[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
