Small Business Investment Companies; Leverage

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