B-149685, JULY 14, 1969, 49 COMP. GEN. 32

B-149685, JULY 14, 1969, 49 COMP. GEN. 32

SMALL BUSINESS ADMINISTRATION -- INVESTMENT COMPANIES -- PARTICIPATION IN GUARANTEED LOAN PROGRAMS THE AUTHORITY OF THE SMALL BUSINESS INVESTMENT COMPANIES (SBIC) TO PROVIDE EQUITY CAPITAL FOR INCORPORATED SMALL-BUSINESS CONCERNS UNDER SECTION 304(A) OF THE SMALL BUSINESS INVESTMENT ACT, AND TO MAKE LONG TERM LOANS (SECTION 305(A)) TO FINANCE THE GROWTH, MODERNIZATION, AND EXPANSION OF INCORPORATED AND UNINCORPORATED SMALL-BUSINESS CONCERNS DOES NOT INCLUDE THE AUTHORITY FOR THE COMPANIES TO PARTICIPATE AS LENDING INSTITUTIONS IN GUARANTEED LOAN PROGRAMS WITH SMALL BUSINESS ADMINISTRATION (SBA), AUTHORIZED UNDER SECTION 7(A) OF THE SMALL BUSINESS ACT TO MAKE LOANS EITHER DIRECTLY OR IN COOPERATION WITH BANKS OR OTHER LENDING INSTITUTIONS, AND TO GUARANTEE LOANS TO SMALL CONCERNS IN DISTRESSED AREAS, OR OWNED BY LOW-INCOME INDIVIDUALS UNDER SECTION 402(A) OF THE ECONOMIC OPPORTUNITY ACT OF 1964 AND, THEREFORE, THE SBA MAY NOT GUARANTEE SBIC LOANS TO DISADVANTAGED SMALL CONCERNS.

TO THE ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION, JULY 14, 1969:

YOUR LETTER OF APRIL 21, 1969, REQUESTS OUR CONCURRENCE IN YOUR PROPOSAL TO AUTHORIZE SMALL BUSINESS INVESTMENT COMPANIES TO PARTICIPATE AS LENDING INSTITUTIONS IN GUARANTEED LOANS UNDER SECTION 7(A) OF THE SMALL BUSINESS ACT, AS AMENDED, 15 U.S.C. 636(A), AND SECTION 402 OF THE ECONOMIC OPPORTUNITY ACT OF 1964, AS AMENDED, 42 U.S.C. 2902.

YOU ADVISE THAT YOUR AGENCY HAS INSTITUTED A MAJOR PROGRAM DESIGNED TO ENABLE THE PARTICIPATION OF SOCIALLY OR ECONOMICALLY DISADVANTAGED CITIZENS IN OUR FREE ENTERPRISE ECONOMY. YOU NOW PROPOSE TO EXTEND THAT PROGRAM TO THE SMALL BUSINESS INVESTMENT PROGRAM UNDER THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, 15 U.S.C. 661, ET SEQ. IN SUBSTANCE, SMALL BUSINESS ADMINISTRATION (SBA) WOULD GUARANTEE SMALL BUSINESS INVESTMENT COMPANY (SBIC) LOANS TO DISADVANTAGED SMALL CONCERNS WITHIN THE LIMITATIONS OF, AND UNDER THE REGULATIONS PROMULGATED PURSUANT TO, SECTION 7(A) OF THE SMALL BUSINESS ACT AND PARALLEL PROVISIONS OF THE ECONOMIC OPPORTUNITY ACT.

SECTION 7(A) EMPOWERS THE ADMINISTRATION TO MAKE LOANS TO SMALL CONCERNS-

*** EITHER DIRECTLY OR IN COOPERATION WITH BANKS OR OTHER LENDING INSTITUTIONS THROUGH AGREEMENTS TO PARTICIPATE ON AN IMMEDIATE OR DEFERRED BASIS.

SIMILARILY, SECTION 402(A) OF THE ECONOMIC OPPORTUNITY ACT, 42 U.S.C. 2902(A), AUTHORIZES SBA TO GUARANTEE LOANS UP TO $25,000 TO SMALL CONCERNS IN DISTRESSED AREAS, OR OWNED BY LOW-INCOME INDIVIDUALS.

YOU HAVE DEFINED LENDING INSTITUTIONS TO--

*** INCLUDE, BUT NOT BE LIMITED TO, BANKS AND OTHER CONCERNS WHOSE REGULAR COURSE OF BUSINESS ENTAILS THE MAKING OF COMMERCIAL AND INDUSTRIAL LOANS. (REG. 122.2(F)(2), 32 FR 11699 (AUGUST 12, 1967)

YOU POINT OUT THAT THE SMALL BUSINESS INVESTMENT ACT DECLARES IT--

*** A FUNCTION OF EACH SMALL BUSINESS INVESTMENT COMPANY TO PROVIDE A SOURCE OF EQUITY CAPITAL FOR INCORPORATED SMALL-BUSINESS CONCERNS *** . (SECTION 304(A), 15 U.S.C. 684(A)) AND AUTHORIZES SBICS TO MAKE LOANS--

*** TO INCORPORATED AND UNINCORPORATED SMALL-BUSINESS CONCERNS IN ORDER TO PROVIDE SUCH CONCERNS WITH FUNDS NEEDED FOR SOUND FINANCING, GROWTH, MODERNIZATION, AND EXPANSION. (SECTION 305(A), 15 U.S.C. 685(A))

YOUR DEFINITION OF "EQUITY CAPITAL," UNDER SECTION 304(A) EXTENDS TO-

*** INSTRUMENTS WHICH EVIDENCE A DEBT AND WHICH PROVIDE A RIGHT OR PRIVILEGE TO CONVERT ALL OR ANY PORTION OF THE DEBT INSTRUMENTS INTO STOCK OF THE SMALL BUSINESS CONCERN OR PROVIDE NONDETACHABLE OR DETACHABLE STOCK PURCHASE WARRANTS OR OPTIONS, OR PROVIDE BOTH A RIGHT OR PRIVILEGE TO CONVERT ALL OR ANY PART OF THE DEBT INSTRUMENTS INTO STOCK AND ALSO DETACHABLE STOCK PURCHASE WARRANTS OR OPTIONS. (SECTION 107.302(B) (2), 33 FR 326, JANUARY 9, 1968)

ACCORDINGLY, YOU WOULD GUARANTEE DEBT INSTRUMENTS FALLING UNDER BOTH SECTIONS 304(A) AND 305(A) OF THE SMALL BUSINESS INVESTMENT ACT, BUT WOULD NOT GUARANTEE ANY EQUITY INSTRUMENTS, OR EQUITY FEATURES OF DEBT INSTRUMENTS. THUS, ACCORDING TO YOUR LETTER, TO THE EXTENT THAT DEBT IS CONVERTED TO EQUITY, SBA'S GUARANTY WOULD BE EXTINGUISHED. YOU STATE THAT THE EXERCISE OF STOCK OPTIONS WOULD BE SUBJECT TO PRIOR SBA APPROVAL, WHICH WOULD BE CONDITIONED UPON THE PROTECTION OF YOUR POSITION AS GUARANTOR; AND THAT AUTHORITY FOR SBICS TO BE THE DISBURSING PARTICIPANT UNDER BOTH SECTIONS WILL BE FOUND IN THE SMALL BUSINESS INVESTMENT ACT, SECTIONS 304(D) (15 U.S.C. 684(D)) AND 305(B) (15 U.S.C. 685(B)).

OTHER PERTINENT FACTS DISCLOSED BY YOUR LETTER ARE SET FORTH BELOW.

THE SUBJECT PROPOSAL WILL CONSTITUTE A REVERSAL OF PAST POLICIES OF YOUR ADMINISTRATION. IN THE FIRST DAYS OF THE SMALL BUSINESS INVESTMENT PROGRAM, THE LOAN POLICY BOARD OF SBA (SECTION 4(D) OF THE SMALL BUSINESS ACT, 15 U.S.C. 633(D)) DECIDED THAT SBA SHOULD NOT PARTICIPATE WITH SBICS IN LOANS TO SMALL CONCERNS PURSUANT TO SECTION 7(A) OF THE SMALL BUSINESS ACT, BECAUSE THE LEGISLATIVE HISTORY OF THE SMALL BUSINESS INVESTMENT ACT INDICATED THAT SBICS WERE NOT INTENDED TO SERVE MERELY AS INTERMEDIARIES IN THE DISBURSING OF GOVERNMENT FUNDS, BUT SBICS WERE DESIGNED "TO ESTABLISH A COMPLETELY NEW SYSTEM OF SMALL BUSINESS CREDIT TO PROVIDE SMALL BUSINESS CONCERNS NOT ONLY WITH EQUITY CAPITAL, BUT WITH LOANS OF LONGER THAN 10 YEARS AND NOT WITHIN SBA'S CAPABILITY, A SYSTEM WHICH WOULD EVENTUALLY OPERATE WITH DECREASING DEPENDENCY UPON THE GOVERNMENT" (MINUTES OF THE LOAN POLICY BOARD MEETING ON DECEMBER 16, 1958. THE BOARD WAS ABOLISHED BY REORGANIZATION PLAN NO. 4 OF 1965 (30 FR 9353) AND ITS FUNCTION TRANSFERRED TO THE SBA ADMINISTRATOR.) ACCORDING TO YOUR LETTER, THE IMPLICATION OF THIS LOAN POLICY BOARD DECISION APPEARS TO BE--ALTHOUGH YOU STATE YOU CANNOT SPEAK FOR THE MEMBERS OF THE BOARD AT THAT TIME- THAT THEY WERE OF THE OPINION THAT SUCH PARTICIPATIONS WERE LEGALLY PERMISSIBLE, OR THE BOARD WOULD HAVE HAD NO REASON TO CONSIDER, OR TO PROHIBIT, WHAT WAS ALREADY BARRED. SUBSEQUENTLY, SBA'S OPINION DIGEST NO. 33 (RENDERED BY THE OFFICE OF GENERAL COUNSEL), FOR THE MONTH OF JUNE 1959, CARRIED AN OPINION THAT PARTICIPATION BETWEEN SBICS AND SBA UNDER SECTION 7(A) WAS NOT PERMISSIBLE. YOU STATE THAT THE OPINION WAS BASED ON THE LOAN POLICY BOARD'S DECISION CITED ABOVE; AND WAS SUBSEQUENTLY INCORPORATED IN THE SBIC REGULATIONS AS INTERPRETIVE SECTION 107.1002 (25 FR 1397, FEBRUARY 17, 1960) AND CARRIED FORWARD VERBATIM IN SUBSEQUENT REVISIONS (SEE, FOR EXAMPLE, REVISION 3, 29 FR 16946, DECEMBER 10, 1964). IT WAS ELIMINATED IN REVISION 4 OF THE SBIC REGULATIONS, 33 FR 326, EFFECTIVE JANUARY 9, 1968, A REVISION WHICH WAS MADE, AMONG OTHER THINGS, TO IMPLEMENT THE SMALL BUSINESS INVESTMENT ACT AMENDMENTS OF 1967, PUBLIC LAW 90-104 (81 STAT. 268, 15 U.S.C. 633 NOTE), WHICH BECAME EFFECTIVE ON THAT DAY.

IN 1961, SENATOR SPARKMAN PROPOSED AN AMENDMENT TO SECTION 305(B) OF THE SMALL BUSINESS INVESTMENT ACT (15 U.S.C. 685(B)), WHICH IS REFLECTED IN THE PRESENT LANGUAGE OF THAT SECTION, EXCEPT THAT THE ORIGINAL PROPOSAL WOULD HAVE EXPRESSLY INCLUDED SBA AMONG "OTHER LENDERS" MENTIONED THEREIN (S. 902, 107 CONG. REC. 1896 (1961)). YOU POINT OUT THAT PREVIOUSLY, IN 1960, THE HOUSE SMALL BUSINESS COMMITTEE HAD RECOMMENDED THAT (QUOTING FROM YOUR LETTER):

THE SBA SHOULD CHANGE ITS POLICY WHICH PROHIBITS THE PARTICIPATION BY THE SBA WITH THE SBICS IN MAKING LOANS. IT IS FELT, AS THE ACT IS PRESENTLY WORDED, THAT THERE IS NOTHING TO PROHIBIT THIS PARTICIPATION. PARTICIPATION BY SBA IS PROVIDED WITH BANKS IN ITS FINANCIAL ASSISTANCE AND OTHER LOAN PROGRAMS. A DEFERRED PARTICIPATION BY THE SBA WOULD HAVE THE PRACTICAL EFFECT OF SUPPLYING A SOURCE OF SUPPORT FUNDS FOR THESE INVESTMENT COMPANIES AND SHOULD ENCOURAGE THE MAKING OF LOANS TO SOUND SMALL BUSINESS ENTERPRISES (H. REPT. NO. 2235, 88TH CONG., 2D SESS., P. 109).

AFTER INTRODUCING HIS BILL, S. 902, ON FEBRUARY 9, 1961, SENATOR SPARKMAN EXPLAINED THE CLARIFYING INTENT OF HIS PROPOSAL AS FOLLOWS: THE FOURTH AMENDMENT CONTAINED IN THIS ACT WOULD MAKE IT CLEAR THAT SBIC'S MAY LEND IN PARTICIPATION WITH THE SMALL BUSINESS ADMINISTRATION AND WITH OTHER INVESTORS, PUBLIC OR PRIVATE, INCORPORATED OR UNINCORPORATED. SBA HAS NOT PERMITTED SBIC'S TO PARTICIPATE WITH THE AGENCY IN MAKING LOANS TO SMALL BUSINESS CONCERNS. HOWEVER, I SEE NO REASON WHY SBIC'S SHOULD NOT PARTICIPATE WITH SBA OR ANYONE ELSE IN FINANCING SMALL BUSINESS CONCERNS. (107 CONG. REC. 2063, 1961.)

YOU STATE THAT THE EXPRESS MENTION OF SBA AS A PARTICIPANT IN SECTION 305 WAS OPPOSED BY ADMINISTRATOR HORNE WHO REQUESTED BOTH BEFORE THE SUBCOMMITTEE ON SMALL BUSINESS OF THE SENATE BANKING AND CURRENCY COMMITTEE AND BEFORE SUBCOMMITTEE NO. 2 OF THE HOUSE BANKING AND CURRENCY COMMITTEE THAT THE PROPOSED AMENDMENT BE CHANGED IN THE EXACT MANNER IN WHICH IT WAS SUBSEQUENTLY ENACTED BY CONGRESS. YOU EXPRESS THE VIEW, HOWEVER, THAT THE UNSUCCESSFUL PART OF THE AMENDMENT WOULD HAVE, AT MOST, CLARIFIED THE PARTICIPATION AUTHORITY FOR SBICS, WITHOUT AFFECTING SBA'S AUTHORITY UNDER THE SMALL BUSINESS ACT. IT IS YOUR OPINION THAT SBA NEED LOOK ONLY TO ITS AUTHORITY UNDER THE SMALL BUSINESS ACT, WHICH IS SUFFICIENT TO SUPPORT ANY DISBURSEMENTS WHICH MAY BE CALLED FOR UNDER THE PROPOSED GUARANTEE PROGRAM. OUR CONCURRENCE IN THIS VIEW IS REQUESTED.

AN EXAMINATION OF THE LEGISLATIVE HISTORY OF THE SMALL BUSINESS INVESTMENT ACT DISCLOSES THE PURPOSE OF THE ACT TO BE AS FOLLOWS (PP. 2 AND 3, S. REPT. NO. 1652, 85TH CONG., 2D SESS.):

S. 3651 HAS THE PRIMARY PURPOSE OF MAKING EQUITY CAPITAL AND LONG TERM CREDIT MORE READILY AVAILABLE FOR SMALL-BUSINESS CONCERNS. THE BILL PROPOSES TO ACHIEVE THIS PURPOSE BY CREATING NEW PRIVATE FINANCIAL INSTITUTIONS WITH FEDERAL ASSISTANCE AND BY GIVING FEDERAL HELP TO STATE AND LOCAL DEVELOPMENT CREDIT CORPORATIONS. THE NEW INSTITUTIONS WILL BE KNOWN AS SMALL BUSINESS INVESTMENT COMPANIES, WILL BE CHARTERED BY THE SMALL BUSINESS ADMINISTRATION, AND WILL RECEIVE LONG-TERM LOANS FROM THE SMALL BUSINESS ADMINISTRATION. STATE AND LOCAL DEVELOPMENT CREDIT CORPORATIONS ARE ALSO ELIGIBLE FOR LONG-TERM FEDERAL LOANS.

WHILE THERE IS DIFFERENCE OF OPINION AS TO THE SEVERITY OF THE PROBLEM, THERE IS GENERAL AGREEMENT THAT SMALL-BUSINESS CONCERNS ARE FACED WITH A REAL DIFFICULTY IN OBTAINING LONG-TERM LOANS AND EQUITY CAPITAL REQUIRED FOR ADEQUATE GROWTH AND DEVELOPMENT. COMMERCIAL BANKS ARE NOT ABLE TO FURNISH SUCH FINANCING; THEIR FUNCTION LIES PRIMARILY IN SHORT- AND INTERMEDIATE-TERM LENDING; THEY DO NOT SUPPLY VENTURE CAPITAL OR LONG-TERM CREDIT. THE PRESENT FINANCIAL INSTITUTIONS WHICH DO PROVIDE A SOURCE OF VENTURE CAPITAL ARE NOT ABLE TO ASSIST SMALLER FIRMS. THE COST INVOLVED IN THE PUBLIC SALE OF SECURITIES IS PROHIBITIVE TO SMALL-BUSINESS ISSUERS. AS A RESULT THERE IS NO INSTITUTIONAL SOURCE TO WHICH SMALL BUSINESS MAY TURN TO MEET ITS CAPITAL NEEDS. UNLIKE LARGE BUSINESS CONCERNS, SMALL-SIZED BUSINESSES MUST SEEK LONG-TERM FUNDS IN A MOST HAPHAZARD FASHION WHICH, BY ITS VERY NATURE, DOES NOT PROVIDE FOR THE ECONOMIC GROWTH OF SMALL FIRMS THAT IS POSSIBLE AND DESIRABLE.

AS WILLIAM MCCHESNEY MARTIN, JR., CHAIRMAN OF THE FEDERAL RESERVE BOARD OF GOVERNORS, TOLD THE COMMITTEE:

THERE IS A GAP IN THE EXISTING STRUCTURE OF FINANCING INSTITUTIONS WHICH LIES IN THE LONGER-TERM DEBT AND EQUITY CAPITAL AREAS.

IT IS THIS "INSTITUTIONAL GAP" WHICH IS OF CONCERN AND WHICH THIS BILL IS DESIGNED TO FILL.

THE SMALL BUSINESS ADMINISTRATION DOES NOT MEET AND WAS NOT ESTABLISHED FOR THE PURPOSE OF MEETING THIS INSTITUTIONAL NEED. THE SBA, THROUGH ITS LENDING PROGRAM, ASSISTS SMALL-BUSINESS CONCERNS WHICH HAVE BEEN UNABLE TO OBTAIN FINANCING THROUGH THE COMMERCIAL BANKS. THEREFORE, WHILE THE SBA SERVES A VALUABLE PURPOSE BY ASSISTING FIRMS IN DISTRESS AND BY ENCOURAGING COMMERCIAL BANKS TO MOVE IN THE DIRECTION OF INTERMEDIATE-TERM LOANS TO SMALL BUSINESS, IT DOES NOT CONTRIBUTE IN ANY SIGNIFICANT EXTENT TO THE GROWTH AND DEVELOPMENT OF SMALL BUSINESSES WHICH NEED LONG-TERM FUNDS.

THIS NEW PROGRAM WILL ESTABLISH NO DIRECT CONTACT BETWEEN THE FEDERAL GOVERNMENT AND SMALL-BUSINESS CONCERNS WHICH NEED EQUITY CAPITAL AND LONG- TERM CREDIT. SUCH SMALL-BUSINESS CONCERNS WILL OBTAIN ASSISTANCE FROM THE NEWLY ESTABLISHED PRIVATE INVESTMENT COMPANIES AND FROM THE STATE AND LOCAL DEVELOPMENT CREDIT CORPORATIONS.

THE COMMITTEE INTENDS THAT THIS NEW PROGRAM BE LAUNCHED WITH A MINIMUM OF FEDERAL ACTIVITY AND WITH ONLY A MODEST INCREASE IN PERSONNEL AND ADMINISTRATIVE EXPENDITURES BY THE SMALL BUSINESS ADMINISTRATION. THE NEW PROGRAM IS CONCEIVED TO CARRY OUT OR TO BE BASED UPON THE FOLLOWING PRINCIPLES:

(1) TO SUPPLEMENT, RATHER THAN SUPPLANT, EXISTING PRIVATE FACILITIES.

(2) TO OPERATE UNDER A SIMPLE AND FLEXIBLE ORGANIZATIONAL STRUCTURE.

(3) TO OPERATE AND BE ACCOUNTED FOR IN COMPLETE SEPARATION FROM OTHER FEDERAL SMALL-BUSINESS PROGRAMS.

(4) TO UTILIZE TO THE MAXIMUM POSSIBLE EXTENT THE FACILITIES OF STATE AND LOCAL DEVELOPMENT CREDIT CORPORATIONS, AND

(5) TO CONCENTRATE UPON MEETING THE EQUITY AND LONG-TERM CREDIT NEEDS OF SMALL-BUSINESS CONCERNS.

AFTER CONSIDERING THE ABOVE-QUOTED LEGISLATIVE HISTORY, WE AGREE WITH THE CONCLUSION OF THE SBA LOAN POLICY BOARD TO THE EFFECT THAT THE LEGISLATIVE HISTORY OF THE SMALL BUSINESS INVESTMENT ACT INDICATES THAT IT WAS NOT INTENDED THAT SBICS PARTICIPATE WITH SBA IN MAKING LOANS TO SMALL BUSINESS CONCERNS. IN SBA OPINION DIGEST NO. 33, MENTIONED IN YOUR LETTER, IT IS STATED, IN PART, THAT:

HOWEVER, PARTICIPATION BETWEEN THE SBA AND SBICS IS ANOTHER MATTER. AFTER CONSIDERATION, IT WAS THE DECISION OF THE BOARD TO PROHIBIT SUCH PARTICIPATION. TO RULE OTHERWISE WOULD, IN THE OPINION OF THE LOAN POLICY BOARD, TEND TO OFFSET THE REQUIREMENT OF THE SMALL BUSINESS INVESTMENT ACT OF 1958 OF MAXIMUM PARTICIPATION BY PRIVATE SOURCES OF CAPITAL AND CREDIT BY INCREASING THE DEPENDENCY OF SUCH COMPANIES ON GOVERNMENT FUNDS. CONSIDERATION OF THE LEGISLATIVE HISTORY DISCLOSED THAT THE STATUTORY LIMITATIONS ON THE FUNDS AVAILABLE TO SMALL BUSINESS INVESTMENT COMPANIES THROUGH SBA WAS INTENDED TO PREVENT SUCH COMPANIES FROM MERELY SERVING AS INTERMEDIARIES IN THE DISBURSING OF GOVERNMENT FUNDS TO SMALL BUSINESS FIRMS. IN ADDITION, THE BOARD WAS OF THE OPINION THAT THE SMALL BUSINESS INVESTMENT ACT WAS DESIGNED TO FILL AN "INSTITUTIONAL GAP" CURRENTLY EXISTING IN THE SYSTEM OF CAPITAL AND CREDIT AVAILABLE TO SMALL BUSINESS CONCERNS. IN OTHER WORDS, THE BOARD CONSIDERED THAT THE LONG-RANGE PURPOSE WAS TO ESTABLISH A COMPLETELY NEW SYSTEM OF SMALL BUSINESS CREDIT TO PROVIDE SMALL BUSINESS CONCERNS NOT ONLY WITH EQUITY CAPITAL BUT WITH LOANS OF LONGER THAN TEN YEARS AND NOT WITHIN SBA CAPABILITIES, A SYSTEM WHICH WOULD EVENTUALLY OPERATE WITH DECREASING DEPENDENCY UPON THE GOVERNMENT. WHILE THE OPINION RENDERED BY SBA'S OFFICE OF GENERAL COUNSEL MAY HAVE BEEN BASED ON THE LOAN POLICY BOARD'S DECISION, WE FIND NOTHING THEREIN TO INDICATE THAT THE GENERAL COUNSEL'S OFFICE WAS OF THE VIEW THAT SUCH PARTICIPATION WOULD BE LEGALLY PERMISSIBLE.

CONCERNING SENATOR SPARKMAN'S PROPOSED AMENDMENT TO SECTION 305(B), IN OPPOSING THE CLAUSE THEREIN WHICH WOULD HAVE EXPRESSLY INCLUDED SBA AMONG "OTHER LENDERS" MENTIONED THEREIN THE THEN ADMINISTRATOR OF SBA TESTIFIED AS FOLLOWS BEFORE THE SENATE SUBCOMMITTEE MENTIONED IN YOUR LETTER (PAGES 15 AND 16 OF THE SENATE HEARINGS ON S.902):

SECTION 6 OF THE BILL WOULD AMEND SECTION 305(B) OF THE ACT SO AS TO AUTHORIZE SBIC'S TO MAKE LOANS TO SMALL BUSINESS CONCERNS DIRECTLY OR IN COOPERATION WITH "OTHER LENDERS, PUBLIC OR PRIVATE, INCORPORATED OR UNINCORPORATED, INCLUDING THE SMALL BUSINESS ADMINISTRATION" THROUGH AGREEMENTS TO PARTICIPATE ON AN IMMEDIATE OR DEFERRED BASIS.

UNDER THE EXISTING PROVISIONS OF SECTION 305(B) OF THE ACT, SBIC'S CAN MAKE LOANS ON A COOPERATIVE BASIS--BUT ONLY WITH LENDING "INSTITUTIONS." I HAVE NO OBJECTIONS TO SECTION 6 OF THE BILL INSOFAR AS IT WOULD EXTEND COVERAGE IN INDIVIDUAL LENDERS AND OTHER LENDERS WHICH DO NOT QUALIFY AS LENDING INSTITUTIONS.

HOWEVER, I DO NOT FAVOR THE PROPOSAL OF SECTION 6 THAT SBIC'S BE AUTHORIZED TO EXTEND LOANS TO SMALL BUSINESS CONCERNS IN COOPERATION WITH THE SMALL BUSINESS ADMINISTRATION.

I WOULD LIKE TO EMPHASIZE THE DIFFERENCE IN THE LENDING FUNCTIONS OF SBIC'S AND THOSE OF SBA. THE MAXIMUM MATURITY OF SBA BUSINESS LOANS IS FIXED BY STATUTE AT 10 YEARS. THE SMALL BUSINESS INVESTMENT PROGRAM WAS NOT ESTABLISHED FOR THE PURPOSE OF PROVIDING SUCH FINANCING FOR SMALL BUSINESS. AT THE TIME THE SMALL BUSINESS INVESTMENT ACT OF 1958 WAS ENACTED, IT WAS OBSERVED THAT, ON THE WHOLE, THE SHORT-TERM AND INTERMEDIATE-TERM CREDIT NEEDS OF SMALL BUSINESS WERE BEING MET THROUGH EXISTING FACILITIES, PRIVATE AND GOVERNMENTAL.

THE PRIMARY PURPOSE OF THE LENDING AUTHORITY DELEGATED UNDER THE ACT TO SBIC'S IS TO PROVIDE SMALL BUSINESS CONCERNS WITH LONG-TERM CREDIT WHICH CANNOT BE OBTAINED FROM SBA--WITH LOANS OF MATURITIES IN EXCESS OF 10 YEARS. IF SBIC'S ARE TO FULFILL THE MISSION INTENDED FOR THEM BY CONGRESS, THEY MUST CONCENTRATE THEIR EFFORTS IN THIS AREA.

BY REGULATION, SBA COULD HAVE CONFINED SBIC LOANS TO MATURITIES OF MORE THAN 10 YEARS. HOWEVER, THIS APPEARED TO BE TOO RIGID A RESTRICTION, AND TO PROVIDE SBIC'S WITH REASONABLE LEEWAY A MINIMUM MATURITY OF 5 YEARS WAS ESTABLISHED ON THEIR LOANS.

SBIC'S SHOULD, AS FAR AS POSSIBLE, AVOID THIS ZONE OF OVERLAP. IN ANY CASE, THEY SHOULD NOT BE ATTRACTED INTO IT WITH OFFERS OF SBA PARTICIPATION.

ACCORDINGLY, I RECOMMEND THAT SECTION 6 OF THE BILL BE STRICKEN AND THAT THE FOLLOWING BE INSERTED IN LIEU THEREOF:

SEC. 6. SECTION 305(B) OF THE ACT IS AMENDED BY DELETING THE PHRASE "OTHER LENDING INSTITUTIONS" AND INSERTING, IN LIEU THEREOF, "OTHER LENDERS, INCORPORATED OR UNINCORPORATED."

THE ADMINISTRATOR GAVE SIMILAR TESTIMONY BEFORE THE HOUSE SUBCOMMITTEE MENTIONED IN YOUR LETTER.

IT WOULD APPEAR FROM THE ADMINISTRATOR'S STATEMENT THAT WITHOUT THE CLAUSE IN QUESTION HE DID NOT CONSIDER SBICS AUTHORIZED TO EXTEND LOANS TO SMALL BUSINESS CONCERNS IN COOPERATION, OR IN PARTICIPATION, WITH THE SMALL BUSINESS ADMINISTRATION.

IT IS CLEAR FROM THE FACTS, AS WELL AS THE LEGISLATIVE HISTORY CITED IN YOUR LETTER, THAT THE CONGRESS (OR AT LEAST THE PERTINENT LEGISLATIVE COMMITTEES THEREOF) WAS AWARE OF SBA'S LONGSTANDING INTERPRETATION OF THE SMALL BUSINESS INVESTMENT ACT, AND COULD HAVE CHANGED THE LAW TO SPECIFICALLY AUTHORIZE SBA AND SBICS TO PARTICIPATE TOGETHER IN LOANS TO SMALL BUSINESS CONCERNS. IN FACT, AS INDICATED ABOVE, A PROPOSED AMENDMENT TO THE SMALL BUSINESS INVESTMENT ACT WOULD HAVE SPECIFICALLY SO PROVIDED, BUT AFTER HEARING SBA'S OBJECTION TO SUCH PROVISION, THE PROVISION WAS ELIMINATED OR DELETED FROM THE BILL IN COMMITTEE. SUCH ACTION INDICATES AN INTENT THAT SBA AND SBICS SHOULD NOT PARTICIPATE TOGETHER IN LOANS TO SMALL BUSINESS CONCERNS.

WHILE IT MAY BE THAT THE UNSUCCESSFUL PART OF SENATOR SPARKMAN'S AMENDMENT WOULD HAVE HAD NO AFFECT ON SBA'S AUTHORITY UNDER THE SMALL BUSINESS ACT TO PRECLUDE SBA FROM PARTICIPATING WITH SBICS IN LOANS TO SMALL BUSINESS CONCERNS, IN LIGHT OF WHAT IS SET FORTH ABOVE, IT IS OUR VIEW THAT THE SMALL BUSINESS INVESTMENT ACT MUST BE CONSTRUED AS PRECLUDING SBICS FROM PARTICIPATING WITH SBA IN SUCH LOANS. ACCORDINGLY, WE CANNOT CONCUR WITH YOUR PROPOSAL TO AUTHORIZE SBICS TO PARTICIPATE WITH SBA IN LOANS TO SMALL BUSINESS CONCERNS.