89–010

Calendar No. 143

107TH CONGRESS REPORT

1st Session " ! SENATE 107–55

SMALL BUSINESS INVESTMENT COMPANY AMENDMENTS

ACT OF 2001

AUGUST 28, 2001.—Ordered to be printed

Filed under authority of the order of the Senate of July 30, 2001

Mr. KERRY, from the Committee on Small Business and

Entrepreneurship, submitted the following

REPORT

[To accompany S. 1196]

On July 19, 2001, the Senate Committee on Small Business and

Entrepreneurship considered S. 1196, ‘‘the Small Business Investment Company Amendments Act of 2001.’’ The bill would permit

a moderate increase in the annual fee paid by the Small Business

Investment Companies to the Small Business Administration

(SBA) and would make other technical changes in the Small Business Investment Company (SBIC) program. Having considered S.

1196, the Committee reports favorably thereon without further

amendment and recommends that the bill do pass.

I. INTRODUCTION

In 1958, Congress created the SBIC program to assist small business owners obtain investment capital. Forty-three years later,

small businesses continue to experience difficulty in obtaining investment capital from banks and traditional investment sources.

Although investment capital is readily available to large businesses

from traditional investment firms, small businesses seeking investments in the range of $250,000 to $5 million have to look elsewhere. SBICs frequently are the only sources of investment capital

for growing small businesses.

The SBIC program has helped some of our Nation’s best-known

companies. It has provided a financial boost at critical points in the

early growth period for many companies that are familiar to all of

us. For example, the FedEx Corporation received a needed infusion

of capital from two SBA-licensed SBICs at a critical juncture in its

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development stage. The SBIC program also helped other wellknown companies, when they were not so well-known, such as

Intel, Outback Steakhouse, America Online, and Callaway Golf.

In 1992 and 1996, the Committee on Small Business worked

closely with the Small Business Administration to correct earlier

deficiencies in the Small Business Investment Act of 1958 in order

to ensure the future of the program. In 1992, and again in 1996,

Congress enacted major changes to strengthen and reform the

SBIC program. Today, the SBIC program is expanding rapidly in

an effort to meet the growing demands of small business owners

for debt and equity investment capital. More qualified investment

teams are seeking license approval from SBA than ever before.

Since October 1998, the number of new SBIC licensees has increased by more than 35 percent, as SBA approved 53 new licenses

in FY 1999 and 60 new licenses in FY 2000, bringing the total

number of active SBIC licenses to 415.

At the same time the SBIC program is experiencing significant

growth, the investment groups that are receiving guaranteed funds

for investing in small businesses are performing at an exceptionally

high level. Each year the SBA and the Office of Management and

Budget (OMB) develop a credit subsidy rate estimate, which is the

cost of running the program based largely on its projected future

losses. Under the Debenture and Participating Securities programs,

the credit subsidy rates have dropped dramatically. For example,

the credit subsidy rate for the Debenture program dropped from

3.19 percent in FY 1997 to zero (0.0%) in FY 2000, a milestone

achieved for the first time in the program’s history. The credit subsidy rate for the Debenture program dropped again in FY 2001 and

is projected to drop still further in FY 2002.

For FY 2002, the Bush Administration has recommended a program level of $2.5 billion for the Participating Securities program

and increasing the annual interest fee paid by the Participating Securities SBICs by thirty-seven basis points (0.37%, taking the fee

from 1 percent to 1.37 percent) in order to cause the credit subsidy

rate to drop to 0.0% and eliminate all appropriations for the program. The Committee does not agree that the program participants

alone should pay for the entire cost of running the program and believes the program level should be $3.5 billion in order to meet the

needs of the market as projected by the National Association of

Small Business Investment Companies (NASBIC). Consequently,

when the Committee considered S. 1196, it agreed to increase the

fee from 1 percent up to no more than 1.28 percent, effectively

splitting the cost of running the program between the Participating

Securities SBICs and the Agency. By allowing the annual interest

fee to increase to no more than 1.28 percent, the Committee assumed a level appropriation of $26.2 million, which in FY 2001 provided for a program level of $2 billion, and that the Participating

Securities SBICs would pay the difference with higher fees in order

to increase the program level for FY 2002 to $3.5 billion.

II. DESCRIPTION OF BILL

SBIC fees

The ‘‘Small Business Investment Company Amendments Act of

2001’’ would permit the annual interest fee paid by Participating

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Securities SBICs to increase from 1.0 percent to no more than 1.28

percent. In addition, the bill would make three technical changes

to the Small Business Investment Act of 1958 (’58 Act) that are intended to make improvements in the day-to-day operation of the

SBIC program.

As stated in the introduction, the projected demand for the Participating Securities SBIC program for FY 2002 is $3.5 billion, a

significant increase over the FY 2001 program level of $2.0 billion.

It is imperative that Congress approve this relatively small increase in the annual interest charge paid by the Participating Securities SBICs before the end of the fiscal year because without the

increase, the program level would be significantly below projected

demands. This fee increase, when combined with an appropriation

of $26.2 million for FY 2002, the same amount Congress approved

for FY 2001, would support a program level of $3.5 million.

The Committee elected to approve legislation that maintained

the requirement for an annual appropriation in part because of the

volatility the credit subsidy rate has experienced over the past two

years. Whereas, the credit subsidy rate has declined dramatically

in the recent fiscal years leading up to FY 2002, the Administration’s credit subsidy rate estimate for FY 2002 for the Participating

Securities program would increase nearly 50% over FY 2001.

Administration officials explained to the Committee that the estimated credit subsidy rate increase was not the result of increased

defaults in the program, but the result of a decrease in the cost of

money to the Federal government, which, when included in the

credit subsidy rate calculations, causes the credit subsidy rate to

increase. While this change on its face may seem to be counter-intuitive, the Administration officials explained that the lower cost of

money would generate less income in the financing account over

the life of the FY 2002 cohort of loans made under the Participating Securities program. The projected drop in interest income in

the financing account would necessitate an increase in principle

paid into the financing account for the FY 2002 cohort in order to

support the cost of the program.

Conflicts of interest

The ‘‘Small Business Investment Company Amendments Act of

2001’’ would also make some technical changes to the ’58 Act that

are drafted to improve the operations of the SBIC program. Section

3 would remove the requirement that the SBA take out local advertisements when it seeks to determine if a conflict of interest exists

involving an SBIC. This section has been recommended to the

Committee by NASBIC, and the SBA, in light of the fact that the

Agency has never received a response to a local advertisement and

believes the requirement is unnecessary.

Criminal penalties

The bill would amend Title 12 and Title 18 of the United States

Code to insure that false statements made to the SBA under the

SBIC program would have the same penalty as making false statements to an SBIC. This section would make it clear that a false

statement to the SBA or to an SBIC for the purpose of influencing

their respective actions taken under the ’58 Act would be a crimiVerDate 11-MAY-2000 06:01 Aug 29, 2001 Jkt 089010 PO 00000 Frm 00003 Fmt 6659 Sfmt 6602 E:\HR\OC\SR055.XXX pfrm12 PsN: SR055
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nal violation. The courts could then assess civil and criminal penalties for such violations.

The purpose of this section is to correct a problem in 18 U.S.C.

1014 which makes it a crime to make a false statement or representation for the purpose of trying to influence the actions of an

SBIC; however, it has not been interpreted to also make it a crime

for an SBIC or any person to make false statements or representations intended to influence in any way the actions of the SBA. As

a result, the Department of Justice lost a case seeking civil penalties against an individual in control of an SBIC that was charged

with making false statements to the SBA for the purpose of obtaining millions of dollars in funds guaranteed by the SBA and steering

the SBA away from prompt collection actions.

The charge of violation of 18 U.S.C. 1014 was dismissed in the

case because the statute does not mention the SBA by name, and

the court found the SBA was not among the generic types of agencies listed in the statute. As a result, civil penalties could not be

imposed under 12 U.S.C. 1833a (FIRREA). The judge also refused

to award civil penalties under the general criminal false statements provision, 18 U.S.C. 287, based on his determination that

the SBIC was not a ‘‘federally insured financial institution.’’ The

change would ensure that persons who make false statements to an

SBIC or the SBA would be subject to the civil penalties set forth

under FIRREA.

Section 4 would also add 15 U.S.C. 645(a) to the civil penalty

provision of FIRREA. The provision would provide fines for violations of, or conspiracies to violate, certain criminal statutes, including 18 U.S.C. 1001. For purposes of FIRREA, 18 U.S.C. 1001 must

involve a false statement made to a federally insured financial institution. Section 4 would add false statements made to a federallylicensed financial institution (such as an SBIC), a federal lending

agency or a federal guarantor, including the SBA. Because 15

U.S.C. 645(a) does not require the showing of materiality necessary

to establish a violation of 18 U.S.C. 1001, it is often used in lieu

of 18 U.S.C. 1001 by criminal prosecutors. Evidently, when the civil

penalty provision of FIRREA was enacted, it did not amend 15

U.S.C. 645(a). Accordingly, unless this provision is changed, those

who make false statements or conspire to make false statements to

the SBA and are charged under a more specific statue, 15 U.S.C.

645(a), are subject to a lesser penalty than others who commit

similar crimes but are charged under 18 U.S.C. 1001.

Removal of management officials

Section 5 of the bill would amend Section 313 of the ’58 Act to

permit the SBA to remove or suspend key management officials of

an SBIC when they have willfully and knowingly committed a substantial violation of the ’58 Act, any regulation issued by the SBA

under the Act, a cease-and-desist order that has become final, or

committed or engaged in any act, omission or practice that constitutes a substantial breach of a fiduciary duty of that person as

a management official.

The section expands the definition of persons covered by Section

313 from officers and directors to ‘‘management officials,’’ which includes not only officers and directors but also general partners,

managers, employees agents or other participants in the manageVerDate 11-MAY-2000 06:01 Aug 29, 2001 Jkt 089010 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 E:\HR\OC\SR055.XXX pfrm12 PsN: SR055
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ment or conduct of the SBIC. At the time Section 313 of the ’58

Act was enacted in November 1966, an SBIC was organized as a

corporation, with directors or officers built into the management

structure. Since that time, it has become more common for SBICs

to organize as partnerships and Limited Liability Companies

(LLCs), with general partners and other individuals taking an active role in the management of the entity, and this amendment

would take into account those different organizations.

III. COMMITTEE VOTE

In compliance with rule XXVI(7)(b) of the Standing Rules of the

Senate, the following vote was recorded on July 19, 2001. A motion

by Senator Bond to adopt S. 1196, the Small Business Investment

Company Amendments Act of 2001, was approved by a recorded

vote, 19–0, with the following Senators voting in the affirmative:

Kerry, Bond, Levin, Harkin, Lieberman, Wellstone, Cleland,

Landrieu, Edwards, Cantwell, Carnahan, Burns, Bennett, Snowe,

Enzi, Fitzgerald, Crapo, Allen, and Ensign.

IV. EVALUATION OF REGULATORY IMPACT

In compliance with rule XXVI(11)(b) of the Standing Rules of the

Senate, it is the opinion of the Committee that no significant additional regulatory impact will be incurred in carrying out the provisions of this legislation. There will be no additional impact on the

personal privacy of companies or individuals who utilize the services provided.

V. CHANGES IN EXISTING LAW

In the opinion of the Committee, it is necessary to dispense with

the requirement of section 12 of rule XXVI of the Standing Rules

of the Senate in order to expedite the business of the Senate.

VI. COST ESTIMATE

In compliance with rule XXVI(11)(a)(1) of the Standing Rules of

the Senate, the Committee estimates the cost of the legislation will

be equal to the amounts discussed in the following letter from the

Congressional Budget Office.

U.S. CONGRESS,

CONGRESSIONAL BUDGET OFFICE,

Washington, DC, August 16, 2001.

Hon. JOHN F. KERRY, Chairman, Committee on Small Business and Entrepreneurship,

U.S. Senate, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for S. 1196, the Small Business

Investment Company Amendments Act of 2001.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is Ken Johnson.

Sincerely,

DAN L. CRIPPEN,

Director.

Enclosure.

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S. 1196—Small Business Investment Company Act of 2001

Summary: S. 1196 would increase the maximum annual fee

charged by the Small Business Administration (SBA) for guaranteeing loans under Small Business Investment Company (SBIC)

programs from 1 percent to 1.28 percent. The bill also would create

new civil and criminal penalties for knowingly making false statements to the SBA regarding loan guarantees offered under the

SBIC and other loan programs.

CBO estimates that implementing S. 1196 would reduce the cost

of guaranteeing loans under the SBIC participating securities program by about $125 million over the 2002–2006 period, assuming

appropriation of the necessary amounts. By creating new civil and

criminal penalties, S. 1196 also would increase receipts and direct

spending by negligible amounts each year. Therefore, pay-as-you-go

procedures would apply.

S. 1196 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA)

and would not affect the budgets of state, local, or tribal governments.

Estimated cost to the Federal Government: The estimated budgetary impact of S. 1196 is shown in the following table. The costs

of this legislation fall within budget function 370 (commerce and

housing credit).

By fiscal year, in millions of dollars—

2001 2002 2003 2004 2005 2006

SPENDING SUBJECT TO APPROPRIATION

Spending Under Current Law for the SBIC Participating Securities Program: 1

Estimated Authorization Level 2 .......................................... 26 65 75 0 0 0

Estimated Outlays ............................................................... 23 35 54 53 26 0

Proposed Changes:

Estimated Authorization Level ............................................. 0 ¥58 ¥67 0 0 0

Estimated Outlays ............................................................... 0 ¥15 ¥40 ¥47 ¥23 0

Spending Under S. 1196 for the SBIC Participating Securities

Program: 1

Estimated Authorization Level ............................................. 26 7 8 0 0 0

Estimated Outlays ............................................................... 23 20 14 6 3 0

1 Excludes administrative costs.

2 The 2001 level is the amount appropriated for that year. The 2002 and 2003 levels are estimates of the appropriation that would be nec- essary to support the existing authorization levels for new loan guarantees in those years.

Basis of estimate: CBO estimates that implementing S. 1196

would reduce the cost of guaranteeing loans under the two SBIC

programs about $125 million over the 2002–2006 period, assuming

appropriations are adjusted to reflect these savings. The bill would

create new civil and criminal penalties, but CBO estimates that the

effect on revenues and direct spending would be insignificant.

Spending subject to appropriation

The Federal Credit Reform Act of 1990 requires appropriation of

the subsidy costs for operating credit programs. The subsidy cost

is the estimated long-term cost to the government of a direct loan

or loan guarantee, calculated on a net present value basis, excluding administrative costs.

Through two SBIC programs, participating securities and debentures, SBA guarantees 10-year loans made to venture capital firms.

To offset the subsidy cost of those guarantees, SBA charges venture

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capital firms that participate in the programs a fee of up to 1 percent of the loan amount each year. Under current law, the annual

fee cannot exceed the percentage necessary to reduce the subsidy

cost to zero.

S. 1196 would raise the maximum annual fee that SBA can

charge under the two SBIC programs for loan guarantees that are

obligated after October 1, 2001. Based on information from SBA,

CBO assumes that the agency will obligate all the amounts previously appropriated for these guarantees by September 30. Therefore, we estimate that this provision only would affect the loan

guarantees that are authorized under current law for 2002 and

2003.

Participating Securities. For fiscal year 2002, the Administration

estimates that it will charge venture capital firms in the participating securities program the full 1 percent annual fee, yielding an

estimated subsidy rate of 1.87 percent. (By comparison, the estimated subsidy rate for 2001 is 1.31 percent.) Because current law

authorizes SBA to guarantee $3.5 billion in new loans under the

program in 2002 and $4 billion in 2003, CBO estimates that the

subsidy cost of guaranteeing these new loans under current law

would be $140 million over the 2002–2005 period.

S. 1196 would increase the maximum annual fee for the participating securities program from 1 percent to 1.28 percent. Although

CBO estimates that it is likely that the fee increase would reduce

the subsidy to zero, there is some possibility that the subsidy rate

would remain above zero. Our estimate reflects that uncertainty.

CBO estimates that implementing this provision would reduce the

subsidy cost of these loan guarantees by a total of $125 million

over the 2002–2005 period, assuming appropriations are adjusted

downward to reflect such savings.

Debentures. S. 1196 would raise the maximum annul fee that the

SBA can charge venture capital firms under the debentures program to 1.28 percent. However, the subsidy cost of the program is

very likely to reach zero without assessing the full 1 percent annual fee allowed under current law. As a result, CBO expects that

the probability of charging the higher fees authorized by the bill

would be very small. Therefore, CBO estimates that implementing

the bill would not have any significant impact on the debentures

program.

Revenues and direct spending

CBO estimates that S. 1196 would increase governmental receipts (revenues) by an insignificant amount each year because the

bill would create new civil and criminal penalties. Collections of

criminal fines are deposited in the Crime Victims Fund and are

available to be spent without further appropriation in the following

year. Therefore, CBO estimates that direct spending also would

rise by a negligible amount each year beginning in 2003.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. Because S. 1196

would create new civil and criminal penalties, the bill would increase both receipts and direct spending. However, CBO estimates

that these effects would not be significant.

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Intergovernmental and private-sector impact: S. 1196 contains no

intergovernmental or private-sector mandates as defined in UMRA

and would not affect the budgets of state, local, or tribal governments.

Estimate prepared by: Federal Costs: Ken Johnson. Impact on

State, Local, and Tribal Governments: Susan Sieg Tompkins. Impact on the Private Sector: Cecil McPherson.

Estimate approved by: Peter H. Fontaine, Deputy Assistant Director for Budget Analysis.

VII. SECTION-BY-SECTION ANALYSIS

Section 1. Short title

This Act will be called the ‘‘Small Business Investment Company

Amendments Act of 2001.’’

Section 2. Subsidy fees

This section amends the Small Business Investment Act of 1958

to permit the SBA to collect an annual interest fee from SBICs in

an amount not to exceed 1.28 percent of the outstanding Participating Security and Debenture balance. In no case will SBA be permitted to charge an interest fee that would reduce the credit subsidy rate to less than 0 percent, when combined with other fees and

congressional appropriations. This section would take effect on October 1, 2001.

Section 3. Conflicts of interest

Section 3 would remove the requirement that SBA run local advertisements when it seeks to determine if a conflict of interest is

present. SBA has informed the Committee that it has never received a response to a local advertisement and believes the requirement is unnecessary. SBA would continue to publish these notices

in the Federal Register. This section would not prohibit the SBA

from requiring a local advertisement should it believe it is necessary; it is supported by the SBA.

Section 4. Penalties for false statements

This section would amend Title 12 and Title 18 of the United

States Code to insure that false statements made to SBA under the

SBIC program would have the same penalty as making false statements to an SBIC. The section would make it clear that a false

statement to SBA or to an SBIC for the purpose of influencing

their respective actions taken under the Small Business Investment Act of 1958 would be a criminal violation. The courts could

then assess civil and criminal penalties for such violations.

Section 5. Removal or suspension of management officials

This section would amend Section 313 the Small Business Investment Act of 1958 to expand the list of persons who could be

removed or suspended by the SBA from the management of an

SBIC to include officers, directors, employees, agents, or other participants of an SBIC. The persons subject to this section are called

‘‘Management Officials,’’ a new term added by this amendment.

The amendment does not change the legal or practical effect of the

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provisions of Section 313; however, it has been drafted to make its

provisions easier to follow.

Sections 3, 4 and 5 would take effect on enactment of this bill.

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