[Federal Register Volume 59, Number 25 (Monday, February 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2677]


[[Page Unknown]]

[Federal Register: February 7, 1994]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

 

Small Business Investment Companies; Leverage

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: SBA proposes regulations that would exempt non-Leveraged 
Licensees from certain regulations primarily intended to safeguard 
SBA's interests as a creditor of, guarantor of, and/or investor in, 
Leveraged Licensees.

DATES: Written comments on this proposed rule must be received no later 
than March 9, 1994.

ADDRESSES: Written comments should be sent to: Robert D. Stillman, 
Associate Administrator for Investment, Small Business Administration, 
suite 6300; 409 3rd Street SW., Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT:
Marvin D. Klapp, Acting Director, Office of Program Development; 
Telephone (202) 205-6515.

SUPPLEMENTARY INFORMATION: Section 408(d) of Public Law 102-366 
(September 4, 1992) directs SBA to review and to revise those 
regulations intended to provide for the ``safety and soundness'' of 
Leveraged Licensees, with a view towards exempting non-Leveraged 
Licensees from compliance with inappropriate regulations.
    Accordingly, SBA has identified 7 areas of its regulations where 
some exemptions to certain provisions could be made. Three regulatory 
changes that would distinguish between Leveraged and non-Leveraged 
Licensees have already been proposed. See 58 FR 41882 at 41894 and 
41896, August 5, 1993.
    In selecting those areas in which regulatory relief could be 
granted, SBA tried to balance two objectives: (1) To insure that SBIC 
investing promotes the ``flow of private equity capital and long-term 
loan funds which small-business concerns need for the sound financing 
of their business operations and for their growth, expansion, and 
modernization''; and (2) to reduce the financial risk to the Government 
that arises from its guarantees or purchases of Leverage.
    If an SBIC has no Leverage, the Government is obviously not at 
financial risk. Therefore, in many instances, relief from certain 
regulations can be provided. SBA therefore proposes to provide 
exemptions to non-Leveraged Licensees from compliance with certain 
sections that are discussed below. It should be clearly understood, 
however, that a Licensee that has availed itself of the exemptions 
proposed to be extended to non-Leveraged Licensees must bring itself 
into compliance with all applicable regulations before any Leverage may 
be extended; and no Leverage will be extended on the basis of a 
Licensee's promise to bring itself into compliance subsequently.
    Under Sec. 107.709, changes in the compensation of an SBIC's 
managers now require advance approval by SBA. SBA's underlying concern 
is the risk to its position as an investor in or (contingent) creditor 
of the Licensee as the result of dissipation of assets through the 
payment of compensation that may be excessive relative to the size of 
an SBIC. However, without Leverage funds at risk, SBA would not be as 
concerned about levels of compensation so long as required minimum 
capital levels were maintained. Accordingly, a non-Leveraged Licensee 
would not be required to obtain SBA's prior approval for its 
compensation arrangements; however, all compensation agreements and 
changes therein would be required to be reported for subsequent 
approval pursuant to Sec. 107.1004(a).
    Section 107.710 imposes limitations on the expenditures a Licensee 
may make for the maintenance and preservation of physical assets 
acquired in connection with the liquidation of a Portfolio asset, 
including payments of mortgage interest, principal, and taxes. SBA 
proposes to exempt non-Leveraged Licensees from the requirement of SBA 
approval for such expenditures, and to leave the determination to make 
such expenditures entirely to the discretion of the non-Leveraged 
Licensee's managers.
    The minimum Private Capital levels of $2.5 million for section 
301(c) companies and $1.5 million for section 301(d) companies are 
floors established by the Act. If a Licensee has no Leverage, SBA is 
not at financial risk if Private Capital is reduced. Accordingly, 
Sec. 107.802 is proposed to be amended so that non-Leveraged Licensees 
may have voluntary decreases in Private Capital as long as they do not 
drop below the applicable statutory minimum. Licensees which are 
liquidating in accordance with a plan previously approved in writing by 
SBA may decrease private capital without restriction. All decreases in 
private capital for non-leveraged licensees shall still be reported to 
SBA pursuant to Sec. 107.1004(a).
    Under Sec. 107.904(a) SBA's prior written approval is presently 
required whenever a Licensee disposes of assets, including assets 
acquired in liquidation, by transfer to an Associate (except as a 
dividend); and SBA's approval is conditional upon a showing that the 
proposed terms of disposal are no less favorable to the Licensee than 
are elsewhere obtainable. The need for such a restriction is obvious 
when SBA is at risk as a guarantor, creditor, or investor. When no such 
risk to SBA exists, the need for the restriction disappears.

Compliance With Executive Orders 12866, 12612, and 12778, and With the 
Regulatory Flexibility and Paperwork Reduction Acts

Executive Order 12866 and Regulatory Flexibility Act

    This proposed rule will not be a significant regulatory action for 
the purposes of Executive Order 12866 because, if promulgated as final, 
it is not likely to have an annual impact on the national economy of 
$100 million or more, and, for purposes of the Regulatory Flexibility 
Act, 5 U.S.C. 601, et seq., it will not have a significant economic 
impact upon a substantial number of small entities.
    This rule is proposed pursuant to a statutory mandate (Section 
408(d) of Pub. L. 102-366) direction SBA to review its regulations and 
to exempt non-Leveraged Licensees from compliance with those 
regulations primarily intended to insure the safety and soundness of 
Leveraged Licensees.
    The potential benefits of this proposed regulation have been set 
forth in the discussion above, under Supplementary Information.
    The potential cost of this proposed regulation cannot be quantified 
or estimated.
    SBA is not aware of reasonably feasible alternatives to this 
proposed rule.

Executive Order 12612

    SBA certifies that this proposed regulation has no federalism 
implications warranting the preparation of a Federalism Assessment in 
accordance with Executive Order 12612.

Executive Order 12278

    For the purposes of Executive Order 12278, SBA certifies that this 
proposed rule is drafted, to the extent practicable, in accordance with 
the standards set forth in Section 2 of that Order.

Paperwork Reduction Act

    This proposed regulation, if adopted as final, will not impose any 
new record-keeping requirement.

Catalog of Federal Domestic Assistance Program 59.011, Small 
Business Investment Companies

List of Subjects in 13 CFR Part 107

    Investment companies, Loan programs-business, Reporting and record-
keeping requirements, Small businesses.

    For the reasons set forth above, part 107 of Title 13, Code of 
Federal Regulations is proposed to be amended as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

    1. The authority citation for part 107 is revised to read as 
follows:

    Authority: 15 U.S.C. 681 et seq.; 683; 687(c); 687b; 687d; 687g; 
687m.

    2. Section 107.709 is proposed to be amended by revising paragraph 
(a) to read as follows:


Sec. 107.709  Investment Adviser/Manager.

    (a) General. A Licensee may employ an Investment Adviser/Manager as 
defined in Sec. 107.3, subject to the supervision of the Licensee's 
Board of Directors or general partner(s). Services performed may 
include management and operating activities. The contract shall specify 
the services to be rendered to the Licensee and to Portfolio Concerns, 
and the basis for computation of compensation. Such contract shall 
therefore be approved annually by the Board of Directors or principals 
of the Licensee. In the case of a Licensee with outstanding Leverage, 
the proposed contract, or any material change to a previously-approved 
contract, shall be submitted to SBA for SBA's prior written approval; 
any doubt regarding the materiality of a change shall be resolved by 
submission to SBA. Licensees with no outstanding Leverage shall submit 
all such contracts, or material changes, to SBA within 30 days of 
execution for postapproval, pursuant to Sec. 107.1004.
* * * * *
    3. Section 107.710 is proposed to be amended by revising paragraph 
(b)(1) to read as follows:


Sec. 107.710  Assets in liquidation.

* * * * *
    (b) Preservation of assets. (1) Any Licensee may incur reasonably 
necessary expenses for maintenance of such assets. Additional expenses 
may also be incurred for the purpose of rendering such assets saleable, 
and for the payment of prior mortgage interest and/or principal, taxes, 
and necessary insurance coverage. The right of a leveraged Licensee to 
incur such additional expenses is subject to the restrictions set forth 
hereafter in paragraphs (b)(2), (b)(3), and (c) of this section, which 
are inapplicable to unleveraged Licensees.
* * * * *
    4. Section 107.802 is proposed to be revised to read as follows:


Sec. 107.802  Voluntary capital decrease.

    (a) General. No Licensee may reduce its Private Capital below an 
amount that is the higher of either the minimum required by the Act or 
regulations, or the amount necessary to prevent the Licensee from 
having outstanding Leverage in excess of the limitations set forth in 
Section 303 of the Act.
    (b) Leveraged licensees. Subject to the restrictions in paragraph 
(a) of this section, a Leveraged Licensee may voluntarily reduce its 
Private Capital in an amount not in excess of 2 percent thereof in one 
of its fiscal years. No voluntary reduction of Private Capital in 
excess of 2 percent in any one of the Licensee's fiscal years is 
permitted without SBA's prior written approval.
    (c) Unleveraged licensees. Subject to the restriction set forth in 
paragraph (a) of this section, an unleveraged Licensee may voluntarily 
reduce its Private Capital to the applicable minimum specified by the 
Act or this part, but any such reduction shall be reported to SBA 
within 30 days.
    5. Section 107.904 is proposed to be amended by revising paragraph 
(a) to read as follows:


Sec. 107.904  Disposition of assets to Licensee's Associates or to 
competitors of Portfolio Concern.

    (a) Sale to Associate. Without prior written permission from SBA, a 
Leveraged Licensee shall not dispose of assets (including assets in 
liquidation) to any Associate. As a prerequisite to such permission, a 
Leveraged Licensee must demonstrate that the proposed terms of disposal 
are no less favorable to it than are obtainable elsewhere, Provided, 
however, That a Licensee without Leverage need not obtain permission 
from SBA.
* * * * *
    Dated: January 13, 1994.
Erskine B. Bowles,
Administrator.
[FR Doc. 94-2677 Filed 2-4-94; 8:45 am]
BILLING CODE 8025-01-M