§ 107.1850 - Watchlist.

§ 107.1850 Watchlist.

Cross Reference

Link to an amendment published at 89 FR 3549, Jan. 19, 2024.

Under certain circumstances, SBA may place Licensees on a Watchlist as a process to increase proactive communication between SBA and the Licensee to help mitigate the potential for a future default or significant regulatory violation. Being on a Watchlist means that SBA has determined, based on certain triggers discussed in this section, a Licensee will provide a heightened level of reporting and communication with SBA.

(a) Watchlist triggers. SBA may place you on the Watchlist for any of the following:

(1) You perform an investment that is a direct violation of your fund's stated investment policy as identified in its limited partnership agreement (or other governing agreement) or as presented to SBA in its license application under § 107.300.

(2) The key person clause in your limited partnership agreement (or other governing agreement) is invoked due to a change in personnel of management team members identified as key persons.

(3) You or your General Partner has been named as a party in litigation proceedings brought by a Federal agency, involving felony charges, or allegations of dishonesty, fraud, or breach of fiduciary duty.

(4) You have violated a material provision in your limited partnership agreement (or other governing agreement) or any side letter agreement.

(5) You rank in the bottom quartile for the primary strategy benchmark, as identified by the Licensee at the time of licensure, by vintage year, defined as the year in which you were licensed as an SBIC, after three years based on the private investor's total value to paid-in capital (TVPI), where TVPI is calculated as (cumulative distributions to private investors plus net asset value minus expenses and carried interest)/cumulative private investor paid in capital.

(6) Your leverage coverage ratio (LCR) falls below 1.25, where LCR is calculated as (unfunded Regulatory Capital commitments plus net asset value minus outstanding Leverage)/outstanding Leverage (Total Assets−Liabilities excluding SBA Leverage−Other Assets) + Unfunded Private Commitments)/Outstanding Leverage, or a Capital Impairment Percentage approaching your threshold set forth in § 107.1830.

(7) You default on your interest payment and fail to pay within 30 days of the date it is due. (Note: This event represents an event of default under § 107.1810(f) for which SBA maintains its rights under § 107.1810(g) if the Licensee does not cure to SBA's satisfaction.)

(8) Outstanding or unresolved regulatory matters.

(b) Requirements for Licensees on the Watchlist. If SBA places you on the Watchlist, you will be required to comply with any or all of the following:

(1) You must submit Portfolio Company Financing Reports (SBA Form 1031s), required under § 107.640, within 30 calendar days of the financing date.

(2) You must participate in monthly portfolio reviews with SBA.

(3) You must file quarterly valuation reports on specific or all of your portfolio company holdings, as requested by SBA.

(4) You must submit a letter formally requesting whether you may submit a request for a subsequent fund if you are currently on the Watchlist or have managed any Licensee on a Watchlist within the last 12 months. If you have already submitted a request or are otherwise in the Licensing process (see § 107.300), SBA may suspend processing your request until it is satisfied that SBA's concerns are resolved or otherwise disapprove your request for a subsequent fund. SBA maintains the right to deny approval of any request to submit a subsequent fund request or any subsequent fund request submitted under § 107.300.

(c) Removal from the Watchlist. SBA will remove you from the Watchlist if the event that triggered your addition to the Watchlist (see paragraph (a) in this section) is resolved to SBA's satisfaction. Accordingly, SBA may require any or all of the following resolutions:

(1) Successful completion of a portfolio review to confirm compliance of your adherence to your investment policy.

(2) SBA's written approval of your key person resolution.

(3) SBA's written acknowledgement of pending litigation.

(4) SBA's written consent to the resolution of the LPA or side letter violation.

(5) Two quarters of performance above a bottom quartile industry benchmark based on the TVPI by vintage year and strategy, as calculated under paragraph (a) of this section.

(6) Two quarters of consistent reporting of your LCR, as calculated under paragraph (a) of this section, exceeding 1.25.

(7) You are current on your Leverage interest payments.

(8) A completed regulatory examination acceptable to SBA.

(d) Watchlist communications —

(1) Notification to Licensee. If you trigger any of the events under paragraph (a) of this section, SBA will notify you in writing that you have been placed on the Watchlist, identify the event(s) which triggered your placement on the Watchlist, the actions you must take as noted under paragraph (b) of this section, and the remedies as identified under paragraph (c) of this section.

(2) Watchlist status disclosure. SBA will not disclose your Watchlist status publicly.

(3) Removal from Watchlist status notification. SBA will provide you with written notice after SBA determines that you have resolved all matter identified in your notification letter and satisfied the applicable requirements set forth in paragraph (c) of this section.

[88 FR 46013, July 18, 2023, as amended at 89 FR 3549, Jan. 19, 2024]