses do not affect the small 
     business' size standard as set forth under the Small Business 
     Act.
       A new term, ``smaller enterprise'' is included in the Act. 
     A smaller enterprise is a business with net financial worth 
     no greater than $6 million and an average net income of no 
     more than $2 million.
       ``Qualified non-private funds'' are defined as funds 
     invested by state or local governments in SSBIC's. The bill 
     limits the amount of qualified private, non-private funds 
     that can be included in the private capital of an SBIC. No 
     more than 20% of private capital can be qualified non-private 
     funds invested on or after June 30, 1996. 33% of private 
     capital can be from these funds if invested prior to June 30, 
     1996.
       For the first time, the Small Business Investment Act is 
     amended to include ``limited liability company'' as the one 
     of the business entities that can qualify to be an SBIC. 
     Current statute allows corporations and partnerships to be 
     SBICs. The ``limited liability company'' is a relatively new 
     business entity that is being organized for raising venture 
     capital.


     section 3. organization of small business investment companies

       This bill includes provisions to speed up the processing of 
     applications from business entities who want to be licensed 
     by SBA as an SBIC. It requires SBA to provide the applicant 
     with a written report detailing status of the application 
     within 90 days of receipt of the application. In addition it 
     states that no application can be denied because Congress has 
     not appropriated sufficient funds to meet leverage demands.
       This bill also permits SBA to approve a new license 
     applicant which has not less than $3 million in private 
     capital so long as the applicant meets all other licensing 
     requirements. Once approved as a licensee, however, the SBIC 
     would not be eligible for leverage until its private capital 
     reaches $5 million.
       Section 301(d) of the Small Business Investment Company Act 
     of 1958 is repealed.


                    section 4. capital requirements

       Under this bill, the minimum capital requirements for new 
     license applicants is increased. To be a debenture licensee, 
     new applicants must have $5 million in private capital. To be 
     a participating security licensee, new applicants must have 
     $10 million in private capital; however, SBA is given the 
     discretion to approve a participating security applicant if 
     it has less than $10 million but more than $5 million so long 
     as SBA determines that approval of that applicant would not 
     create or otherwise contribute to an unreasonable risk of 
     default or loss to the federal government.
       This bill also grandfathers existing licensees in the 
     program and includes provisions under which they will be 
     exempt from the increased capital requirement. Licensees with 
     a record of regulatory compliance and profitable operations 
     will continue to be eligible for leverage, based upon the 
     exercise of SBA discretion. Any licensee which continues to 
     receive leverage under this exemption must certify that 50% 
     of its aggregate dollar investments are going to smaller 
     enterprises.
       The bill directs SBA to ensure that each licensee licensed 
     after enactment of this bill maintains diversification 
     between the management and ownership of the licensee. This is 
     a safety and soundness measure design to maintain 
     independence and objectivity in the financial management and 
     oversight of the investment and operations of the SBIC.


                          section 5. borrowing

       This provision requires SBA to regulate SBICs closely to 
     ensure that they do not incur excessive third party debt 
     which would create or contribute to an unreasonable risk of 
     default or loss to federal government. In addition, this 
     provision requires that each SBIC, regardless of its size, 
     invest at least 20% of its aggregate dollar investments in 
     smaller enterprises.
       This section also requires SBA to ensure that no SBIC 
     receives leverage when it is under capital impairment. This 
     will be a judgment call by SBA which will take in to 
     consideration the nature of assets of the SBIC and the amount 
     and terms of any third party debt owed by the SBIC.
       This section also includes two increases in fees to be paid 
     by SBICs to SBA. First, SBICs would pay an annual charge of 
     50 basis point on the value of all outstanding leverage 
     granted after the effective date. In addition, the non-
     refundable up-front fee which is currently 2% would be 
     increased to 3% of new leverage amounts.

[[Page S8936]]

               section 6. liability of the united states

       This section restates and clarifies the limits of liability 
     on SBA under this program.


                  section 7, examinations; valuations

       This is a section designed to improve the examination and 
     oversight function of SBA to enhance the safety and soundness 
     of the program. It requires each SBIC to adopt 
     valuation criteria set forth by SBA to be used for 
     establishing the values of loans and investments of each 
     SBIC. This section requires that an independent certified 
     accountant approved by SBA review these valuations at 
     least once a year to ensure that these requirements are 
     being met.


           section 8. trustee or receivership over licensees

       This section states that it is the finding of the Congress 
     that increased recoveries of assets in liquidation under the 
     SBIC program are in the best interest of the Federal 
     Government. Not later than October 15, 1996, SBA is directed 
     to submit to the Senate and House Committees on Small 
     Business a detailed plan to expedite the orderly liquidation 
     of all licensee assets in liquidation. This plan in to 
     include a timetable for liquidating the liquidation portfolio 
     of assets owned by SBA.


                   section 9. book entry registration

       This section permits the use of electronic means for 
     registration of trust certificates.


            section 10. technical and conforming amendments

       An SBIC preferred stock buy back program was authorized by 
     Congress effective November 1, 1989. This bill directs that 
     any monies received by SBA under this repurchase program 
     shall be used solely to guarantee debenture leverage for 
     SBICs that maintain an investment protfolio with 50% of its 
     investments in smaller enterprises.


              section 11. authorization of appropriations

       This section increases the authorization for debenture 
     leverage from $200 million to $300 million for FY 1997.


                       section 12. effective date

       This Act and any amendments will become effective on the 
     date of enactment.


 section 13. extension of small business competitiveness demonstration 
                                program

       This section provides for a one year extension of the Small 
     Business Competitiveness Demonstration Program Act, which 
     would otherwise expire on September 30, 1996.


                           Amendment No. 5090

  Mr. MURKOWSKI. Mr. President, I understand there is an amendment at 
the desk offered by Senators Bond and Bumpers. I ask for its immediate 
consideration.
  The PRESIDING OFFICER. The clerk will report.
  The legislative clerk read as follows:

       The Senator from Alaska [Mr. Murkowski], for Mr. Bond, for 
     himself, and Mr. Bumpers, proposes an amendment numbered 
     5090.
       On page 49, line 4, add the following new section:

     SEC 13, EXTENSION OF SMALL BUSINESS COMPETITIVENESS 
                   DEMONSTRATION PROGRAM

       Section 711(c) of the Small Business Competitiveness 
     Demonstration Program Act of 1988 (15 U.S.C. 644 note) is 
     amended by striking ``September 30, 1996'' and inserting 
     ``September 30, 1997''.

  Mr. MURKOWSKI. Mr. President, I ask unanimous consent that the 
amendment be agreed to.
  The amendment (No. 5090) was agreed to.
  Mr. MURKOWSKI. Mr. President, I ask unanimous consent that the 
committee substitute, as amended, be agreed to, the bill be deemed read 
a third time, passed, and the motion to reconsider be laid upon the 
table, and any statement relating to the bill be placed at the 
appropriate place in the Record.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The committee amendment was agreed to.
  The bill (S. 1784), as amended, was deemed read the third time and 
passed, as follows:

                                S. 1784

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

     SECTION 1. SHORT TITLE.

       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 committed for investment before 
     the date of enactment of the Small Business Investment 
     Company Improvement Act of 1996; or
       ``(ii) 20 percent of the private capital of the applicant 
     or licensee, if such funds were committed for investment on 
     or after the date of enactment of the Small Business 
     Investment Company Improvement Act of 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

[[Page S8937]]

     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.--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--
       ``(A) 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
       ``(B) the Administrator determines that--
       ``(i) the licensee has a record of profitable operations;
       ``(ii) the licensee has not committed any serious or 
     continuing violation of any applicable provision of Federal 
     or State law or regulation; and
       ``(iii) such action would not create or otherwise 
     contribute to an unreasonable risk of default or loss to the 
     United States Government.''.
       (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.

[[Page S8938]]

       ``(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) Finding.--It is the finding of the Congress that 
     increased recoveries on assets in liquidation under the Small 
     Business Investment Act of 1958 are in the best interests of 
     the Federal Government.
       (b) Definitions.--For purposes of this section--
       (1) the term ``Administrator'' means the Administrator of 
     the Small Business Administration;
       (2) the term ``Administration'' means the Small Business 
     Administration; and
       (3) the term ``licensee'' has the same meaning as in 
     section 103 of the Small Business Investment Act of 1958.
       (c) Liquidation Plan.--
       (1) In general.--Not later than October 15, 1996, the 
     Administrator shall submit to the Committees on Small 
     Business of the Senate and the House of Representatives a 
     detailed plan to expedite the orderly liquidation of all 
     licensee assets in liquidation, including assets of licensees 
     in receivership or in trust held by or under the control of 
     the Administration or its agents.
       (2) Contents.--The plan submitted under paragraph (1) shall 
     include a timetable for liquidating the liquidation portfolio 
     of small business investment company assets owned by the 
     Administration, and shall contain the Administrator's 
     findings and recommendations on various options providing for 
     the fair and expeditious liquidation of such assets within a 
     reasonable period of time, giving due consideration to the 
     option of entering into one or more contracts with private 
     sector entities having the capability to carry out the 
     orderly liquidation of similar assets.

     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.

       (a) Small Business Investment Act of 1958.--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''.
       (b) Amendment in Other Law.--Section 11(h) of the Federal 
     Home Loan Bank Act (12 U.S.C. 1431(h)) is amended by striking 
     ``301(d)'' and inserting ``301''.

     SEC. 11. AMENDMENTS TO THE SMALL BUSINESS ACT.

       (a) Powers of the Administrator.--Section 5(b)(7) of the 
     Small Business Act (15 U.S.C. 634(b)(7)) is amended by 
     striking the colon and all that follows before the semicolon 
     at the end of the paragraph and inserting the following: ``: 
     Provided, That with respect to deferred participation loans, 
     the Administrator may, in the discretion of and pursuant to 
     regulations promulgated by the Administrator, authorize 
     participating lending institutions to take actions relating 
     to loan servicing on behalf of the Administrator, including 
     determining eligibility and creditworthiness and loan 
     monitoring, collection, and liquidation''.
       (b) 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''.

                          ____________________