[Federal Register Volume 59, Number 151 (Monday, August 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19285]


[[Page Unknown]]

[Federal Register: August 8, 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 to allow Small Business Investment Companies 
licensed under sections 301(c) and (d) of the Small Business Investment 
Act of 1958 (Licensees) having no immediate need for SBA financial 
assistance (Leverage) to reserve the future availability of such 
financial assistance by obtaining SBA's conditional commitment to 
guarantee Debentures or Participating Securities (collectively ``pooled 
securities''), and Preferred Securities, that will be offered in the 
future as the Licensee draws against SBA's commitment.

DATES: Written comments on this proposed rule must be received no later 
than September 7, 1994.

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

FOR FURTHER INFORMATION CONTACT: Saunders Miller, Office of Program 
Development; Telephone (202) 205-6510.

SUPPLEMENTARY INFORMATION: Because it is often difficult for Licensees 
to precisely project their cash needs three months or more into the 
future, many Licensees consider it prudent to draw down Leverage funds 
in excess of actual need, hold the Leverage in permissible idle funds 
investments, and treat the resulting expense, representing the 
difference between interest expense and return on ``idle funds'' 
investments, as an unavoidable cost of participating in the small 
business investment company program. SBA proposes to relieve Licensees 
of this additional cost by making it possible for them to assure 
themselves that a specific amount of Leverage, not less than 
$1,000,000, but not more than 50 percent of their Regulatory Capital, 
will be reserved for future draws, as and when needed. Subject to these 
limitations, the actual amount of any particular request for a 
reservation of Leverage which is approved by SBA will depend in part on 
factors other than the applicant Licensee's own financial and 
regulatory situation, including such matters as the anticipated need 
for Leverage by all other Licensees making Leverage requests.
    Under the terms of this proposed rule, an application for SBA's 
conditional commitment to reserve Leverage against which draws may be 
made may be submitted by a Licensee at any time, and would be 
accompanied by the same financial information and other documentation 
that is presently required of Licensees that which to have their 
securities purchased by SBA or included in the next scheduled pooling, 
except that no securities forms will have to accompany an application 
for SBA's commitment. For a Licensee wishing to participate in the next 
pool, and also wishing to obtain SBA's conditional commitment, which 
would pertain solely to subsequent sales, separate applications would 
be filed.
    SBA will review all such applications for SBA's conditional 
commitment and make a determination as to whether to grant the request 
only after reviewing a Licensee's financial and regulatory status as 
well as its representation as to projected needs. The commitment when 
granted will represent a conditional agreement on SBA's part to permit 
a Licensee to make draws against an agreed upon reserved amount of 
Leverage over a fixed period of time.
    As a condition precedent to the effectiveness of a commitment, 
within thirty days following SBA's notification that the Licensee's 
application for a commitment for a reservation of Leverage has been 
approved, or prior to any draw against SBA's commitment if requested 
within such thirty day period, the Licensee must pay a non-refundable 
commitment fee. When a Licensee issuing pooled securities draws against 
SBA's commitment, the amount of the user fee associated with the 
guarantee of the Licensee's security or securities will be debited 
against an account holding the commitment fees and credited against an 
account holding guaranty fees. Failure to make timely and full payment 
of the commitment fee will preclude any draws against the commitment, 
and will cause SBA's commitment to lapse automatically at 5 p.m. 
Eastern Time on the thirtieth calendar day following SBA's notification 
of approval.
    In any case, SBA's commitment will also lapse at 5 p.m. Eastern 
Time on the sixtieth calendar day preceding the close of the next full 
Federal fiscal year following issuance of such commitment. (Under 
present law, the Federal fiscal year ends on September 30.) Therefore, 
depending upon when within a given Federal fiscal year a commitment was 
extended, the term of the commitment may be as short as ten months or 
as long as twenty-two months.
    As indicated above, at the time a Licensee seeks a commitment, it 
shall submit the same information required for a purchase of preferred 
securities or for participation in a guaranteed pool sale, including a 
Financial Statement on SBA Form 468 (Short Form). SBA will consider 
this information as well as any other available information pertaining 
to the Licensee's regulatory compliance in deciding whether, and how 
much of a commitment to reserve Leverage it may approve. If SBA extends 
a commitment, the Licensee will be required to prepare a Financial 
Statement on Short Form 468 as of the close of each quarter of its 
fiscal year during the term of the commitment, and to send a copy of 
that statement to SBA within 30 days after the close of each quarter. 
If a request for a draw is submitted within 30 days after the close of 
the Licensee's fiscal quarter, the Short Form 468 shall accompany the 
request. SBA will conduct an expedited review of this information and 
the Licensee's regulatory status in conjunction with its review of each 
such request.
    Requests for a draw may be submitted at any time. It is 
contemplated that requests for pooled securities may be funded as 
frequently as twice a month and requests for preferred securities may 
be funded at any time. The minimum amount of any draw of pooled 
securities will be $1,000,000, with integral multiples of $100,000 
permitted thereafter. When requesting a draw, a Licensee shall submit a 
certified statement to SBA indicating that there has been no adverse 
change in its financial condition since the date of its most recent 
Form 468 (Short Form), plus a statement that the Licensee is in 
compliance with applicable regulations, and, in appropriate cases, that 
the Licensee has complied with previous SBA instructions concerning 
matters such as divestitures and refunds. As indicated above, SBA will 
review such statements against the information in its own files before 
it will approve a draw against a commitment.
    The Licensee must also furnish SBA with information concerning the 
specific Financing for which the draw proceeds are intended; and, 
thereafter, furnish SBA with evidence that the Financing in question 
has been made or an explanation satisfactory to SBA of why an 
anticipated Financing has not been made.
    SBA's present general practice, which is not proposed to be changed 
(and which SBA is extending to Participating Securities pursuant to 
rules published at 59 FR 16898, April 8, 1994) is to extend invitations 
to Licensees to participate in the creation of a pool of SBA-guaranteed 
Debentures, against which a public offering of SBA-guaranteed trust or 
pool certificates is made and the certificates, each evidencing a 
fractional interest in the pool, sold to long-term investors. Such 
pools are formed and certificates sold every three months, give or take 
a few days. Preceding the closing of the sale of the pool certificates 
there is a ten-day period during which no more Debentures may be 
considered for inclusion in the pool. During that ten-day period, the 
rate of interest on debentures or of Prioritized Payments on 
Participating Securities is determined. When a Licensee requests a 
draw, it will be deemed to have authorized SBA to guarantee its 
security immediately, and to have authorized SBA, acting as the 
Licensee's agent, to sell such security to a short-term investor that 
will agree to hold the Licensee's security until the Licensee's 
security is either put into the next pool or is repurchased by SBA 
because of a definitive determination based on subsequently-received 
adverse information concerning the Licensee's credit or regulatory 
status.
    If the security is a Debenture, it will be sold to a short-term 
investor at a discount, calculated as if the maturity date of the 
Debenture were the next scheduled closing date for the sale of pool 
certificates. The Licensee will also agree to the payment of additional 
interest to the short-term investor, at the same rate used to calculate 
the discount, for each day that the sale of pool certificates is 
delayed beyond the scheduled date. While payment to the short-term 
investor of all interest accrued from the date of sale to the actual 
closing date shall be the responsibility of the Licensee, it shall be 
guaranteed by SBA. The Licensee's failure to make full payment of such 
additional interest shall constitute an event giving rise to a 
condition affecting the Licensee's good standing under SBA's 
regulations. If the Licensee's security is a Participating Security, 
the same conditions will apply, however, the Participating Security 
(Securities) will be sold to a short-term investor at a price equal to 
the face amount thereof.
    Although SBA guarantees the Licensee's undertaking to the short-
term investor concerning payment of interest on a Debenture or 
Prioritized Payments on a Participating Security on the date such 
Debenture or Participating Security is pooled, the Licensee does not 
warrant, nor does SBA guarantee, that pooling will take place on any 
specific date. The short-term investor assumes the risk that the 
recovery of its invested principal and the receipt of interest or 
Prioritized Payments will be delayed to the extent that the pool 
closing is delayed. Based on historical experience, it is unlikely that 
any such delay will occur and if it does, the duration of the delay 
should be minimal. The rate at which the Licensee's Debenture will be 
discounted or at which the Prioritized Payments will accumulate on a 
Participating Security when either of these securities are sold to a 
short-term investor will, in both cases, be determined with reference 
to the current average market yield on obligations of the United States 
with comparable periods to maturity. However, for the purpose of 
determining the rate of interest or of Prioritized Payments payable to 
a short-term investor, ``maturity'' refers to the next scheduled 
pooling date, not the stated maturity date of the security in question.
    In the normal course of events, when the sale of pool certificates 
closes, the Licensee's security will be included in the pool, having 
been purchased, as previously agreed, from the short-term investor with 
the Licensee's share of the proceeds of the sale of SBA guaranteed 
certificates issued against the pool.
    The sale of the Licensee's security to a short-term investor with 
SBA's guaranty does not obligate SBA to include that security in a pool 
of long-term securities in disregard of subsequently-obtained 
information calling into question either the Licensee's financial 
soundness or the Licensee's compliance with applicable regulations. If 
SBA determines to withhold its guarantee of the Licensee's security to 
the pool, SBA will purchase the Licensee's security from the short-term 
investor on or before the pool closing date.
    Sale of the Licensee's security to a short-term investor with SBA's 
guaranty does not cut off the Licensee's right to withdraw its security 
from entering into the pool by repurchasing it directly from the short-
term investor if notice is given to SBA at least ten days prior to the 
pool cut-off date. However, since the sale of the Licensee's security 
to a short-term investor, and not the subsequent pooling of the 
security, is the event that discharges SBA from its reservation 
obligation to the extent of the security's face amount, the Licensee's 
subsequent repurchase of its security from the short-term investor does 
not re-obligate SBA under the terms of its commitment, or restore SBA's 
guarantee authority to the extent of the face amount of the repurchased 
security.
    SBA's approval of an application for a commitment does not lock in 
any interest or Prioritized Payment rate, nor does SBA's guarantee of a 
security sold to a short-term investor indicate in any way what the 
Licensee's interest or Prioritized Payment rate will be when the 
security is pooled and certificates are sold to long-term investors.
    Once in the hands of the pool trustee, the Licensee's Debenture or 
Participating Security will assume all the terms and characteristics of 
the other securities in the pool, including an interest or Prioritized 
Payment rate recalculated with reference to the maturities of the other 
securities being pooled.

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 constitute 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 
substantial impact upon a significant number of small entities. This 
proposed rule will not increase the amount of Leverage available to any 
particular Licensee or to the industry as a whole, but it is 
anticipated that if this rule is adopted as proposed, there will be a 
significant decrease in the percentage of funds derived from the 
pooling of SBA-guaranteed securities that, at any given time, are 
classifiable as ``idle funds'' not invested in Small Concerns. Under 
present rules, some of SBA risk as a long-term guarantor is taken on in 
connection with securities whose proceeds are ``idle funds'' that are 
not invested in Small Concerns.
    1. The legal basis for this proposed regulation is section 308(c) 
of the Small Business Investment Act, 15 U.S.C. 687(c), and section 
20(a)(2) of the Small Business Act, 15 U.S.C. 631 (note) as amended by 
section 414 of Pub. L. 102-366.
    2. The potential benefits of this proposed regulation have been set 
forth in the discussion above, under Supplementary Information.
    3. The potential cost of this proposed regulation cannot be 
quantified or estimated.
    4. There are no Federal rules which duplicate, overlap, or conflict 
with this proposed rule.
    5. SBA is not aware of regulatory alternatives that could achieve 
the same objectives at lower cost.
    This rule was not reviewed under Executive Order 12866.

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 impose an 
additional record-keeping requirement on those Licensees that 
voluntarily avail themselves of the benefit of this proposed rule. 
Viewing the matter from the Licensee's standpoint, the additional 
burden of preparing a quarterly short-form financial statement is 
offset by the assurance of the future availability of Leverage and the 
reduction of cost resulting from elimination of the need to draw down 
Leverage funds long before they may be invested in Small Concerns. From 
SBA's standpoint, the additional recordkeeping is necessary if SBA is 
not to rely upon out-dated financial information when it funds draws 
against its commitment.

[Catalog of Federal Domestic Assistance Program No. 59.011 Small 
Business Investment Companies]

List of Subject in 13 CFR Part 107

    Investment companies, Loan programs-business, Reporting and 
recordkeeping 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 continues to read as 
follows:

    Authority: Title III of the Small Business Investment Act, 15 
U.S.C. 681 et seq.; 15 U.S.C. 683; 15 U.S.C. 687(c); 15 U.S.C. 687b; 
15 U.S.C. 687d; 15 U.S.C. 687g; 15 U.S.C. 687m, as amended by Pub. 
L. 102-366.

    2. Part 107 is proposed to be amended by adding a new Sec. 107.215 
to read as follows:


Sec. 107.215  Commitments by SBA.

    (a) General. A Licensee may apply for SBA's commitment to reserve 
an amount of Leverage against which SBA may purchase its Preferred 
Securities or guarantee its Debentures or Participating Securities as 
and when offered for future public sales. The amount of any such 
commitment shall be not less than $1,000,000 but not more than 50 
percent of Regulatory Capital. Applications shall be prepared and 
submitted in accordance with Sec. 107.210(b), as amended from time to 
time, except to the extent that this regulation is inconsistent 
therewith.
    (b) Commitment fees. The Licensee shall pay to SBA a non-refundable 
fee. No request for a draw will be approved unless this fee has been 
paid in full.
    (c) Automatic revocation of commitment. Unless the full amount of 
the commitment fee is paid by 5 p.m. Eastern Time on the 30th calendar 
day following SBA's notification that its commitment has been extended, 
SBA's commitment shall be automatically revoked.
    (d) Lapse of commitment. Notwithstanding payment of the commitment 
fee, SBA's commitment shall automatically lapse at 5 p.m. Eastern Time 
on the 60th calendar day preceding the close of the next full Federal 
fiscal year following issuance of such commitment.
    (e) Additional recordkeeping requirements. Following notification 
that SBA's commitment has been granted, a Licensee shall submit a 
Financial Statement on SBA Form 468 (Short Form) as of the close of 
each quarter of its fiscal year to SBA within 30 days after the close 
of the quarter, or with any request for a draw that is made within such 
30-day period.
    (f) Draws--(1) Minimum amount of draw. The minimum face amount of 
Debentures or Participating Securities that may be issued in connection 
with a draw against SBA's commitment is $1,000,000; plus multiples of 
$100,000 above $1,000,000.
    (2) Procedures for funding draws--(i) General. A request for a 
draw, which may be submitted at any time, is submitted in the form of a 
request that the Licensee's Preferred Security be purchased by SBA or 
that its Debenture or Participating Security be guaranteed by SBA, sold 
to a short-term investor and subsequently included in the next pool for 
which the Licensee's securities are eligible. The following 
documentation shall accompany each such request for a draw:
    (A) If such request is submitted within 30 days following the close 
of the Licensee's fiscal quarter, the request shall be accompanied by a 
Financial Statement on SBA Form 468 (Short Form) reflecting the 
Licensee's condition as of the close of that fiscal quarter; otherwise, 
the request shall be accompanied by a formal statement of no adverse 
change in financial condition since the filing of the most recent SBA 
Form 468 (Short Form). If a Licensee is not in compliance with 
paragraph (e) of this section, no draw request will be considered.
    (B) A certified statement executed by an officer of the Licensee or 
of a corporate general partner of the Licensee, or by an individual 
that is authorized to act as or for a general partner of the Licensee, 
as the case may be, representing that the Licensee is in compliance 
with applicable regulations; i.e., no unresolved regulatory violations.
    (C) A statement that the proceeds are needed to fund a particular 
Small Concern, which statement shall also include the name, address and 
Standard Industrial Classification Manual Industry number, a summary of 
the Licensee's proposed Financing, and the scheduled closing date 
thereof. Within 30 calendar days after the scheduled closing date, the 
Licensee shall submit an executed copy of SBA Form 1031 confirming the 
closing of a transaction(s) with the proceeds of the draw, or a written 
explanation of the failure to close. Failure to make timely submittal 
of an accurate Form 1031 or satisfactory written explanation of failure 
to close will preclude consideration of any subsequent draw requests; 
and may be deemed an event affecting the Licensee's good standing or 
constituting consent to restricted operations, as the case may be.
    (ii) Draw process--(A) General. By submitting a request for a draw, 
a Licensee is conclusively presumed to have authorized SBA to purchase 
its Preferred Security or to have authorized SBA or any agent or 
trustee designated by SBA to guaranty its Debenture or Participating 
Security and to sell it with SBA's guarantee, to enter into any 
agreements (and to bind the Licensee to such agreements) that may be 
necessary to effect: (1) The sale of the Licensee's security to a 
short-term investor, (2) its purchase on the Licensee's behalf (or by 
the Licensee itself), and (3) the subsequent pooling of that security 
with other securities with the same maturity date: Provided, however, 
That the Licensee shall retain the right to repurchase its securities 
upon notice to SBA at least 10 days prior to the cut-off date for the 
pool in which the Licensee's security is to be included by tendering 
the face amount of the Debenture, or the face amount of the 
Participating Security plus Earned Prioritized Payments, as the case 
may be, to the short-term investor.
    (B) Debentures. An SBA guaranteed Debenture shall be sold to a 
short-term investor at a discount calculated with reference to a rate 
determined by the Secretary of the Treasury in accordance with Section 
303(b) of the Act (but without regard to any interest subsidy to which 
the Licensee may be otherwise entitled), as if the maturity date of the 
Debenture were the next scheduled date for the sale of pool 
certificates: Provided, however, That if the actual sale of pool 
certificates shall take place after the scheduled date, the Licensee 
shall pay to the short-term investor, on the actual sale date, an 
additional sum equal to daily interest as scheduled on the Debenture, 
at the same rate, from the scheduled sale date to the actual sale date. 
Failure to make such interest payment on the closing date shall 
constitute an event giving rise to a condition affecting the Licensee's 
good standing.
    (C) Participating securities. The Licensee's Participating Security 
shall be sold to a short-term investor for a sum equal to the face 
amount thereof. The Licensee shall undertake, with SBA's guarantee, to 
pay the short-term investor, at the closing of the next scheduled sale 
of pool certificates, Prioritized Payments as scheduled on the Security 
at a rate determined by the Secretary of the Treasury in accordance 
with Section 303(b) of the Act, as if the maturity date of the 
Participating Security were the next scheduled date for the sale pool 
certificates.

    Dated: July 22, 1994.
Erskine B. Bowles,
Administrator.
[FR Doc. 94-19285 Filed 8-5-94; 8:45 am]
BILLING CODE 8025-01-M