[House Report 114-508]
[From the U.S. Government Publishing Office]


114th Congress }                                                {  Report
                        HOUSE OF REPRESENTATIVES
 2d Session    }                                                { 114-508

======================================================================



 
                 SMALL BUSINESS CREDIT AVAILABILITY ACT

                                _______
                                

 April 19, 2016.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3868]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 3868) to amend the Investment Company Act of 
1940 to remove certain restrictions on the ability of business 
development companies to own securities of investment advisers 
and certain financial companies, to change certain requirements 
relating to the capital structure of business development 
companies, to direct the Securities and Exchange Commission to 
revise certain rules relating to business development 
companies, and for other purposes, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Small Business Credit Availability 
Act''.

SEC. 2. BUSINESS DEVELOPMENT COMPANY OWNERSHIP OF SECURITIES OF 
                    INVESTMENT ADVISERS AND CERTAIN FINANCIAL 
                    COMPANIES.

  (a) In General.--
          (1) In general.--Not later than 1 year after the date of 
        enactment of this Act, the Securities and Exchange Commission 
        shall promulgate regulations to codify the order in Investment 
        Company Act Release No. 30024, dated March 30, 2012. If the 
        Commission fails to complete the regulations as required by 
        this subsection, a business development company shall be 
        entitled to treat such regulations as having been completed in 
        accordance with the actions required to be taken by the 
        Commission until such time as such regulations are completed by 
        the Commission.
          (2) Rule of construction.--Nothing in this subsection shall 
        prevent the Commission from issuing rules to address potential 
        conflicts of interest between business development companies 
        and investment advisers.
  (b) Permissible Assets of an Eligible Portfolio Company.--Section 55 
of the Investment Company Act of 1940 (15 U.S.C. 80a-54) is amended by 
adding at the end the following:
  ``(c) Securities Deemed To Be Permissible Assets.--Notwithstanding 
subsection (a), securities that would be described in paragraphs (1) 
through (6) of such subsection except that the issuer is a company 
described in paragraph (2), (3), (4), (5), (6), or (9) of section 3(c) 
may be deemed to be assets described in paragraphs (1) through (6) of 
subsection (a) to the extent necessary for the sum of the assets to 
equal 70 percent of the value of a business development company's total 
assets (other than assets described in paragraph (7) of subsection 
(a)), provided that the aggregate value of such securities counting 
toward such 70 percent shall not exceed 20 percent of the value of the 
business development company's total assets.''.

SEC. 3. EXPANDING ACCESS TO CAPITAL FOR BUSINESS DEVELOPMENT COMPANIES.

  (a) In General.--Section 61(a) of the Investment Company Act of 1940 
(15 U.S.C. 80a-60(a)) is amended--
          (1) by redesignating paragraphs (2) through (4) as paragraphs 
        (3) through (5), respectively;
          (2) by striking paragraph (1) and inserting the following:
          ``(1) Except as provided in paragraph (2), the asset coverage 
        requirements of subparagraphs (A) and (B) of section 18(a)(1) 
        (and any related rule promulgated under this Act) applicable to 
        business development companies shall be 200 percent.
          ``(2) The asset coverage requirements of subparagraphs (A) 
        and (B) of section 18(a)(1) and of subparagraphs (A) and (B) of 
        section 18(a)(2) (and any related rule promulgated under this 
        Act) applicable to a business development company shall be 150 
        percent if--
                  ``(A) within five business days of the approval of 
                the adoption of the asset coverage requirements 
                described in clause (ii), the business development 
                company discloses such approval and the date of its 
                effectiveness in a Form 8-K filed with the Commission 
                and in a notice on its website and discloses in its 
                periodic filings made under section 13 of the 
                Securities Exchange Act of 1934 (15 U.S.C. 78m)--
                          ``(i) the aggregate value of the senior 
                        securities issued by such company and the asset 
                        coverage percentage as of the date of such 
                        company's most recent financial statements; and
                          ``(ii) that such company has adopted the 
                        asset coverage requirements of this 
                        subparagraph and the effective date of such 
                        requirements;
                  ``(B) with respect to a business development company 
                that issues equity securities that are registered on a 
                national securities exchange, the periodic filings of 
                the company under section 13(a) of the Securities 
                Exchange Act of 1934 (15 U.S.C. 78m) include 
                disclosures reasonably designed to ensure that 
                shareholders are informed of--
                          ``(i) the amount of indebtedness and asset 
                        coverage ratio of the company, determined as of 
                        the date of the financial statements of the 
                        company dated on or most recently before the 
                        date of such filing; and
                          ``(ii) the principal risk factors associated 
                        with such indebtedness, to the extent such risk 
                        is incurred by the company; and
                  ``(C)(i) the application of this paragraph to the 
                company is approved by the required majority (as 
                defined in section 57(o)) of the directors of or 
                general partners of such company who are not interested 
                persons of the business development company, which 
                application shall become effective on the date that is 
                1 year after the date of the approval, and, with 
                respect to a business development company that issues 
                equity securities that are not registered on a national 
                securities exchange, the company extends, to each 
                person who is a shareholder as of the date of the 
                approval, an offer to repurchase the equity securities 
                held by such person as of such approval date, with 25 
                percent of such securities to be repurchased in each of 
                the four quarters following such approval date; or
                  ``(ii) the company obtains, at a special or annual 
                meeting of shareholders or partners at which a quorum 
                is present, the approval of more than 50 percent of the 
                votes cast of the application of this paragraph to the 
                company, which application shall become effective on 
                the date immediately after the date of the approval.'';
          (3) in paragraph (3) (as redesignated), by inserting ``or 
        which is a stock, provided that all such stock is issued in 
        accordance with paragraph (6)'' after ``indebtedness'';
          (4) in subparagraph (A) of paragraph (4) (as redesignated)--
                  (A) in the matter preceding clause (i), by striking 
                ``voting''; and
                  (B) by amending clause (iii) to read as follows:
                          ``(iii) the exercise or conversion price at 
                        the date of issuance of such warrants, options, 
                        or rights is not less than--
                                  ``(I) the market value of the 
                                securities issuable upon the exercise 
                                of such warrants, options, or rights at 
                                the date of issuance of such warrants, 
                                options, or rights; or
                                  ``(II) if no such market value 
                                exists, the net asset value of the 
                                securities issuable upon the exercise 
                                of such warrants, options, or rights at 
                                the date of issuance of such warrants, 
                                options, or rights; and''; and
          (5) by adding at the end the following:
          ``(6)(A) Qualified institutional buyer.--Except as provided 
        in subparagraph (B), the following shall not apply to a senior 
        security which is a stock and which is issued to and held by a 
        qualified institutional buyer (as defined in section 3(a)(64) 
        of the Securities Exchange Act of 1934):
                  ``(i) Subparagraphs (C) and (D) of section 18(a)(2).
                  ``(ii) Subparagraph (E) of section 18(a)(2), to the 
                extent such subparagraph requires any priority over any 
                other class of stock as to distribution of assets upon 
                liquidation.
                  ``(iii) With respect to a senior security which is a 
                stock, subsections (c) and (i) of section 18.
          ``(B) Individual investors who are not qualified 
        institutional buyers.--Subparagraph (A) shall not apply with 
        respect to a senior security which is a stock and which is 
        issued to a person who is not known by the business development 
        company to be a qualified institutional buyer (as defined in 
        section 3(a) of the Securities Exchange Act of 1934).
          ``(7) Rule of construction.--Notwithstanding any other 
        provision of law, any additional class of stock issued pursuant 
        to this section must be issued in accordance with all investor 
        protections contained in all applicable federal securities laws 
        administered by the Commission.''.
  (b) Conforming Amendments.--The Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.) is amended--
          (1) in section 57--
                  (A) in subsection (j)(1), by striking ``section 
                61(a)(3)(B)'' and inserting ``section 61(a)(4)(B)''; 
                and
                  (B) in subsection (n)(2), by striking ``section 
                61(a)(3)(B)'' and inserting ``section 61(a)(4)(B)''; 
                and
          (2) in section 63(3), by striking ``section 61(a)(3)'' and 
        inserting ``section 61(a)(4)''.

SEC. 4. PARITY FOR BUSINESS DEVELOPMENT COMPANIES REGARDING OFFERING 
                    AND PROXY RULES.

  (a) Revision to Rules.--Not later than 1 year after the date of 
enactment of this Act, the Securities and Exchange Commission shall 
revise any rules to the extent necessary to allow a business 
development company that has filed an election pursuant to section 54 
of the Investment Company Act of 1940 (15 U.S.C. 80a-53) to use the 
securities offering and proxy rules that are available to other issuers 
that are required to file reports under section 13 or section 15(d) of 
the Securities Exchange Act of 1934 (15 U.S.C. 78m; 78o(d)). Any action 
that the Commission takes pursuant to this subsection shall include the 
following:
          (1) The Commission shall revise rule 405 under the Securities 
        Act of 1933 (17 C.F.R. 230.405)--
                  (A) to remove the exclusion of a business development 
                company from the definition of a well-known seasoned 
                issuer provided by that rule; and
                  (B) to add registration statements filed on Form N-2 
                to the definition of automatic shelf registration 
                statement provided by that rule.
          (2) The Commission shall revise rules 168 and 169 under the 
        Securities Act of 1933 (17 C.F.R. 230.168 and 230.169) to 
        remove the exclusion of a business development company from an 
        issuer that can use the exemptions provided by those rules.
          (3) The Commission shall revise rules 163 and 163A under the 
        Securities Act of 1933 (17 C.F.R. 230.163 and 230.163A) to 
        remove a business development company from the list of issuers 
        that are ineligible to use the exemptions provided by those 
        rules.
          (4) The Commission shall revise rule 134 under the Securities 
        Act of 1933 (17 C.F.R. 230.134) to remove the exclusion of a 
        business development company from that rule.
          (5) The Commission shall revise rules 138 and 139 under the 
        Securities Act of 1933 (17 C.F.R. 230.138 and 230.139) to 
        specifically include a business development company as an 
        issuer to which those rules apply.
          (6) The Commission shall revise rule 164 under the Securities 
        Act of 1933 (17 C.F.R. 230.164) to remove a business 
        development company from the list of issuers that are excluded 
        from that rule.
          (7) The Commission shall revise rule 433 under the Securities 
        Act of 1933 (17 C.F.R. 230.433) to specifically include a 
        business development company that is a well-known seasoned 
        issuer as an issuer to which that rule applies.
          (8) The Commission shall revise rule 415 under the Securities 
        Act of 1933 (17 C.F.R. 230.415)--
                  (A) to state that the registration for securities 
                provided by that rule includes securities registered by 
                a business development company on Form N-2; and
                  (B) to provide an exception for a business 
                development company from the requirement that a Form N-
                2 registrant must furnish the undertakings required by 
                item 34.4 of Form N-2.
          (9) The Commission shall revise rule 497 under the Securities 
        Act of 1933 (17 C.F.R. 230.497) to include a process for a 
        business development company to file a form of prospectus that 
        is parallel to the process for filing a form of prospectus 
        under rule 424(b).
          (10) The Commission shall revise rules 172 and 173 under the 
        Securities Act of 1933 (17 C.F.R. 230.172 and 230.173) to 
        remove the exclusion of an offering of a business development 
        company from those rules.
          (11) The Commission shall revise rule 418 under the 
        Securities Act of 1933 (17 C.F.R. 230.418) to provide that a 
        business development company that would otherwise meet the 
        eligibility requirements of General Instruction I.A of Form S-3 
        shall be exempt from paragraph (a)(3) of that rule.
          (12) The Commission shall revise rule 14a-101 under the 
        Securities Exchange Act of 1934 (17 C.F.R. 240.14a-101) to 
        provide that a business development company that would 
        otherwise meet the requirements of General Instruction I.A of 
        Form S-3 shall be deemed to meet the requirements of Form S-3 
        for purposes of Schedule 14A.
          (13) The Commission shall revise rule 103 under Regulation FD 
        (17 C.F.R. 243.103) to provide that paragraph (a) of that rule 
        applies for purposes of Form N-2.
  (b) Revision to Form N-2.--Not later than 1 year after the date of 
enactment of this Act, the Commission shall revise Form N-2--
          (1) to include an item or instruction that is similar to item 
        12 on Form S-3 to provide that a business development company 
        that would otherwise meet the requirements of Form S-3 shall 
        incorporate by reference its reports and documents filed under 
        the Securities Exchange Act of 1934 into its registration 
        statement filed on Form N-2; and
          (2) to include an item or instruction that is similar to the 
        instruction regarding automatic shelf offerings by well-known 
        seasoned issuers on Form S-3 to provide that a business 
        development company that is a well-known seasoned issuer may 
        file automatic shelf offerings on Form N-2.
  (c) Treatment if Revisions Not Completed in Timely Manner.--If the 
Commission fails to complete the revisions required by subsections (a) 
and (b) by the time required by such subsections, a business 
development company shall be entitled to treat such revisions as having 
been completed in accordance with the actions required to be taken by 
the Commission by such subsections until such time as such revisions 
are completed by the Commission.
  (d) Rule of Construction.--Any reference in this section to a rule or 
form means such rule or form or any successor rule or form.

                          Purpose and Summary

    Introduced by Representative Mick Mulvaney on November 2, 
2015, H.R. 3868, the Small Business Credit Availability Act, 
amends the Investment Company Act of 1940 to modernize the 
regulatory regime for Business Development Companies (BDCs). 
BDCs are investment vehicles designed to facilitate capital 
formation for small and middle-market companies. The 
legislation streamlines the offering, filing, and registration 
processes for BDCs with the Securities and Exchange Commission 
(SEC) in order to:
           eliminate significant regulatory burdens;
           increase a BDC's ability to deploy capital 
        to businesses by reducing its asset coverage ratio, or 
        required ratio of assets to debt, from 200% to 150% if 
        certain requirements are met;
           inform shareholders of a decision by the BDC 
        to avail itself of the 150% asset coverage ratio; and
           provide liquidity to investors if a BDC or 
        its funds are not publicly traded.
    The legislation also directs the SEC, within one year, to 
codify an order to govern a BDC's relationship with an 
investment adviser and revise its rules to allow BDCs to use 
the streamlined securities offering provisions available to 
other registrants under the Securities Act of 1933 such as the 
ability to be a Well Known Seasoned Issuer (``WKSI''), use 
shelf offerings, and communicate directly with shareholders. If 
the SEC does not act within one year to codify its order or 
update its rules, the provisions of H.R. 3868 shall take effect 
and shall remain effective until the SEC acts.

                  Background and Need for Legislation

    In 1980, Congress amended the Investment Company Act of 
1940 to authorize the creation of BDCs in order to facilitate 
private finance investment in small and middle market 
businesses. By 1980, many banks had pulled back from lending to 
small businesses after the banks suffered significant losses 
related to oil and real estate in the 1970s. Private equity and 
venture capital firms represented an alternative source of 
credit to small businesses, but they could not provide this 
credit to small, growing businesses because the Investment 
Company Act prohibited their securities from being owned by 
more than 100 persons.
    BDCs are closed-end funds that make investments in small 
and developing businesses and financially troubled firms.\1\ By 
law, BDCs must invest at least 70 percent of their assets in 
so-called ``eligible assets.'' The most common ``eligible 
assets'' are private and small public companies in the U.S. 
with $5 million to $150 million in annual revenues. This so-
called middle market sector of the economy is responsible for 
one-third of the private sector GDP and these businesses 
produce $10 billion in revenues annually. These investments 
must be privately negotiated, and the BDC is required to offer 
managerial assistance to these companies to meet specific 
business challenges. BDCs have greater flexibility than other 
investment companies in dealing with the businesses in which 
they have invested; they also have greater flexibility than 
other investment companies in issuing securities and 
compensating their managers. In addition, BDCs need not 
register as investment companies; they are, however, required 
to register their securities under the Securities Exchange Act 
of 1934.
---------------------------------------------------------------------------
    \1\Small Business Investment Incentive Act of 1980 (P.L. 96-477).
---------------------------------------------------------------------------
    BDCs have recently invested in small and medium-size 
companies that provide vital services to the American public, 
including companies involved in disease treatment and 
prevention, education, information technology security, 
agriculture, and construction. Many BDCs specialize in 
financing acquisitions made by private equity firms. While 
there is a wide variation among BDCs in the size of their 
investments, the companies they invest in, and the industries 
in which they concentrate, they all share a common investment 
objective of making it easier for small and medium-sized 
companies to obtain access to capital.
    Funding from BDCs has become more important for small 
businesses as the stifling regulatory regime enacted following 
the 2008 financial crisis has restricted bank and other 
traditional financing options for these companies. As a result, 
for the first time since the U.S. Census Bureau began keeping 
data on the subject, the number of smaller companies--i.e., 
those with less than 500 employees--has declined over the five 
years since the financial crisis.\2\ As lending to small and 
medium-sized companies from commercial banks has fallen off due 
to the regulatory constraints and compliance burdens imposed by 
the Dodd-Frank Act, BDCs now find themselves in a position 
similar to the one at their creation over 30 years ago--
addressing the unmet capital needs of small business.\3\ There 
are currently over 80 BDCs in existence in the U.S. with over 
$70 billion in outstanding loans to middle market 
businesses.\4\ Of the 80 BDCs, 57 are publicly traded BDCs, 
allowing retail investors a chance to purchase shares in the 
growth of middle market America.\5\
---------------------------------------------------------------------------
    \2\Kate Davidson, ``Two-Speed Recovery: Small firms Lag Big 
Business,'' The Wall Street Journal (Apr. 27, 2015) available at http:/
/blogs.wsj.com/economics/2015/04/27/two-speed-recovery-small-firms-lag-
big-business/.
    \3\Testimony of Michael J. Arougheti, Chief Executive Officer, Ares 
Capital Corporation, before the Subcommittee on Capital Markets and 
Government Sponsored Enterprises, ``Legislation to Further Reduce 
Impediments to Capital Formation'' (Oct. 23, 2013), available at http:/
/financialservices.house.gov/uploadedfiles/hhrg-113-ba16-
wstatemarougheti-20131023.pdf.
    \4\Small Business Investor Alliance, ``BDC Modernization Agenda: 
Legislative Recommendations for Members of the 114th Congress,'' 
available at: http://c.ymcdn.com/sites/www.sbia.org/resource/resmgr/
Government_Relations/2015_SBIA_BDC_Agenda_Web.pdf.
    \5\Id.
---------------------------------------------------------------------------
    Despite the important role that BDCs play in helping to 
fund small and medium-sized businesses, the BDC regulatory 
regime has prevented BDCs from playing as large a role as they 
might otherwise. The BDCs regulatory regime has not been 
significantly updated in over 30 years since Congress 
authorized the creation of BDCs in 1980. Currently, BDCs are 
limited in the amount they can borrow, as their debt to equity 
ratio is capped at 1 to 1. A modest increase in the leverage 
ratio, though still below that of other financial institutions, 
would enable BDCs to deploy significantly more capital to small 
and mid-sized businesses and still generate returns to their 
shareholders.
    BDCs are also prohibited from investing in registered 
investment advisers unless the SEC uses its exemptive relief 
authority to allow BDCs to own registered investment advisers. 
Removing the exemptive relief requirement will level the 
playing field for all BDCs and avoid the legal costs of seeking 
relief as well as eliminate the lengthy time period that it 
takes the SEC to approve such requests.
    Like other companies that regularly raise capital through 
securities issuances, BDCs rely on pre-filed ``shelf 
registration'' statements, which are securities filings that 
allow companies to position themselves to issue additional 
securities. Because shelf registrations contain financial 
information that becomes outdated as companies publicly report 
more recent financial information, most companies incorporate 
subsequent financial reports in their shelf registrations by 
reference. BDCs, however, are prohibited from incorporating 
subsequent financial information by reference. Instead, BDCs 
must manually update their shelf registration statements each 
time they report new quarterly information, which slows a BDC's 
ability to issue additional securities and makes it more 
expensive by requiring a BDC to hire lawyers, accountants, and 
printers to continually update its shelf-registration 
statements. H.R. 3868 will streamline disclosure requirements 
and reduce burdensome, duplicative regulatory paperwork for 
BDCs, while still ensuring investors would receive relevant and 
necessary disclosures.
    Finally, to date BDCs have been barred from the benefits 
associated with being a WKSI, which includes taking advantage 
of more flexible rules relating to communications with 
investors and the registration process.\6\ These changes will 
allow eligible BDCs more flexibility and efficiency while 
seeking to raise capital in the public market by allowing them 
to time offerings for when they will best be received by the 
market.
---------------------------------------------------------------------------
    \6\A WKSI is an issuer that is required to file reports under the 
Securities Exchange Act of 1934 (the Exchange Act); is a ``primary 
eligible'' issuer; and has a worldwide market capitalization of at 
least $700 million or has issued at least $1 billion of non-convertible 
securities in registered primary offerings for cash in the last three 
years. WKSIs benefit from a more flexible automatic securities 
registration process including, but not limited to, the ability to have 
their registration statements be deemed by the SEC as immediately 
effective upon filing. In addition, WKSIs can (i) register unspecified 
amounts of different types of securities; (ii) register additional 
classes of securities and eligible majority-owned subsidiaries as 
additional registrants after effectiveness by filing a post-effective 
amendment that also will be automatically effective upon filing; (iii) 
exclude certain additional information from a base prospectus; (iv) pay 
filing fees on a ``pay-as-you-go'' basis at the time of each takedown; 
and (v) use ``free writing prospectuses'' relating to an offering 
before the registration statement is filed. WKSIs ``are frequent 
issuers in the public markets and have significant market capital size. 
Generally, WKSIs can take advantage of new, liberalized rules relating 
to communications with investors and the registration process. However, 
BDCs were explicitly excluded from the definition of WKSI by the SEC 
without any explanation or rationale.
---------------------------------------------------------------------------
    Modernizing the regulatory regime for BDCs will allow them 
to amplify financing for small and medium-size businesses at a 
time when these companies are struggling to access capital to 
support growth and job creation. As Michael Gerber, Executive 
Vice President of Franklin Square Holdings, testified at a June 
16, 2015, Capital Markets and Government Sponsored Enterprises 
Subcommittee hearing, the Small Business Credit Availability 
Act will:

        enable BDCs to provide even more capital to small and 
        middle-market U.S. companies, and do so in a manner 
        that could increase returns and decrease risk for 
        investors, all while maintaining the strong regulatory 
        regime and transparency that separates BDCs from many 
        of the other non-bank lenders in the marketplace. The 
        Great Recession changed many dynamics in the capital 
        markets, as have new and more robust regulatory 
        requirements. Small and mid-size U.S. businesses have 
        struggled to access previously available sources of 
        capital. Several non-bank lenders have emerged as 
        significant providers of capital, but none as 
        transparent and heavily regulated as BDCs. Franklin 
        Square believes that the ``Small Business Credit 
        Availability Act,'' if enacted into law, would allow 
        BDCs to play an even greater role in supporting the 
        capital markets and more effectively fill the existing 
        capital void that has hampered businesses and job 
        growth.

    While H.R. 3868 does direct the SEC to revise nineteen 
rules, the Committee expects that the SEC would combine many of 
these rulemakings as the majority of the directives apply to 
the BDCs' ability to use offering provisions found in the 
Securities Act of 1933.

                                Hearings

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing examining a discussion draft of H.R. 3868 on June 16, 
2015.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
November 3, 2015, and adopted by voice vote an amendment to 
H.R. 3868 offered by Representative Velazquez. Amendments 
offered by Representatives Himes and Moore were each withdrawn. 
The Committee ordered H.R. 3868 to be reported favorably to the 
House as amended by a recorded vote of 53 yeas to 4 nays 
(recorded vote no. FC-72), a quorum being present.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote in Committee was a motion by Chairman 
Hensarling to report the bill favorably to the House as 
amended. That motion was agreed to by a recorded vote of 53 
yeas to 4 nays (recorded vote no. FC-72), a quorum being 
present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 3868 
will help address the unmet capital needs of small businesses 
by modernizing the regulatory regime for business development 
companies.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                                    March 17, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3868, the Small 
Business Credit Availability Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Kim Cawley.
            Sincerely,
                                         Robert A. Sunshine
                                        (For Keith Hall, Director).
    Enclosure.

H.R. 3868--Small Business Credit Availability Act

    Summary: H.R. 3868 would direct the Securities and Exchange 
Commission (SEC) to amend certain regulations that affect 
business development companies (BDCs)--companies that operate 
like a mutual fund to invest in the stocks of small, private 
companies and offer significant managerial assistance to the 
issuer. H.R. 3868 would allow BDCs to invest in advisors to 
investment companies and would raise the limits on the amount 
of leverage allowed to a BDC.
    The staff of the Joint Committee on Taxation (JCT) 
estimates that enacting H.R. 3868 would reduce federal revenues 
by $95 million over the 2016-2026 period; therefore, pay-as-
you-go procedures apply. CBO estimates that enacting H.R. 3868 
would not affect direct spending.
    CBO estimates that implementing H.R. 3868 would increase 
spending by the SEC by less than $500,000 per year to amend 
certain regulations affecting BDCs. However, the SEC is 
authorized to collect fees sufficient to offset its annual 
appropriation; therefore, CBO estimates that the net effect on 
discretionary spending would be negligible.
    CBO and JCT estimate that enacting the legislation would 
not increase net direct spending or on-budget deficits by more 
than $5 billion in any of the four consecutive 10-year periods 
beginning in 2027.
    H.R. 3868 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary effect of H.R. 3868 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credit).

        CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 3868, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON NOVEMBER 4, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 By fiscal year, in millions of dollars--
                                                 -------------------------------------------------------------------------------------------------------
                                                   2016   2017   2018   2019   2020   2021   2022    2023    2024    2025    2026   2016-2021  2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  CHANGES IN REVENUESa
 
Estimated Revenues..............................      *     -1     -4     -6     -8     -9     -11     -12     -13     -14     -16       -29        -95
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: Details do not add to totals because of rounding; * = between zero and -$500,000
aNegative numbers denote decreases in revenues.

    Basis of estimate: For this estimate, CBO assumes that the 
bill will be enacted late in fiscal year 2016, the necessary 
amounts will be appropriated near the start of each year, and 
spending will follow historical patterns for the SEC.

Revenues

    JCT estimates that revenue losses under H.R. 3868 would 
result from a shift in business lending and taxable income from 
C corporations to BDCs, which are pass-through entities for tax 
purposes. Specifically, H.R. 3868 would allow BDCs to take on 
additional debt, increasing the amount they can borrow to a 
maximum of $4 dollars for every $6 dollars they hold in assets; 
under current law, they can borrow up to $3 for every $6 they 
hold in assets. The bill also would allow BDCs to issue 
preferred stock, and BDCs would be able to invest in securities 
issued by certain financial institutions and by registered 
investment advisors.
    Generally, the income of interests in pass-through entities 
(like BDCs) that are owned by individual taxpayers is treated 
as personal income; such income is subject only to the 
individual income tax, and is taxed at the personal income tax 
rates of the businesses' owners. In contrast, taxable income 
from C corporations is subject to the corporate income tax, and 
that income can be taxed again at the individual tax level 
after it is distributed to shareholders or investors. JCT 
estimates that, by shifting income from C corporations to BDCs, 
this legislation would reduce tax revenues by $95 million over 
the 2016-2026 period.

Spending subject to appropriation

    Based on information from the SEC, CBO expects that the 
agency would need the equivalent of two additional staff 
positions to meet the bill's deadline for issuing new 
regulations and to monitor compliance with those regulations 
once finalized. CBO estimates that implementing the provisions 
of H.R. 3868 would cost less than $500,000 per year. Because 
the SEC is authorized to collect fees sufficient to offset its 
appropriation each year, CBO estimates that implementing H.R. 
3868 would have a negligible effect on net outlays each year, 
assuming appropriation actions consistent with the agency's 
authority.
    Pay-As-You-Go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget-reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in revenues that are subject to those 
pay-as-you-go procedures are shown in the following table.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    By fiscal year, in millions of dollars--
                                                      --------------------------------------------------------------------------------------------------
                                                        2016   2017   2018   2019   2020   2021   2022   2023   2024   2025   2026  2016-2021  2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
 
Statutory Pay-As-You-Go Impact.......................      0      1      4      6      8      9     11     12     13     14     16        29         95
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Increase in long-term direct spending and deficits: CBO and 
JCT estimate that enacting the legislation would not increase 
net direct spending or on-budget deficits by more than $5 
billion in any of the four consecutive 10-year periods 
beginning in 2027.
    Intergovernmental and private-sector impact: H.R. 3868 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Federal spending: Kim Cawley; Federal 
revenues: Staff of the Joint Committee on Taxation; Impact on 
state, local, and tribal governments: Leo Lex; Impact on the 
private sector: Logan Smith.
    Estimate approved by: H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 3868 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    Duplication of Federal Programs

    Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), 
the Committee states that no provision of H.R. 3868 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), 
the Committee states that H.R. 3868 contains nineteen directed 
rulemakings.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section cites H.R. 3868 as the ``Small Business Credit 
Availability Act.''

Section 2. Business development company ownership of securities of 
        investment advisers and certain financial companies

    This section requires the Securities and Exchange 
Commission (SEC) to promulgate regulations to codify the order 
in Investment Company Act Release No. 30024. It also amends the 
Investment Company Act of 1940 to expand the definition of 
permissible assets of an eligible portfolio company.

Section 3. Expanding access to capital for business development 
        companies

    This section provides for an increase in business 
development companies' (BDCs') ability to deploy capital to 
businesses by reducing their asset coverage ratio, or required 
ratio of assets to debt, from 200% to 150% if certain 
requirements are met. To address concerns raised by SEC Chair 
White regarding investors in a non-traded BDC, after a board or 
general partner vote to take advantage of the new asset 
coverage ratio, the non-traded BDC must provide its 
shareholders with the ability to redeem 100% of their shares 
over the course of the year (25% per quarter). Alternatively, 
both traded and non-traded BDCs can immediately reduce their 
asset coverage ratio after a majority shareholder vote.

Section 4. Parity for business development companies regarding offering 
        and proxy rules

    This section requires the SEC to revise its rules to allow 
BDCs to use the streamlined securities offering provisions 
available to other registrants under the Securities Act of 1933 
such as the ability to be a WKSI, use shelf offerings, and 
communicate directly with shareholders. If the SEC does not act 
within one year to codify its order or update its rules, the 
provisions shall take effect and shall remain effective until 
the SEC acts.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

                     INVESTMENT COMPANY ACT OF 1940


TITLE I--INVESTMENT COMPANIES

           *       *       *       *       *       *       *



       functions and activities of business development companies

  Sec. 55. (a) It shall be unlawful for a business development 
company to acquire any assets (other than those described in 
paragraphs (1) through (7) of this subsection) unless, at the 
time the acquisition is made, assets described in paragraphs 
(1) through (6) below represent at least 70 per centum of the 
value of its total assets (other than assets described in 
paragraph (7) below):
          (1) securities purchased, in transactions not 
        involving any public offering or in such other 
        transactions as the Commission may, by rule, prescribe 
        if it finds that enforcement of this title and of the 
        Securities Act of 1933 with respect to such 
        transactions is not necessary in the public interest or 
        for the protection of investors by reason of the small 
        amount, or the limited nature of the public offering, 
        involved in such transactions--
                  (A) from the issuer of such securities, which 
                issuer is an eligible portfolio company, from 
                any person who is, or who within the preceding 
                thirteen months has been, an affiliated person 
                of such eligible portfolio company, or from any 
                other person, subject to such rules and 
                regulations as the Commission may prescribe as 
                necessary or appropriate in the public interest 
                or for the protection of investors; or
                  (B) from the issuer of such securities, which 
                issuer is described in section 2(a)(46) (A) and 
                (B) but is not an eligible portfolio company 
                because it has issued a class of securities 
                with respect to which a member of a national 
                securities exchange, broker, or dealer may 
                extend or maintain credit to or for a customer 
                pursuant to rules or regulations adopted by the 
                Board of Governors of the Federal Reserve 
                System under section 7 of the Securities 
                Exchange Act of 1934, or from any person who is 
                an officer or employee of such issuer, if--
                          (i) at the time of the purchase, the 
                        business development company owns at 
                        least 50 per centum of--
                                  (I) the greatest number of 
                                equity securities of such 
                                issuer and securities 
                                convertible into or 
                                exchangeable for such 
                                securities; and
                                  (II) the greatest amount of 
                                debt securities of such issuer,
                        held by such business development 
                        company at any point in time during the 
                        period when such issuer was an eligible 
                        portfolio company, except that options, 
                        warrants, and similar securities which 
                        have by their terms expired and debt 
                        securities which have been converted, 
                        or repaid or prepaid in the ordinary 
                        course of business or incident to a 
                        public offering of securities of such 
                        issuer, shall not be considered to have 
                        been held by such business development 
                        company for purposes of this 
                        requirement; and
                          (ii) the business development company 
                        is one of the 20 largest holders of 
                        record of such issuer's outstanding 
                        voting securities;
          (2) securities of any eligible portfolio company with 
        respect to which the business development company 
        satisfies the requirements of section 2(a)(46)(C)(ii);
          (3) securities purchased in transactions not 
        involving any public offering from an issuer described 
        in sections 2(a)(46) (A) and (B) or from a person who 
        is, or who within the preceding thirteen months has 
        been, an affiliated person of such issuer, or from any 
        person in transactions incident thereto, if such 
        securities were--
                  (A) issued by an issuer that is, or was 
                immediately prior to the purchase of its 
                securities by the business development company, 
                in bankruptcy proceedings, subject to 
                reorganization under the supervision of a court 
                of competent jurisdiction, or subject to a plan 
                or arrangement resulting from such bankruptcy 
                proceedings or reorganization;
                  (B) issued by an issuer pursuant to or in 
                consummation of such a plan or arrangement; or
                  (C) issued by an issuer that, immediately 
                prior to the purchase of such issuer's 
                securities by the business development company, 
                was not in bankruptcy proceedings but was 
                unable to meet its obligations as they came due 
                without material assistance other than 
                conventional lending or financing arrangements;
          (4) securities of eligible portfolio companies 
        purchased from any person in transactions not involving 
        any public offering, if there is no ready market for 
        such securities and if immediately prior to such 
        purchase the business development company owns at least 
        60 per centum of the outstanding equity securities of 
        such issuer (giving effect to all securities presently 
        convertible into or exchangeable for equity securities 
        of such issuer as if such securities were so converted 
        or exchanged);
          (5) securities received in exchange for or 
        distributed on or with respect to securities described 
        in paragraphs (1) through (4) of this subsection, or 
        pursuant to the exercise of options, warrants, or 
        rights relating to securities described in such 
        paragraphs;
          (6) cash, cash items, Government securities, or high 
        quality debt securities maturing in one year or less 
        from the time of investment in such high quality debt 
        securities; and
          (7) office furniture and equipment, interests in real 
        estate and leasehold improvements and facilities 
        maintained to conduct the business operations of the 
        business development company, deferred organization and 
        operating expenses, and other noninvestment assets 
        necessary and appropriate to its operations as a 
        business development company, including notes of 
        indebtedness of directors, officers, employees, and 
        general partners held by a business development company 
        as payment for securities of such company issued in 
        connection with an executive compensation plan 
        described in section 57(j).
  (b) For purposes of this section, the value of a business 
development company's assets shall be determined as of the date 
of the most recent financial statements filed by such company 
with the Commission pursuant to section 13 of the Securities 
Exchange Act of 1934, and shall be determined no less 
frequently than annually.
  (c) Securities Deemed To Be Permissible Assets.--
Notwithstanding subsection (a), securities that would be 
described in paragraphs (1) through (6) of such subsection 
except that the issuer is a company described in paragraph (2), 
(3), (4), (5), (6), or (9) of section 3(c) may be deemed to be 
assets described in paragraphs (1) through (6) of subsection 
(a) to the extent necessary for the sum of the assets to equal 
70 percent of the value of a business development company's 
total assets (other than assets described in paragraph (7) of 
subsection (a)), provided that the aggregate value of such 
securities counting toward such 70 percent shall not exceed 20 
percent of the value of the business development company's 
total assets.

           *       *       *       *       *       *       *


                  transactions with certain affiliates

  Sec. 57. (a) It shall be unlawful for any person who is 
related to a business development company in a manner described 
in subsection (b) of this section, acting as principal--
          (1) knowingly to sell any security or other property 
        to such business development company or to any company 
        controlled by such business development company, unless 
        such sale involves solely (A) securities of which the 
        buyer is the issuer, or (B) securities of which the 
        seller is the issuer and which are part of a general 
        offering to the holders of a class of its securities;
          (2) knowingly to purchase from such business 
        development company or from any company controlled by 
        such business development company, any security or 
        other property (except securities of which the seller 
        is the issuer);
          (3) knowingly to borrow money or other property from 
        such business development company or from any company 
        controlled by such business development company (unless 
        the borrower is controlled by the lender), except as 
        permitted in section 21(b) or section 62; or
          (4) knowingly to effect any transaction in which such 
        business development company or a company controlled by 
        such business development company is a joint or a joint 
        and several participant with such person in 
        contravention of such rules and regulations as the 
        Commission may prescribe for the purpose of limiting or 
        preventing participation by such business development 
        company or controlled company on a basis less 
        advantageous than that of such person, except that 
        nothing contained in this paragraph shall be deemed to 
        preclude any person from acting as manager of any 
        underwriting syndicate or other group in which such 
        business development company or controlled company is a 
        participant and receiving compensation therefor.
  (b) The provisions of subsection (a) of this section shall 
apply to the following persons:
          (1) Any director, officer, employee, or member of an 
        advisory board of a business development company or any 
        person (other than the business development company 
        itself) who is, within the meaning of section 
        2(a)(3)(C) of this title, an affiliated person of any 
        such person specified in this paragraph.
          (2) Any investment adviser or promoter of, general 
        partner in, principal underwriter for, or person 
        directly or indirectly either controlling, controlled 
        by, or under common control with, a business 
        development company (except the business development 
        company itself and any person who, if it were not 
        directly or indirectly controlled by the business 
        development company, would not be directly or 
        indirectly under the control of a person who controls 
        the business development company), or any person who 
        is, within the meaning of section 2(a)(3) (C) or (D), 
        an affiliated person of any such person specified in 
        this paragraph.
  (c) Notwithstanding paragraphs (1), (2), and (3) of 
subsection (a), any person may file with the Commission an 
application for an order exempting a proposed transaction of 
the applicant from one or more provisions of such paragraphs. 
The Commission shall grant such application and issue such 
order of exemption if evidence establishes that--
          (1) the terms of the proposed transaction, including 
        the consideration to be paid or received, are 
        reasonable and fair and do not involve overreaching of 
        the business development company or its shareholders or 
        partners on the part of any person concerned;
          (2) the proposed transaction is consistent with the 
        policy of the business development company as recited 
        in the filings made by such company with the Commission 
        under the Securities Act of 1933, its registration 
        statement and reports filed under the Securities 
        Exchange Act of 1934, and its reports to shareholders 
        or partners; and
          (3) the proposed transaction is consistent with the 
        general purposes of this title.
  (d) It shall be unlawful for any person who is related to a 
business development company in the manner described in 
subsection (e) of this section and who is not subject to the 
prohibitions of subsection (a) of this section, acting as 
principal--
          (1) knowingly to sell any security or other property 
        to such business development company or to any company 
        controlled by such business development company, unless 
        such sale involves solely (A) securities of which the 
        buyer is the issuer, or (B) securities of which the 
        seller is the issuer and which are part of a general 
        offering to the holders of a class of its securities;
          (2) knowingly to purchase from such business 
        development company or from any company controlled by 
        such business development company, any security or 
        other property (except securities of which the seller 
        is the issuer);
          (3) knowingly to borrow money or other property from 
        such business development company or from any company 
        controlled by such business development company (unless 
        the borrower is controlled by the lender), except as 
        permitted in section 21(b); or
          (4) knowingly to effect any transaction in which such 
        business development company or a company controlled by 
        such business development company is a joint or a joint 
        and several participant with such affiliated person in 
        contravention of such rules and regulations as the 
        Commission may prescribe for the purpose of limiting or 
        preventing participation by such business development 
        company or controlled company on a basis less 
        advantageous than that of such affiliated person, 
        except that nothing contained in this paragraph shall 
        be deemed to preclude any person from acting as manager 
        of any underwriting syndicate or other group in which 
        such business development company or controlled company 
        is a participant and receiving compensation therefor.
  (e) The provisions of subsection (d) of this section shall 
apply to the following persons:
          (1) Any person (A) who is, within the meaning of 
        section 2(a)(3)(A), an affiliated person of a business 
        development company, (B) who is an executive officer or 
        a director of, or general partner in, any such 
        affiliated person, or (C) who directly or indirectly 
        either controls, is controlled by, or is under common 
        control with, such affiliated person.
          (2) Any person who is an affiliated person of a 
        director, officer, employee, investment adviser, member 
        of an advisory board or promoter of, principal 
        underwriter for, general partner in, or an affiliated 
        person of any person directly or indirectly either 
        controlling or under common control with a business 
        development company (except the business development 
        company itself and any person who, if it were not 
        directly or indirectly controlled by the business 
        development company, would not be directly or 
        indirectly under the control of a person who controls 
        the business development company).
For purposes of this subsection, the term ``executive officer'' 
means the president, secretary, treasurer, any vice president 
in charge of a principal business function, and any other 
person who performs similar policymaking functions.
  (f) Notwithstanding subsection (d) of this section, a person 
described in subsection (e) may engage in a proposed 
transaction described in subsection (d) if such proposed 
transaction is approved by the required majority (as defined in 
subsection (o)) of the directors of or general partners in the 
business development company on the basis that--
          (1) the terms thereof, including the consideration to 
        be paid or received, are reasonable and fair to the 
        shareholders or partners of the business development 
        company and do not involve overreaching of such company 
        or its shareholders or partners on the part of any 
        person concerned;
          (2) the proposed transaction is consistent with the 
        interests of the shareholders or partners of the 
        business development company and is consistent with the 
        policy of such company as recited in filings made by 
        such company with the Commission under the Securities 
        Act of 1933, its registration statement and reports 
        filed under the Securities Exchange Act of 1934, and 
        its reports to shareholders or partners; and
          (3) the directors or general partners record in their 
        minutes and preserve in their records, for such periods 
        as if such records were required to be maintained 
        pursuant to section 31(a), a description of such 
        transaction, their findings, the information or 
        materials upon which their findings were based, and the 
        basis therefor.
  (g) Notwithstanding subsection (a) or (d), a person may, in 
the ordinary course of business, sell to or purchase from any 
company merchandise or may enter into a lessor-lessee 
relationship with any person and furnish the services incident 
thereto.
  (h) The directors of or general partners in any business 
development company shall adopt, and periodically review and 
update as appropriate, procedures reasonably designed to ensure 
that reasonable inquiry is made, prior to the consummation of 
any transaction in which such business development company or a 
company controlled by such business development company 
proposes to participate, with respect to the possible 
involvement in the transaction of persons described in 
subsections (b) and (e) of this section.
  (i) Until the adoption by the Commission of rules or 
regulations under subsections (a) and (d) of this section, the 
rules and regulations of the Commission under subsections (a) 
and (d) of section 17 applicable to registered closed-end 
investment companies shall be deemed to apply to transactions 
subject to subsections (a) and (d) of this section. Any rules 
or regulations adopted by the Commission to implement this 
section shall be no more restrictive than the rules or 
regulations adopted by the Commission under subsections (a) and 
(d) of section 17 that are applicable to all registered closed-
end investment companies.
  (j) Notwithstanding subsections (a) and (d) of this section, 
any director, officer, or employee of, or general partner in, a 
business development company may--
          (1) acquire warrants, options, and rights to purchase 
        voting securities of such business development company, 
        and securities issued upon the exercise or conversion 
        thereof, pursuant to an executive compensation plan 
        offered by such company which meets the requirements of 
        [section 61(a)(3)(B)] section 61(a)(4)(B); and
          (2) borrow money from such business development 
        company for the purpose of purchasing securities issued 
        by such company pursuant to an executive compensation 
        plan, if each such loan--
                  (A) has a term of not more than ten years;
                  (B) becomes due within a reasonable time, not 
                to exceed sixty days, after the termination of 
                such person's employment or service;
                  (C) bears interest at no less than the 
                prevailing rate applicable to 90-day United 
                States Treasury bills at the time the loan is 
                made;
                  (D) at all times is fully collateralized 
                (such collateral may include any securities 
                issued by such business development company); 
                and
                  (E)(i) in the case of a loan to any officer 
                or employee of such business development 
                company (including any officer or employee who 
                is also a director of such company), is 
                approved by the required majority (as defined 
                in subsection (o)) of the directors of or 
                general partners in such company on the basis 
                that the loan is in the best interests of such 
                company and its shareholders or partners; or
                  (ii) in the case of a loan to any director of 
                such business development company who is not 
                also an officer or employee of such company, or 
                to any general partner in such company, is 
                approved by order of the Commission, upon 
                application, on the basis that the terms of the 
                loan are fair and reasonable and do not involve 
                overreaching of such company or its 
                shareholders or partners.
  (k) It shall be unlawful for any person described in 
subsection (l)--
          (1) acting as agent, to accept from any source any 
        compensation (other than a regular salary or wages from 
        the business development company) for the purchase or 
        sale of any property to or for such business 
        development company or any controlled company thereof, 
        except in the course of such person's business as an 
        underwriter or broker; or
          (2) acting as broker, in connection with the sale of 
        securities to or by the business development company or 
        any controlled company thereof, to receive from any 
        source a commission, fee, or other remuneration for 
        effecting such transaction which exceeds--
                  (A) the usual and customary broker's 
                commission if the sale is effected on a 
                securities exchange;
                  (B) 2 per centum of the sales price if the 
                sale is effected in connection with a secondary 
                distribution of such securities; or
                  (C) 1 per centum of the purchase or sale 
                price of such securities if the sale is 
                otherwise effected,
unless the Commission, by rules and regulations or order in the 
public interest and consistent with the protection of 
investors, permits a larger commission.
  (l) The provisions of subsection (k) of this section shall 
apply to the following persons:
          (1) Any affiliated person of a business development 
        company.
          (2)(A) Any person who is, within the meaning of 
        section 2(a)(3) (B), (C), or (D), an affiliated person 
        of any director, officer, employee, or member of an 
        advisory board of the business development company.
          (B) Any person who is, within the meaning of section 
        2(a)(3) (A), (B), (C), or (D), an affiliated person of 
        any investment adviser of, general partner in, or 
        person directly or indirectly either controlling, 
        controlled by, or under common control with, the 
        business development company.
          (C) Any person who is, within the meaning of section 
        2(a)(3)(C), an affiliated person of any person who is 
        an affiliated person of the business development 
        company within the meaning of section 2(a)(3)(A).
  (m) For purposes of subsections (a) and (d), a person who is 
a director, officer, or employee of a party to a transaction 
and who receives his usual and ordinary fee or salary for usual 
and customary services as a director, officer, or employee from 
such party shall not be deemed to have a financial interest or 
to participate in the transaction solely by reason of his 
receipt of such fee or salary.
  (n)(1) Notwithstanding subsection (a)(4) of this section, a 
business development company may establish and maintain a 
profit-sharing plan for its directors, officers, employees, and 
general partners and such directors, officers, employees, and 
general partners may participate in such profit-sharing plan, 
if--
          (A)(i) in the case of a profit-sharing plan for 
        officers and employees of the business development 
        company (including any officer or employee who is also 
        a director of such company), such profit-sharing plan 
        is approved by the required majority (as defined in 
        subsection (o)) of the directors of or general partners 
        in such company on the basis that such plan is 
        reasonable and fair to the shareholders or partners of 
        such company, does not involve overreaching of such 
        company or its shareholders or partners on the part of 
        any person concerned, and is consistent with the 
        interests of the shareholders or partners of such 
        company; or
          (ii) in the case of a profit-sharing plan which 
        includes one or more directors of the business 
        development company who are not also officers or 
        employees of such company, or one or more general 
        partners in such company, such profit-sharing plan is 
        approved by order of the Commission, upon application, 
        on the basis that such plan is reasonable and fair to 
        the shareholders or partners of such company, does not 
        involve overreaching of such company or its 
        shareholders or partners on the part of any person 
        concerned, and is consistent with the interests of the 
        shareholders or partners of such company; and
          (B) the aggregate amount of benefits which would be 
        paid or accrued under such plan shall not exceed 20 per 
        centum of the business development company's net income 
        after taxes in any fiscal year.
  (2) This subsection may not be used where the business 
development company has outstanding any stock option, warrant, 
or right issued as part of an executive compensation plan, 
including a plan pursuant to [section 61(a)(3)(B)] section 
61(a)(4)(B), or has an investment adviser registered or 
required to be registered under title II of this Act.
  (o) The term ``required majority'', when used with respect to 
the approval of a proposed transaction, plan, or arrangement, 
means both a majority of a business development company's 
directors or general partners who have no financial interest in 
such transaction, plan, or arrangement and a majority of such 
directors or general partners who are not interested persons of 
such company.

           *       *       *       *       *       *       *


                           capital structure

  Sec. 61. (a) Notwithstanding the exemption set forth in 
section 6(f), section 18 shall apply to a business development 
company to the same extent as if it were a registered closed-
end investment company, except as follows:
          [(1) The asset coverage requirements of section 
        18(a)(1) (A) and (B) applicable to business development 
        companies shall be 200 per centum.]
          (1) Except as provided in paragraph (2), the asset 
        coverage requirements of subparagraphs (A) and (B) of 
        section 18(a)(1) (and any related rule promulgated 
        under this Act) applicable to business development 
        companies shall be 200 percent.
          (2) The asset coverage requirements of subparagraphs 
        (A) and (B) of section 18(a)(1) and of subparagraphs 
        (A) and (B) of section 18(a)(2) (and any related rule 
        promulgated under this Act) applicable to a business 
        development company shall be 150 percent if--
                  (A) within five business days of the approval 
                of the adoption of the asset coverage 
                requirements described in clause (ii), the 
                business development company discloses such 
                approval and the date of its effectiveness in a 
                Form 8-K filed with the Commission and in a 
                notice on its website and discloses in its 
                periodic filings made under section 13 of the 
                Securities Exchange Act of 1934 (15 U.S.C. 
                78m)--
                          (i) the aggregate value of the senior 
                        securities issued by such company and 
                        the asset coverage percentage as of the 
                        date of such company's most recent 
                        financial statements; and
                          (ii) that such company has adopted 
                        the asset coverage requirements of this 
                        subparagraph and the effective date of 
                        such requirements;
                  (B) with respect to a business development 
                company that issues equity securities that are 
                registered on a national securities exchange, 
                the periodic filings of the company under 
                section 13(a) of the Securities Exchange Act of 
                1934 (15 U.S.C. 78m) include disclosures 
                reasonably designed to ensure that shareholders 
                are informed of--
                          (i) the amount of indebtedness and 
                        asset coverage ratio of the company, 
                        determined as of the date of the 
                        financial statements of the company 
                        dated on or most recently before the 
                        date of such filing; and
                          (ii) the principal risk factors 
                        associated with such indebtedness, to 
                        the extent such risk is incurred by the 
                        company; and
                  (C)(i) the application of this paragraph to 
                the company is approved by the required 
                majority (as defined in section 57(o)) of the 
                directors of or general partners of such 
                company who are not interested persons of the 
                business development company, which application 
                shall become effective on the date that is 1 
                year after the date of the approval, and, with 
                respect to a business development company that 
                issues equity securities that are not 
                registered on a national securities exchange, 
                the company extends, to each person who is a 
                shareholder as of the date of the approval, an 
                offer to repurchase the equity securities held 
                by such person as of such approval date, with 
                25 percent of such securities to be repurchased 
                in each of the four quarters following such 
                approval date; or
                  (ii) the company obtains, at a special or 
                annual meeting of shareholders or partners at 
                which a quorum is present, the approval of more 
                than 50 percent of the votes cast of the 
                application of this paragraph to the company, 
                which application shall become effective on the 
                date immediately after the date of the 
                approval.
          [(2)] (3) Notwithstanding section 18(c), a business 
        development company may issue more than one class of 
        senior security representing indebtedness or which is a 
        stock, provided that all such stock is issued in 
        accordance with paragraph (6).
          [(3)] (4) Notwithstanding section 18(d)--
                  (A) a business development company may issue 
                warrants, options, or rights to subscribe or 
                convert to [voting] securities of such company, 
                accompanied by securities, if--
                          (i) such warrants, options, or rights 
                        expire by their terms within ten years;
                          (ii) such warrants, options, or 
                        rights are not separately transferable 
                        unless no class of such warrants, 
                        options, or rights and the securities 
                        accompanying them has been publicly 
                        distributed;
                          [(iii) the exercise or conversion 
                        price is not less than the current 
                        market value at the date of issuance, 
                        or if no such market value exists, the 
                        current net asset value of such voting 
                        securities; and]
                          (iii) the exercise or conversion 
                        price at the date of issuance of such 
                        warrants, options, or rights is not 
                        less than--
                                  (I) the market value of the 
                                securities issuable upon the 
                                exercise of such warrants, 
                                options, or rights at the date 
                                of issuance of such warrants, 
                                options, or rights; or
                                  (II) if no such market value 
                                exists, the net asset value of 
                                the securities issuable upon 
                                the exercise of such warrants, 
                                options, or rights at the date 
                                of issuance of such warrants, 
                                options, or rights; and
                          (iv) the proposal to issue such 
                        securities is authorized by the 
                        shareholders or partners of such 
                        business development company, and such 
                        issuance is approved by the required 
                        majority (as defined in section 57(o)) 
                        of the directors of or general partners 
                        in such company on the basis that such 
                        issuance is in the best interests of 
                        such company and its shareholders or 
                        partners;
                  (B) a business development company may issue, 
                to its directors, officers, employees, and 
                general partners, warrants, options, and rights 
                to purchase voting securities of such company 
                pursuant to an executive compensation plan, 
                if--
                          (i)(I) in the case of warrants, 
                        options, or rights issued to any 
                        officer or employee of such business 
                        development company (including any 
                        officer or employee who is also a 
                        director of such company), such 
                        securities satisfy the conditions in 
                        clauses (i), (iii), and (iv) of 
                        subparagraph (A); or (II) in the case 
                        of warrants, options, or rights issued 
                        to any director of such business 
                        development company who is not also an 
                        officer or employee of such company, or 
                        to any general partner in such company, 
                        the proposal to issue such securities 
                        satisfies the conditions in clauses (i) 
                        and (iii) of subparagraph (A), is 
                        authorized by the shareholders or 
                        partners of such company, and is 
                        approved by order of the Commission, 
                        upon application, on the basis that the 
                        terms of the proposal are fair and 
                        reasonable and do not involve 
                        overreaching of such company or its 
                        shareholders or partners;
                          (ii) such securities are not 
                        transferable except for disposition by 
                        gift, will, or intestacy;
                          (iii) no investment adviser of such 
                        business development company receives 
                        any compensation described in section 
                        205(a)(1) of title II of this Act, 
                        except to the extent permitted by 
                        paragraph (1) or (2) of section 205(b); 
                        and
                          (iv) such business development 
                        company does not have a profit-sharing 
                        plan described in section 57(n); and
                  (C) a business development company may issue 
                warrants, options, or rights to subscribe to, 
                convert to, or purchase voting securities not 
                accompanied by securities, if--
                          (i) such warrants, options, or rights 
                        satisfy the conditions in clauses (i) 
                        and (iii) of subparagraph (A); and
                          (ii) the proposal to issue such 
                        warrants, options, or rights is 
                        authorized by the shareholders or 
                        partners of such business development 
                        company, and such issuance is approved 
                        by the required majority (as defined in 
                        section 57(o)) of the directors of or 
                        general partners in such company on the 
                        basis that such issuance is in the best 
                        interests of the company and its 
                        shareholders or partners.
        Notwithstanding this paragraph, the amount of voting 
        securities that would result from the exercise of all 
        outstanding warrants, options, and rights at the time 
        of issuance shall not exceed 25 per centum of the 
        outstanding voting securities of the business 
        development company, except that if the amount of 
        voting securities that would result from the exercise 
        of all outstanding warrants, options, and rights issued 
        to such company's directors, officers, employees, and 
        general partners pursuant to any executive compensation 
        plan meeting the requirements of subparagraph (B) of 
        this paragraph would exceed 15 per centum of the 
        outstanding voting securities of such company, then the 
        total amount of voting securities that would result 
        from the exercise of all outstanding warrants, options, 
        and rights at the time of issuance shall not exceed 20 
        per centum of the outstanding voting securities of such 
        company.
          [(4)] (5) For purposes of measuring the asset 
        coverage requirements of section 18(a), a senior 
        security created by the guarantee by a business 
        development company of indebtedness issued by another 
        company shall be the amount of the maximum potential 
        liability less the fair market value of the net 
        unencumbered assets (plus the indebtedness which has 
        been guaranteed) available in the borrowing company 
        whose debts have been guaranteed, except that a 
        guarantee issued by a business development company of 
        indebtedness issued by a company which is a wholly-
        owned subsidiary of the business development company 
        and is licensed as a small business investment company 
        under the Small Business Investment Act of 1958 shall 
        not be deemed to be a senior security of such business 
        development company for purposes of section 18(a) if 
        the amount of the indebtedness at the time of its 
        issuance by the borrowing company is itself taken fully 
        into account as a liability by such business 
        development company, as if it were issued by such 
        business development company, in determining whether 
        such business development company, at that time, 
        satisfies the asset coverage requirements of section 
        18(a).
          (6)(A) Qualified institutional buyer.--Except as 
        provided in subparagraph (B), the following shall not 
        apply to a senior security which is a stock and which 
        is issued to and held by a qualified institutional 
        buyer (as defined in section 3(a)(64) of the Securities 
        Exchange Act of 1934):
                  (i) Subparagraphs (C) and (D) of section 
                18(a)(2).
                  (ii) Subparagraph (E) of section 18(a)(2), to 
                the extent such subparagraph requires any 
                priority over any other class of stock as to 
                distribution of assets upon liquidation.
                  (iii) With respect to a senior security which 
                is a stock, subsections (c) and (i) of section 
                18.
          (B) Individual investors who are not qualified 
        institutional buyers.--Subparagraph (A) shall not apply 
        with respect to a senior security which is a stock and 
        which is issued to a person who is not known by the 
        business development company to be a qualified 
        institutional buyer (as defined in section 3(a) of the 
        Securities Exchange Act of 1934).
          (7) Rule of construction.--Notwithstanding any other 
        provision of law, any additional class of stock issued 
        pursuant to this section must be issued in accordance 
        with all investor protections contained in all 
        applicable federal securities laws administered by the 
        Commission.
  (b) A business development company shall comply with the 
provisions of this section at the time it becomes subject to 
sections 55 through 65, as if it were issuing a security of 
each class which it has outstanding at such time.

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               distribution and repurchase of securities

  Sec. 63. Notwithstanding the exemption set forth in section 
6(f), section 23 shall apply to a business development company 
to the same extent as if it were a registered closed-end 
investment company, except as follows:
          (1) The prohibitions of section 23(a)(2) shall not 
        apply to any company which (A) is a wholly-owned 
        subsidiary of, or directly or indirectly controlled by, 
        a business development company, and (B) immediately 
        after the issuance of any of its securities for 
        property other than cash or securities, will not be an 
        investment company within the meaning of section 3(a).
          (2) Notwithstanding the provisions of section 23(b), 
        a business development company may sell any common 
        stock of which it is the issuer at a price below the 
        current net asset value of such stock, and may sell 
        warrants, options, or rights to acquire any such common 
        stock at a price below the current net asset value of 
        such stock, if--
                  (A) the holders of a majority of such 
                business development company's outstanding 
                voting securities, and the holders of a 
                majority of such company's outstanding voting 
                securities that are not affiliated persons of 
                such company, approved such company's policy 
                and practice of making such sales of securities 
                at the last annual meeting of shareholders or 
                partners within one year immediately prior to 
                any such sale, except that the shareholder 
                approval requirements of this subparagraph 
                shall not apply to the initial public offering 
                by a business development company of its 
                securities;
                  (B) a required majority (as defined in 
                section 57(o)) of the directors of or general 
                partners in such business development company 
                have determined that any such sale would be in 
                the best interests of such company and its 
                shareholders or partners; and
                  (C) a required majority (as defined in 
                section 57(o)) of the directors of or general 
                partners in such business development company, 
                in consultation with the underwriter or 
                underwriters of the offering if it is to be 
                underwritten, have determined in good faith, 
                and as of a time immediately prior to the first 
                solicitation by or on behalf of such company of 
                firm commitments to purchase such securities or 
                immediately prior to the issuance of such 
                securities, that the price at which such 
                securities are to be sold is not less than a 
                price which closely approximates the market 
                value of those securities, less any 
                distributing commission or discount.
          (3) A business development company may sell any 
        common stock of which it is the issuer at a price below 
        the current net asset value of such stock upon the 
        exercise of any warrant, option, or right issued in 
        accordance with [section 61(a)(3)] section 61(a)(4).

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