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B-149685, MAR 25, 1971

B-149685 Mar 25, 1971
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HAS AUTHORITY TO ASSIGN AND SELL SECURITIES HELD BY IT UNDER THE ACT AND TO GUARANTEE SALES TO PRIVATE FINANCIAL INSTITUTIONS OF DEBENTURES ORIGINALLY PURCHASED BY SBA FROM SMALL BUSINESS INVESTMENT COMPANIES PROVIDED BUDGETED PROGRAM LEVELS ARE NOT EXCEEDED. THESE DEBENTURES WILL THEN BE IMMEDIATELY RESOLD TO PRIVATE INVESTORS BY MEANS OF AN UNDERWRITTEN PUBLIC OFFERING. THE DEBENTURES WILL BE GUARANTEED BY SBA AS TO TIMELY PAYMENT OF PRINCIPAL AND INTEREST ACCORDING TO THE TERMS OF THE INSTRUMENTS. YOUR LETTER STATES THAT A SUBSTITUTION POOL OF DEBENTURES WILL BE ESTABLISHED AS FOLLOWS: " *** SBA WILL HAVE THE RIGHT TO SUBSTITUTE FOR ANY DEFAULTED DEBENTURE. OR FOR ANY DEBENTURE ISSUED BY AN SBIC WITH RESPECT TO WHICH SBA IS EXPERIENCING SERIOUS REGULATORY DIFFICULTIES.

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B-149685, MAR 25, 1971

SMALL BUSINESS INVESTMENT COMPANIES - DEBENTURES - GUARANTEED SALE DESPITE THE ABSENCE OF A SPECIFIC GUARANTEE PROVISION, THE SMALL BUSINESS ADMINISTRATION, UNDER SUBSECTIONS 5(B)(2) AND 5(B)(7) OF THE SMALL BUSINESS ACT, 15 U.S.C. 634, HAS AUTHORITY TO ASSIGN AND SELL SECURITIES HELD BY IT UNDER THE ACT AND TO GUARANTEE SALES TO PRIVATE FINANCIAL INSTITUTIONS OF DEBENTURES ORIGINALLY PURCHASED BY SBA FROM SMALL BUSINESS INVESTMENT COMPANIES PROVIDED BUDGETED PROGRAM LEVELS ARE NOT EXCEEDED. IN CONNECTION WITH THE LATTER CONSIDERATION THE COMP. GEN. SUGGESTS THAT IT WOULD BE PREFERABLE TO OBTAIN THE CONCURRENCE OF CONGRESSIONAL APPROPRIATIONS COMMITTEES BEFORE PROCEEDING SINCE THE PROPOSAL APPEARS TO CONSTITUTE A SUBSTANTIAL "REPROGRAMMING" WITHIN THE TOTAL BUDGETARY AMOUNTS FOR FISCAL YEAR 1971.

TO MR. KLEPPE:

BY LETTER OF MARCH 15, 1971, YOU ADVISED OF A PROPOSED SALE OF GUARANTEED SMALL BUSINESS INVESTMENT COMPANY DEBENTURES BY SMALL BUSINESS ADMINISTRATION (SBA) TO A GROUP OF UNDERWRITERS FOR RESALE TO PRIVATE INVESTORS, AND YOU REQUESTED OUR APPROVAL OF THE PROPOSAL.

THE PLAN, AS OUTLINED IN YOUR LETTER, CALLS FOR THE ADMINISTRATION TO PURCHASE $30 MILLION OF NEWLY ISSUED DEBENTURES FROM SMALL BUSINESS INVESTMENT COMPANIES UNDER THE AUTHORITY OF SECTION 303(B) OF THE SMALL BUSINESS INVESTMENT ACT (15 U.S.C. 683(B), SUPP. V). THESE DEBENTURES WILL THEN BE IMMEDIATELY RESOLD TO PRIVATE INVESTORS BY MEANS OF AN UNDERWRITTEN PUBLIC OFFERING. THE DEBENTURES WILL BE GUARANTEED BY SBA AS TO TIMELY PAYMENT OF PRINCIPAL AND INTEREST ACCORDING TO THE TERMS OF THE INSTRUMENTS.

YOUR LETTER STATES THAT A SUBSTITUTION POOL OF DEBENTURES WILL BE ESTABLISHED AS FOLLOWS:

" *** SBA WILL HAVE THE RIGHT TO SUBSTITUTE FOR ANY DEFAULTED DEBENTURE, OR FOR ANY DEBENTURE ISSUED BY AN SBIC WITH RESPECT TO WHICH SBA IS EXPERIENCING SERIOUS REGULATORY DIFFICULTIES, ANOTHER LIKE DEBENTURE OF ANOTHER SBIC. FOR THIS PURPOSE, SBA WILL CREATE A POOL OF APPROXIMATELY $25 MILLION OF IDENTICAL DEBENTURES ACQUIRED

"(1) IN THE EXERCISE OF ITS DIRECT LOAN AUTHORITY FOR FISCAL 1971 (TO THE EXTENT OF $15 MILLION); AND

"(2) BY THE RENEWAL OF CURRENTLY OUTSTANDING NOTES AND DEBENTURES (IN AN AMOUNT APPROXIMATING $10 MILLION)."

EACH PURCHASER OF A DEBENTURE (TO BE INITIALLY SOLD AT THE FACE AMOUNT OF $10,000 OR MULTIPLES THEREOF) WILL RECEIVE A GUARANTY AGREEMENT FROM YOUR AGENCY. EACH TRANSFER OF A DEBENTURE WILL BE REQUIRED TO BE REGISTERED WITH THE REGISTRAR BANK, AND SBA WILL THEN ISSUE A NEW GUARANTY AGREEMENT TO THE TRANSFEREE. THE SBA WILL RECEIVE PAYMENTS FROM THE SBIC'S, WHICH WILL NOT HAVE A RIGHT OF PREPAYMENT, AND WILL REMIT INTEREST AND PRINCIPAL TO THE DEBENTURE HOLDERS IN THE AMOUNTS AND ON THE DATES SPECIFIED IN THE DEBENTURES. YOU ALSO STATE THAT YOU EXPECT TO RECEIVE SHORTLY AN OPINION OF THE ATTORNEY GENERAL CONFIRMING THAT SBA'S OBLIGATIONS UNDER THE PROPOSED SALE WILL REPRESENT "FULL FAITH AND CREDIT" OBLIGATIONS OF THE UNITED STATES.

IN A DECISION DATED DECEMBER 30, 1965, 45 COMP. GEN. 370, THIS OFFICE APPROVED THE GUARANTEED SALE BY THE SMALL BUSINESS ADMINISTRATION TO PRIVATE FINANCIAL INSTITUTIONS OF DEBENTURES ORIGINALLY PURCHASED BY SBA FROM SMALL BUSINESS INVESTMENT COMPANIES UNDER THE PREDECESSOR OF PRESENT SECTION 303(B) OF THE SMALL BUSINESS INVESTMENT ACT. DESPITE THE ABSENCE OF A SPECIFIC GUARANTEE PROVISION, WE RELIED UPON THE BROAD AUTHORITY GIVEN THE SBA ADMINISTRATOR, UNDER SUBSECTIONS 5(B)(2) AND 5(B)(7) OF THE SMALL BUSINESS ACT, 15 U.S.C. 634, TO ASSIGN OR SELL SECURITIES HELD BY HIM UNDER THE ACT AT PUBLIC OR PRIVATE SALE AND UPON SUCH TERMS AND CONDITIONS AS HE DETERMINES TO BE REASONABLE, AND TO TAKE ANY ACTION DETERMINED BY HIM TO BE NECESSARY OR DESIRABLE IN DEALING WITH LOANS UNDER THE ACT. WE NOTED THAT THE ADMINISTRATOR'S BROAD AUTHORITY UNDER SAID SUBSECTIONS WAS MADE APPLICABLE TO HIS FUNCTIONS UNDER THE SMALL BUSINESS INVESTMENT ACT BY SECTION 201 THEREOF (NOW SECTION 308(F), 15 U.S.C. 687(F), SUPP. V). WE ALSO RELIED UPON OUR EARLIER DECISIONS IN 44 COMP. GEN. 549 (1965) AND 45 COMP. GEN. 253 (1965).

IN OUR OPINION, THE PROPOSED SALE AND GUARANTEE OF DEBENTURES COMES WITHIN THE SCOPE OF 45 COMP. GEN. 370 AND OUR EARLIER DECISIONS AND IS WITHIN THE STATUTORY AUTHORITY OF THE SMALL BUSINESS ADMINISTRATION, PROVIDED THAT IT DOES NOT EXCEED ANY PERTINENT STATUTORY LIMITATIONS AND THE BUDGETED PROGRAM LEVELS.

YOUR LETTER STATES THAT THE PROPOSED SALE IS WITHIN THE LIMITS OF THE BUDGET APPROVED BY CONGRESS AND HAS BEEN APPROVED BY THE OFFICE OF MANAGEMENT AND BUDGET. HOWEVER, THE FUNDING DISCLOSED BY YOUR LETTER INDICATES A POSSIBLE BUDGETARY PROBLEM. AS YOU POINT OUT, TITLE V OF THE DEPARTMENTS OF STATE, JUSTICE AND COMMERCE, THE JUDICIARY AND RELATED AGENCIES APPROPRIATION ACT, 1971, PUBLIC LAW 91-472, 84 STAT. 1060, LIMITS YOUR AUTHORITY TO MAKE EXPENDITURES TO THOSE "NECESSARY IN CARRYING OUT THE PROGRAM SET FORTH IN THE BUDGET FOR THE CURRENT FISCAL YEAR *** ." YOUR BUDGET PROVIDES $35 MILLION FOR DIRECT LOANS AND $30 MILLION FOR GUARANTEED LOANS DURING FISCAL YEAR 1971. YOUR GENERAL COUNSEL'S OFFICE CONTENDS THAT THE PROPOSED PURCHASE AND SALE OF $30 MILLION OF SBIC DEBENTURES IS A "WASH" TRANSACTION WHICH, IN RESULT, USES UP THE $30 MILLION GUARANTEE FUND, BUT DOES NOT REDUCE THE $35 MILLION DIRECT LOAN FUND BECAUSE THE AMOUNTS TO BE USED TO ACQUIRE THE DEBENTURES FROM SMALL BUSINESS INVESTMENT COMPANIES ARE TO BE REPLACED IMMEDIATELY BY THE PROCEEDS OF SALE OF THE DEBENTURES TO THE UNDERWRITERS. THEN THE DIRECT LOAN FUNDS ARE TO BE EXPENDED BY THE PURCHASE OF $15 MILLION OF REGULAR SBIC DEBENTURES FOR THE SUBSTITUTION POOL AND THE PURCHASE OF $20 MILLION DEBENTURES FROM MINORITY ENTERPRISE SMALL BUSINESS INVESTMENT COMPANIES.

WE NOTE THAT THE 1972 BUDGET SHOWS ESTIMATED RESERVATIONS FOR 1971 OF $20 MILLION FOR DIRECT PURCHASE OF DEBENTURES AND $45 MILLION FOR GUARANTEE OF DEBENTURES. WE SUGGEST THAT IT WOULD BE PREFERABLE TO OBTAIN THE CONCURRENCE OF THE HOUSE AND SENATE APPROPRIATIONS COMMITTEES BEFORE PROCEEDING SINCE THE PROPOSAL APPEARS TO CONSTITUTE A SUBSTANTIAL "REPROGRAMMING" WITHIN THE TOTAL BUDGETARY AMOUNTS FOR THE FISCAL YEAR 1971.

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