Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53253

Although the Finance Board anticipates

that the proposed rule will be of benefit

primarily to small depository

institutions, it will not have a

disproportionate impact on small

entities. Therefore, in accordance with

the Regulatory Flexibility Act, the

Finance Board hereby certifies that this

proposed rule, if promulgated as a final

rule, will not have a significant

economic impact on a substantial

number of small entities. 5 U.S.C.

605(b).

IV. Paperwork Reduction Act

The proposed rule does not contain

any collections of information, as

defined by the Paperwork Reduction

Act of 1995. See 44 U.S.C. 3501 et seq.

Consequently, the Finance Board has

not submitted any information to the

Office of Management and Budget for

review.

List of Subjects

12 CFR Part 933

Federal home loan banks, Reporting

and recordkeeping requirements.

12 CFR Part 935

Credit, Federal home loan banks,

Reporting and recordkeeping

requirements.

Accordingly, the Federal Housing

Finance Board hereby proposes to

amend title 12, chapter IX, parts 933

and 935 of the Code of Federal

Regulations as follows:

PART 933—MEMBERS OF THE BANKS

1. The authority citation for part 933

continues to read as follows:

Authority: 12 U.S.C. 1422a, 1422b, 1424,

1426, 1430, 1442.

2. Amend § 933.1 by revising

paragraph (n)(1)(iii), removing ‘‘or’’ at

the end of paragraph (bb)(6)(iii),

removing the period at the end of

paragraph (bb)(7) and adding ‘‘; or’’ in

its place, and adding paragraph (bb)(8)

to read as follows:

§ 933.1 Definitions.

* * * * *

(n) Home mortgage loan * * *

(1) * * *

(iii) Combination business or farm

property, on which is located a

permanent structure actually used as a

residence, other than for temporary or

seasonal housing; or

* * * * *

(bb) Residential mortgage loan * * *

(8) Loans that finance properties or

activities that, if made by a member,

would satisfy the statutory requirements

for the Community Investment Program

established under section 10(i) of the

Bank Act, or the regulatory

requirements established for any

community investment cash advance

program authorized by section 10(j)(10)

of the Bank Act.

* * * * *

PART 935—ADVANCES

1. The authority citation for part 935

continues to read as follows:

Authority: 12 U.S.C. 1422a(a)(3),

1422b(a)(1), 1426, 1429, 1430, 1430b, and

1431.

2. Amend § 935.1 by revising

paragraph (1)(v) in the definition of

‘‘Residential real property’’ to read as

follows:

§ 935.1 Definitions.

* * * * *

Residential real property * * *

(1) * * *

(v) Combination business or farm

property, on which is located a

permanent structure actually used as a

residence, other than for temporary or

seasonal housing.

* * * * *

Dated: September 10, 1997.

By the Board of Directors of the Federal

Housing Finance Board.

Bruce A. Morrison,

Chairperson.

[FR Doc. 97–26893 Filed 10–10–97; 8:45 am]

BILLING CODE 6725–01–U

SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

Small Business Investment Companies

AGENCY: Small Business Administration.

ACTION: Proposed rule.

SUMMARY: Title II of Public Law 104–208

(September 30, 1996), entitled the

‘‘Small Business Programs Improvement

Act of 1996’’, made a number of changes

to the Small Business Investment Act of

1958, as amended. For the Small

Business Investment Company program,

these changes include provisions

affecting capital requirements, Leverage

eligibility and fees, and the status of

Section 301(d) Licensees. This proposed

rule would implement the statutory

provisions; in addition, it would make

various technical corrections and

clarifications, as well as changes

intended to improve the fairness and

flexibility of the regulations.

DATES: Comments must be submitted on

or before November 13, 1997.

ADDRESSES: Written comments should

be addressed to Don A. Christensen,

Associate Administrator for Investment,

U.S. Small Business Administration,

409 3rd Street, S.W., Suite 6300,

Washington, D.C. 20416.

FOR FURTHER INFORMATION CONTACT:

Leonard W. Fagan, Investment Division,

at (202) 205–7583.

SUPPLEMENTARY INFORMATION: This

proposed rule would implement the

provisions of Title II of Public Law 104–

208 (September 30, 1996) which relate

to small businesses investment

companies (SBICs). This rule would also

make certain other substantive changes,

clarifications and technical corrections

to the regulations governing SBICs,

including those concerning portfolio

diversification, Cost of Money, and the

computation of distributions to be made

by SBICs that have issued Participating

Securities.

Section 301(d) Licensees

Prior to October 1, 1996, an SBIC

program applicant could be licensed

under either section 301(c) or section

301(d) of the Small Business Investment

Act of 1958, as amended (Act). A

Section 301(d) Licensee, also known as

a ‘‘specialized SBIC’’ or ‘‘SSBIC’’, agreed

to invest only in businesses owned and

controlled by socially or economically

disadvantaged individuals. In return, a

Section 301(d) Licensee received certain

benefits not available to other SBICs,

such as eligibility for certain types of

subsidized Leverage (as defined in

§ 107.50).

Effective October 1, 1996, section

208(b)(3) of Public Law 104–208

repealed section 301(d) of the Act.

However, the repeal provision was

accompanied by the following language:

‘‘The repeal * * * shall not be

construed to require the Administrator

to cancel, revoke, withdraw, or modify

any license issued under section 301(d)

of the Small Business Investment Act of

1958 before the date of enactment of this

Act.’’

This proposed rule would revise

several sections in part 107 to

implement this statutory change. The

revisions would eliminate provisions

relating to the licensing of new SSBICs

while retaining rules governing the

operations of existing SSBICs.

Thus, in § 107.50, a ‘‘Section 301(d)

Licensee’’ would be defined as ‘‘a

company licensed prior to October 1,

1996 under section 301(d) of the Act as

in effect on the date of licensing, that

may provide Assistance only to

Disadvantaged Businesses.’’ Current

§ 107.110, which deals with

organization of a section 301(d) license

applicant, would be removed. Similarly,

§ 107.120 would be revised by
53254 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

eliminating references to the licensing

of an SSBIC to operate as the subsidiary

of another Licensee or group of

Licensees. Any existing SSBIC which

was licensed as a subsidiary would be

permitted to continue its operations

under the same conditions as before;

however, the proposed rule would not

allow an existing SSBIC that is not

already a subsidiary of another Licensee

to become one. SBA has noted no

demand on the part of existing

Licensees to reorganize in this fashion.

The proposed revision of

§ 107.230(d)(4) would eliminate future

use of the provision which allowed

Section 301(d) Licensees to include in

their Private Capital, without limitation,

funds indirectly obtained from State or

local government sources. Under the

proposed rule, such funds would be

included in Private Capital only if they

were invested in or committed in

writing to the Licensee prior to October

1, 1996. Otherwise, Section 301(d)

Licensees would be limited to State and

local government funds equal to 33

percent of their Regulatory Capital

under current § 107.230(d)(3), which

applies to all Licensees. This change is

necessary to bring the regulations into

conformity with the Act as amended by

Public Law 104–208.

Other proposed changes reflect

amendments to the Act which

eliminated subsidized SBA Leverage.

Such Leverage was previously available

to SSBICs in the form of Debentures

with an interest rate subsidy or

Preferred Securities with a 4 percent

dividend. Although subsidized Leverage

can no longer be issued, the Act does

not require SSBICs to prepay or redeem

such Leverage prior to its scheduled

maturity. In addition, an SSBIC may

apply for any type of non-subsidized

Leverage (Debentures or Participating

Securities) for which it is eligible.

To implement these changes, current

§§ 107.1100 and 107.1110 would be

condensed into proposed § 107.1100.

The proposed section would eliminate

the separate descriptions of the types of

Leverage available to Section 301(c) and

Section 301(d) Licensees and would

eliminate all references to subsidized

Leverage.

SBA is also proposing revisions to

§ 107.1160 in order to conform with the

Act. The entire section, which sets forth

conditions governing the issuance of

Leverage by a Section 301(d) Licensee,

would apply only to Leverage issued on

or before September 30, 1996. After that

date, a Section 301(d) Licensee would

be eligible to apply for Leverage under

§ 107.1150, subject to the same terms

and conditions as other Licensees.

Similarly, the proposed revisions to

the definition of ‘‘Preferred Securities’’

in § 107.50 and to §§ 107.1400, 107.1420

and 107.1430 reflect the fact that SBA’s

authority under the Act to purchase

Preferred Securities ceased as of October

1, 1996. The appropriation of funds for

such securities actually ended as of

October 1, 1995, but some Preferred

Securities were issued in fiscal year

1996 by Licensees drawing against

SBA’s commitments of fiscal year 1995

funds.

Finally, the provisions of current

§ 107.1350 which allow a Section 301(d)

Licensee to retire certain Debentures by

issuing Preferred Securities would be

eliminated. The remainder of the

section, dealing with the retirement of

Debentures through the issuance of

Participating Securities, would be

redesignated as § 107.1585 and would

apply to both SBICs and SSBICs.

Common Control

‘‘Common Control’’ as defined in

§ 107.50 currently means ‘‘a condition

where two or more Licensees, either

through ownership, management,

contract, or otherwise, are under the

Control of one group or Person.’’

However, the defined term as used in

paragraphs (4) and (5) of the definition

of ‘‘Associate’’ is clearly intended to

refer to Persons other than Licensees. To

accommodate this usage, the proposed

rule would revise the Common Control

definition to refer to ‘‘two or more

Persons’’ rather than ‘‘two or more

Licensees’’. The portion of the

definition under which certain

circumstances establish a presumption

of Common Control would continue to

apply only to two or more Licensees.

Management and Ownership Diversity

Section 208(c)(3) of Public Law 104–

208 amended the Act to require that

new SBICs have diversity between

management and ownership. For any

SBIC licensed on or after September 30,

1996, SBA must ensure that the

management ‘‘is sufficiently diversified

from and unaffiliated with the

ownership of the licensee in a manner

that ensures independence and

objectivity in the financial management

and oversight of the investments and

operations of the licensee.’’ SBA has

required diversity between management

and ownership since 1994 for

Participating Securities issuers and

since 1996 for other new leveraged

Licensees. Therefore, in response to the

new statutory requirement, SBA is

proposing only minor changes to

improve the effectiveness of § 107.150.

Under current § 107.150(a), a Licensee

or license applicant can demonstrate

diversity if at least 30 percent of its

Regulatory Capital is held by at least

three shareholders or limited partners

(or one acceptable Institutional Investor)

unrelated to management. Specifically,

these investors cannot be Associates of

the Licensee or applicant, or Affiliates

of any of its Associates. The proposed

rule would retain these concepts, but

would eliminate the phrase ‘‘Affiliate of

an Associate’’. Instead, proposed

§ 107.150(a) would specify that to

qualify for diversity purposes, an

investor must not be an Associate of the

Licensee or applicant and must not

‘‘Control, be Controlled by, or be under

Common Control with’’ an Associate.

SBA does not intend for this language

to be substantively different from the

current language, but believes that

readers may find it easier to understand.

In addition, the proposed rule would

address certain other characteristics of

‘‘diversity investors’’ which are not

covered in the current regulation, but

which SBA considers important.

Proposed § 107.150(a) would specify

that the investors relied upon to satisfy

the diversity requirement cannot be

Affiliates of one another. SBA believes

that if such investors are related parties,

the requirement that there be at least

three of them is rendered essentially

meaningless. The proposed rule also

would give SBA discretion to reject for

diversity purposes an investor whose

ownership interest is not significant,

either in terms of absolute dollars or

percentage of ownership. This provision

underscores the purpose of the diversity

rules, which is to encourage the

presence of investors who are likely to

have a serious interest, similar to SBA’s,

in the fair and prudent management of

the SBIC.

The proposed changes reflect policies

which SBA has been developing in its

review of license applications. In

particular, SBA has used informal

internal guidelines to evaluate whether

a proposed investor’s interest is

substantial enough to qualify for

diversity purposes. SBA is continuing to

refine these guidelines and expects to

incorporate them into its standard

operating procedures.

Capital Requirements

Under the Act as amended by section

208(c) of Public Law 104–208, SBICs

licensed on or after October 1, 1996

must meet increased minimum capital

requirements. Previously, the statutory

minimum capital requirement was $2.5

million. The new requirements would

be implemented in proposed § 107.210,

which combines and revises elements of

current §§ 107.210 and 107.220.

Proposed § 107.210(a)(1) would require
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53255

a company that does not wish to be

eligible to issue Participating Securities

to have Regulatory Capital of at least

$5,000,000. As an exception to this

general rule, SBA would be able to

license an applicant with Regulatory

Capital of at least $3,000,000, but only

if the applicant meets certain conditions

set forth in the proposed regulation. As

mandated by the Act, this exception is

limited to those instances where

‘‘special circumstances and good cause’’

can be shown.

Proposed § 107.210(a)(2) contains

essentially the same language as the

current § 107.220(a). It would require a

company licensed on or after October 1,

1996, that wishes to be eligible to apply

for Participating Securities to have

Regulatory Capital of at least

$10,000,000, with a permitted exception

for an applicant which demonstrates to

SBA’s satisfaction that it can be

financially viable over the long term

with a lower amount (but under no

circumstances less than $5,000,000).

SBA regulations have required this level

of Regulatory Capital for Participating

Securities issuers since 1994.

The proposed rule would not permit

prospective Participating Securities

issuers to be licensed pursuant to the

exception available to other applicants,

under which a license may be granted

with Regulatory Capital as low as

$3,000,000. For applicants planning to

issue Participating Securities, SBA

believes that the ability to meet the

standard minimum capital requirement

is an important indicator of the

credibility of management. SBA also

doubts that any such applicant can

demonstrate financial viability with

Regulatory Capital of only $3,000,000,

even on a temporary basis.

In addition to the Regulatory Capital

requirements described above, proposed

§ 107.210(a) would also require any

company licensed on or after October 1,

1996, to have Leverageable Capital of at

least $2,500,000. Leverageable Capital is

a subset of Regulatory Capital; while

both include capital actually

contributed to a Licensee by its private

investors, the major difference between

them is that Regulatory Capital also

includes the Licensee’s unfunded

binding commitments from Institutional

Investors. The proposed rule, which is

consistent with SBA’s current licensing

policy, reflects the Agency’s belief that

the presence of a certain minimum level

of Leverageable Capital demonstrates an

applicant’s seriousness and readiness to

operate actively as an SBIC.

The proposed rule would not require

SBICs licensed before October 1, 1996 to

increase their capital. Under proposed

§ 107.210(b), such companies would

have to meet the applicable minimum

capital requirements under the

regulations in effect on September 30,

1996 (see §§ 107.210 and 107.220 as in

effect on that date). These requirements

vary depending upon the date a

company was licensed and the type of

SBA Leverage it has issued or wants to

issue.

See also the section of this preamble

entitled ‘‘Eligibility for Leverage and

Leverage Commitments’’.

Valuations

Section 208(f)(2) of Public Law 104–

208 included one provision related to

the valuation of portfolio securities held

by Licensees which was not already

reflected in the regulations. Under this

provision, as part of the annual audit of

a Licensee’s financial statements, the

independent auditor must provide to

SBA a statement that the Licensee’s

valuations were performed in

accordance with its SBA-approved

valuation policy, as required by section

310(d)(2) of the Act. SBA has included

this requirement in proposed

§ 107.503(e). SBA is also proposing

various non-substantive wording

changes in § 107.503 to improve the

clarity of the section.

Reports To Be Filed With SBA

Current § 107.660 requires an SBIC to

provide SBA with copies of reports

given to its investors or filed with the

Securities and Exchange Commission,

and to notify SBA when it becomes a

party to litigation or other proceedings.

Proposed § 107.660(d) would add a

requirement for a Licensee to notify

SBA if an officer, director, general

partner or other Control Person is

charged with or convicted of any

criminal offense other than a

misdemeanor involving a minor motor

vehicle violation. Key personnel

associated with a license applicant

currently must provide this type of

information as part of the personal

history statement included in the SBIC

license application. The purpose of the

proposed rule is to give SBA a

mechanism for updating such

information as needed to ensure the

integrity of the SBIC program.

Financing of Smaller Enterprises

Since April 1994, SBICs have been

required to direct a certain percentage of

their investment activity to businesses

which fall significantly below the

maximum size permitted for a Small

Business. These businesses were

originally referred to as ‘‘Smaller

Businesses’’, a term which was changed

to ‘‘Smaller Enterprises’’ in a final rule

published in the Federal Register on

March 13, 1997 (62 FR 11759).

Under proposed § 107.710, the basic

requirement for a Licensee to invest at

least 20 percent of the total dollar

amount of its Financings in Smaller

Enterprises would remain unchanged.

However, proposed § 107.710(c) would

add a new requirement to implement

section 208(c)(2) of Public Law 104–208.

This provision applies to SBICs licensed

on or before September 30, 1996, which

issue Leverage after that date and which

do not meet the current minimum

capital requirement (Regulatory Capital

of at least $5,000,000 for Debentures or

at least $10,000,000 for Participating

Securities). For such Licensees, at least

50 percent of the aggregate dollar

amount of their Financings extended

after September 30, 1996 must be

invested in Smaller Enterprises. As a

practical matter, SBA has found that

Licensees to which this requirement

applies typically invest almost

exclusively in Smaller Enterprises.

Like the current regulation, the

proposed rule would measure

compliance with the requirements to

finance Smaller Enterprises as of the

end of a Licensee’s fiscal year. Under

current § 107.710(e), a Licensee which

has not achieved the required

percentage of investments in Smaller

Enterprises is allowed one additional

year to bring its portfolio into

compliance. The proposed rule would

retain this provision. However, such a

Licensee would not be eligible for

additional Leverage until it reaches the

required percentage. See also the section

of this preamble entitled ‘‘Eligibility for

Leverage and Leverage Commitments’’.

Passive Businesses

SBICs are generally prohibited from

investing in passive businesses.

However, an exception is provided for

holding companies which pass through

the financing proceeds to an active

subsidiary. The precise nature of this

exception has changed over time. Prior

to 1996, the general prohibition did not

apply ‘‘to any Small Concern wholly

owning another eligible Small Concern

engaged in a regular and continuous

business operation.’’ Under current

§ 107.720(b)(2), which became effective

January 31, 1996, an SBIC may finance

a passive business ‘‘if, for all Financings

extended, it passes substantially all the

proceeds through to the same eligible

Small Business that is not passive.’’

The goal of the 1996 revision was to

eliminate the requirement for the

passive business to be the 100 percent

owner of the operating business, while

still ensuring some substantial

relationship between the two by
53256 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

allowing funds to be passed through to

only one active entity. SBA now

believes that the latter provision may

unnecessarily restrict some Small

Businesses. For example, a holding

company may be established with two

operating subsidiaries, one engaged in

manufacturing and the other in

distribution of the manufactured

product. Under the current regulation, if

the holding company received financing

from an SBIC, it could pass through the

proceeds to only one subsidiary, even

though both subsidiaries are essentially

components of the same business.

At the same time, SBA continues to

believe that there must be a significant

relationship between a financed passive

business and the active business which

ultimately receives the proceeds. To

satisfy this goal, proposed

§ 107.720(b)(2) would permit financing

of a passive Small Business if it passes

substantially all the proceeds through to

one or more ‘‘subsidiary companies’’,

defined as companies in which the

financed passive business owns at least

50 percent of the voting securities. The

current provision limiting the passthrough of proceeds to only one Small

Business would be eliminated.

Co-Investment With Associates

Licensees may co-invest with

Associates, subject to the conditions in

§ 107.730(d). This section sets forth

certain circumstances under which the

terms of a co-investment are presumed

to be fair and equitable to the SBIC, so

that no specific demonstration of equity

is required. Under current

§ 107.730(d)(3)(iv), this presumption

applies to co-investments by two nonleveraged SBICs. The proposed rule

would apply the same presumption to

co-investments by a non-leveraged SBIC

and its non-SBIC Associate. The

rationale behind the presumption is the

same in both cases: SBA has no

financial exposure, and is therefore

unconcerned that a Licensee may be

disadvantaged relative to its Associate.

Portfolio Diversification Requirements

Under current § 107.740, a leveraged

SBIC may not have more than 20

percent of its Regulatory Capital

invested in or committed to a single

Small Business or group of related

businesses, unless SBA gives its prior

written approval (for SSBICs, the limit

is 30 percent of Regulatory Capital). The

purpose of this ‘‘overline’’ limit is to

avoid excessive risk by ensuring a

certain degree of portfolio

diversification.

Since the beginning of the

Participating Securities program, SBA

has been aware that the current

regulation may have an unintended

effect. Participating Securities issuers

operate under detailed rules governing

distributions to SBA as well as to their

private investors. These regulations

permit a Licensee to return capital to its

non-SBA partners under certain

conditions, thereby reducing its

Regulatory Capital and overline limit.

SBA is concerned that a Licensee in

these circumstances may suddenly have

multiple violations of the overline

regulation, even though its portfolio was

sufficiently diversified based on its

original Regulatory Capital.

To address this problem, proposed

§ 107.740(a) would base a Licensee’s

maximum permitted investment in or

commitment to a Small Business on its

Regulatory Capital at the time the

investment or commitment is made. The

limit would apply to the total amount of

Financings and Commitments extended

to the Small Business by the Licensee.

For example, if a Licensee had invested

$1,000,000 in a Small Business and

wanted to provide follow-on financing

at a time when its Regulatory Capital

was $8,000,000, the amount of the

follow-on financing could not exceed

$600,000 (20 percent of $8,000,000,

minus the $1,000,000 already invested).

It should be noted that the proposed

rule would require a Licensee to be in

compliance at the date of a Commitment

and at the date of a Financing. Thus, a

Licensee preparing to fund a

Commitment it had made to a Small

Business must ensure that it has

sufficient Regulatory Capital as of the

closing date to support the completed

Financing.

Proposed § 107.740(a) would continue

to permit overline investments with the

prior written approval of SBA.

Cost of Money

Current § 107.855 sets forth limits on

interest rates and other charges that

SBICs may impose on Small Businesses.

SBA is proposing three changes to these

‘‘Cost of Money’’ rules. The first change

reflects section 208(d)(6) of Public Law

104–208, under which SBICs must pay

to SBA an additional charge of 1 percent

per year on any Leverage issued after

September 30, 1996 (except for draws

against commitments made by SBA in

fiscal year 1996). The proposed rule

would allow a Licensee to include this

charge in its base rate when computing

its Cost of Money ceiling. The base rate

would be equal to either the current

Debenture Rate plus the 1 percent

charge (see § 107.855(c)), or the

Licensee’s own Cost of Capital with the

1 percent charge treated as additional

interest expense in the computation (see

§ 107.855(d)). Although this change may

increase the cost of borrowing for some

Small Businesses, SBA believes that it is

warranted because it reflects the

increase in Licensees’ cost of funds.

There would be no change in the basic

Cost of Money limitations of 19 percent

for Loans and 14 percent for Debt

Securities which Licensees may use

regardless of the level of prevailing

interest rates.

For Section 301(d) Licensees which

elect to compute a Cost of Money ceiling

based on their own Cost of Capital,

proposed § 107.855(d)(4) would clarify

that interest expense on a subsidized

SBA-guaranteed debenture may be

computed using the debenture’s face

(unsubsidized) interest rate. This

provision was inadvertently deleted

when the regulations were revised in

January 1996, but has since remained in

effect as a matter of SBA policy.

Finally, SBA is proposing to clarify

the treatment of warrants with respect to

Cost of Money. The regulations

governing Cost of Money apply to Loans

(which have no provision for obtaining

equity in a Small Business) and Debt

Securities (which involve some type of

equity feature). SBA generally interprets

these rules to exclude from Cost of

Money any returns realized on the

equity portion of a Debt Security

because such returns normally are

neither assured nor predictable.

However, SBA has become aware of

certain situations under which the

current regulations may effectively

require inclusion of the value of

warrants in Cost of Money.

This may occur when a Licensee

lends cash to a Small Business, and

receives in return not only a note for the

amount lent, but also detachable

warrants to acquire equity in the Small

Business. Generally accepted

accounting principles require the

Licensee to determine the fair value, if

any, of the warrants received and to

record the warrants at that value, while

discounting the note by the same

amount. The discount is then amortized

to interest income over the life of the

note. Under current § 107.855(f), the

income created through amortization of

the discount is included in Cost of

Money.

SBA believes that this provision

unduly disadvantages SBICs which

allocate substantial value to the

warrants acquired, relative to SBICs

which assign zero or nominal value.

Typically, SBICs invest in private

companies which have no readily

ascertainable market value. Thus, the

value allocated to such companies’

warrants is often determined through

negotiation rather than the application

of precise methods. Given the level of
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53257

uncertainty associated with such

valuations, SBA prefers to create a level

playing field in which all returns

realized on detachable warrants are

excluded from Cost of Money.

Proposed § 107.855(g)(1) would

address this concern by allowing a

specific exclusion from Cost of Money

for a discount on the loan portion of a

Debt Security, if the discount results

solely from the allocation of fair value

to detachable stock purchase warrants

as required by generally acceptable

accounting principles. Discounts in

general would still be included in Cost

of Money. For example, if a Licensee

provided $1,000,000 to a Small Business

and received a note for $1,100,000, the

amortization of the $100,000 discount

over the life of the note would be treated

as additional interest income for Cost of

Money purposes.

Control

Proposed § 107.865 contains two

clarifications to the existing regulation

concerning Control of a Small Business

by an SBIC. Under current § 107.865(c),

a Licensee can rebut a presumption of

Control if certain criteria concerning the

ownership of the Small Business and

the composition of its board of directors

are satisfied. The proposed rule would

eliminate references to the rounding of

percentages in determining whether the

board of directors meets the established

criteria. The current language is

confusing because it is unclear how the

rounding is to be applied; SBA believes

that removing it would permit a plain

reading of the regulation.

The second proposed clarification

involves current § 107.865(d), which

sets forth the conditions under which a

Licensee may take temporary Control of

a portfolio company. The proposed rule

would permit such Control where

reasonably necessary for the protection

of a Licensee’s existing investment; the

only revision is the addition of the word

‘‘existing’’. The proposed language is

not a substantive change; it is intended

simply to make explicit SBA’s longstanding interpretation of this provision.

Eligibility for Leverage and Leverage

Commitments

Section 208 of Public Law 104–208

established certain requirements which

an SBIC must satisfy in order to obtain

SBA Leverage. Proposed § 107.1120 (c)

and (d) would implement these

requirements. An SBIC licensed after

September 30, 1996, with Regulatory

Capital of less than $5,000,000 would be

ineligible for Leverage until it reached

the $5,000,000 level. An SBIC licensed

on or before September 30, 1996, would

not be required to increase its capital in

order to obtain additional Leverage;

however, if its Regulatory Capital was

less than $5,000,000 ($10,000,000 for a

company seeking to issue Participating

Securities), it would have to certify in

writing that at least 50 percent of the

aggregate dollar amount of its

Financings extended after September

30, 1996 would be provided to Smaller

Enterprises (see also proposed

§ 107.710(c)). Finally, any Licensee

seeking Leverage would be required to

certify in writing that it is in compliance

with the general requirement to provide

20 percent of its total Financings to

Smaller Enterprises under § 107.710(b).

SBICs can obtain Leverage by

applying directly for funding when it is

needed or by obtaining a Leverage

commitment from SBA which it can

draw down over a period of time. SBA

is proposing minor changes to the

current rules governing the commitment

process. The proposed rule would

eliminate the minimum and maximum

amounts for a Leverage commitment in

current § 107.1200(c). SBA believes that

these limits are unnecessary. Under the

proposed rule, commitment amounts

would have to be in multiples of $5,000

to accommodate requirements of the

Leverage funding process; in all other

respects, the amount of a commitment

would be at SBA’s discretion. Similarly,

the current limitations in § 107.1230(b)

on the amount that a Licensee can draw

against its commitment would be

eliminated. The proposed rule would

require draws, like commitments, to be

in multiples of $5,000; in addition, SBA

would have discretion to determine a

minimum draw amount, and would

publish notice of any such

determination in the Federal Register

from time to time.

Leverage Fees

SBA is proposing changes in

§§ 107.1130 and 107.1210 to implement

provisions of section 208(d)(6) of Public

Law 104–208 which affect the fees

SBICs must pay in order to obtain SBA

Leverage. These fee changes were

effective October 1, 1996, and were

implemented on an interim basis by

SBA Policy Notice 1000–6.

Under proposed § 107.1130, a

Licensee would pay a nonrefundable

‘‘leverage fee’’ to SBA when Debentures

or Participating Securities are issued.

The fee is 3 percent of the face amount

of the Leverage issued, replacing the 2

percent user fee and the 1 percent

commitment fee previously in effect. If

a Licensee receives a Leverage

commitment from SBA, it must prepay

the 3 percent fee at the time it receives

the commitment (see proposed

§ 107.1210(a)); otherwise, the fee is

payable when the Leverage is issued.

Proposed § 107.1130(d) would require

a Licensee to pay to SBA an additional

‘‘Charge’’ on Debentures and

Participating Securities (see also

§ 107.50 for the definition of this

proposed new term). For both types of

Leverage, the Charge is 1 percent per

annum. The Charge is payable under the

same terms and conditions as the

interest on Debentures or the Prioritized

Payments on Participating Securities, as

applicable. Thus, a Debenture issuer

would pay the Charge in two semiannual installments together with its

interest payments. In contrast, a

Participating Securities issuer would

pay the Charge only when it had profits

and was distributing Prioritized

Payments under § 107.1540. The Charge

would not apply to Leverage drawn

down against a commitment obtained

from SBA on or before September 30,

1996.

Participating Securities—General

SBICs began to issue Participating

Securities in 1995. As Licensees and

SBA have gained experience with the

program, there have been a number of

regulatory changes intended to correct

errors and to eliminate inconsistencies

and confusing language. The proposed

rule continues this process of correction

and clarification, and also includes

certain substantive changes.

Current § 107.1500 sets forth general

terms and conditions of the

Participating Security. One of these

conditions, set forth in § 107.1500(b)(4),

is that a Licensee must make Equity

Capital Investments equal to the amount

of Participating Securities it issues, and

must maintain such investments in an

amount equal to its outstanding balance

of Participating Securities. The

proposed rule would implement a

provision of Public Law 104–208 by

eliminating the maintenance

requirement. Thus, a Licensee would be

responsible only for investing the

appropriate dollar amount in Equity

Capital Investments, and would not

have to be concerned with the timing of

the liquidation of those investments.

The same change would also be

reflected in proposed § 107.1820, which

sets forth conditions that an SBIC must

comply with in connection with its

issuance of Participating Securities. In

this section, under paragraph (e)(9), the

failure to maintain a specified amount

of Equity Capital Investments would be

eliminated from the list of Restricted

Operations Conditions.

Proposed § 107.1500(e), concerning

amounts to be paid upon redemption of

Participating Securities, includes the
53258 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

new 1 percent annual Charge on

Leverage issued on or after October 1,

1996 (see the section entitled ‘‘Leverage

Fees’’ in this preamble). Proposed

§ 107.1500(f), concerning the priority of

Participating Securities when a Licensee

liquidates, reflects the same change. In

addition, this paragraph would clarify

that only Earned Prioritized Payments

(that is, those Prioritized Payments

which the Licensee has sufficient profits

to pay) have priority in liquidation; the

Licensee has no obligation to pay

Accumulated Prioritized Payments

(those not covered by available profits).

Liquidity Requirements for

Participating Securities

The proposed rule includes two

minor changes to the liquidity

requirements in § 107.1505. Currently, a

Licensee must perform the liquidity

impairment computation at the end of

its fiscal year, when it applies for

Leverage, and when it intends to make

a Distribution. Under proposed

§ 107.1505(a)(2), SBA would be able to

exempt a Licensee applying for Leverage

from the computation requirement. SBA

has found that many SBICs in the early

stages of their existence are extremely

liquid; in these cases, the Agency

believes that the formal liquidity

computation provides no additional

useful information and need not be

performed.

The second proposed change involves

the computation of the liquidity ratio in

§ 107.1505(b). Various components of

the ratio are assigned weights which

reflect the ease and/or probability of

their conversion to cash. One of the

components of ‘‘Total Current Funds

Available’’ (the numerator of the

liquidity ratio) is Publicly Traded and

Marketable Securities, as reported on

SBA Form 468. Under the current

regulation, a Licensee is given credit for

65 percent of the reported value of these

securities in the liquidity computation.

In contrast, the proposed rule would

allow the Licensee to count 100 percent

of the reported value as a source of

liquidity. SBA is proposing this change

because Licensees are expected to take

appropriate discounts (for restrictions,

large holdings relative to trading

volume, etc.) when valuing their

securities, as required by SBA’s

valuation guidelines for SBICs. Since

these discounts are already reflected in

the portfolio valuations reported on

Form 468, SBA considers it unnecessary

to discount these values further in the

liquidity computation.

Earmarked Profit (Loss)

Under § 107.1510, Participating

Securities issuers are required to

compute Earmarked Profit (Loss) as a

preliminary step in determining the

amounts of various Distributions. SBA

is proposing two changes to this section.

The first would affect only a Licensee

holding assets not subject to SBA Profit

Participation (‘‘non-Earmarked Assets’’).

For a hypothetical SBIC in this situation

(none are currently licensed), the

proposed rule would simplify the

computation of the ‘‘Earmarked Asset

Ratio’’. This ratio is intended to measure

the proportion of the total portfolio

which consists of Earmarked Assets, but

is currently complicated by the

inclusion of a factor described as

‘‘weighted average uninvested proceeds

of Participating Securities’’. SBA

believes that this amount would be

extremely difficult, if not impossible, to

compute in practice; even if it could be

determined, it would have little effect

on the resulting ratio because it is

included in both the numerator and

denominator. Therefore, SBA is

proposing to eliminate this factor

entirely from the Earmarked Asset Ratio

computation in § 107.1510(c). The

proposed rule would also simplify the

Earmarked Asset Ratio formula by

replacing ‘‘weighted average’’

Earmarked Assets and ‘‘weighted

average’’ Loans and Investments with

simple averages. The intent of this

change is that the ‘‘average’’ amounts

specified would represent average

monthly balances, as computed by the

Participating Securities software

developed by SBA. The Agency believes

this method provides reasonable

precision without requiring detailed

tracking of the number of days

outstanding for each portfolio

investment, as the weighted average

method requires.

The other proposed change affecting

the Earmarked Profit (Loss) computation

is in § 107.1510(d)(1)(ii), which deals

with the amortization of leverage fees

paid to SBA and partnership

syndication costs incurred by an SBIC.

Currently, for the purpose of computing

Earmarked Profit (Loss), such costs must

be amortized over five years. The

proposed rule would require

amortization over not less than five

years. This change would accommodate

companies which amortize the fees over

a longer period for financial statement

purposes and would prefer not to make

an additional adjustment when

performing the required profit

computations.

Prioritized Payments

Section 107.1520 tells a Licensee how

to compute Prioritized Payments and

how to determine whether it has profits

which will cause Prioritized Payments

to become ‘‘earned’’ and therefore

payable to SBA. Three changes to this

section are proposed. First, the

proposed rule would implement a

provision of Public Law 104–208 by

including ‘‘Charges’’ (the 1 percent

annual fee discussed in this preamble

under the heading ‘‘Leverage Fees’’) on

outstanding Participating Securities in

the required computations. Although

Charges are not part of Prioritized

Payments, they are payable under the

same terms and conditions, as set forth

in the proposed section.

Second, the computation of profit for

the purposes of § 107.1520 would be

revised under proposed § 107.1520(d).

Under the current regulations, a

Licensee’s ‘‘profit’’ equals its

cumulative Earmarked Profit minus its

cumulative Earned Prioritized Payments

from prior periods. This computation

ignores the fact that some or all of the

profit computed in this manner may

have already been distributed under

other sections of the regulations, either

to SBA as Profit Participation or to the

Licensee’s private investors. SBA

received no comments addressing this

concern when the regulations governing

Participating Securities were originally

proposed in April 1994 or revised in

January 1996; nevertheless, the Agency

is concerned that the current regulation

may, in effect, place duplicate claims on

the same income. The proposed rule

would take prior profit distributions

into account in determining whether a

Licensee has profits which can be used

to pay Prioritized Payments.

Third, proposed § 107.1520(f) would

provide additional detail concerning the

computation of Adjustments, a type of

compounding of unpaid Prioritized

Payments. The current regulation is

written in general terms which do not

explain exactly how certain amounts

should be calculated. The proposed rule

follows the method which is currently

used in the software developed by SBA

to perform the allocation and

distribution computations required for

Participating Securities.

Profit Participation

An SBIC which has issued

Participating Securities must allocate

Profit Participation to SBA when it has

earned profits over and above the

amount necessary to pay its Prioritized

Payments in full. Under current

§ 107.1530, Profit Participation is

determined by computing a ‘‘Base’’ and

a ‘‘Profit Participation Rate’’, and

multiplying the Base by the Rate. The

proposed rule would modify both the

Base and the Rate under certain

circumstances.
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53259

The Base for Profit Participation

represents a cumulative measure of a

Licensee’s Earmarked Profit after

Prioritized Payments, Adjustments and

Charges. A Participating Securities

issuer must compute its Base as of the

end of each fiscal year, but may also

compute the Base for a period of less

than one year in order to make an

interim distribution of profits. If an

SBIC elects to make such a distribution,

it faces the possibility that the Profit

Participation it pays to SBA for the

interim period will be greater than the

Profit Participation it would have been

obligated to pay had it waited until the

end of the fiscal year. This can happen

because the SBIC suffers losses during

the remainder of the year, or simply

because additional Prioritized Payments

accumulate during that time; either or

both of these factors would reduce the

SBIC’s year-end Base. Under current

§ 107.1530(c), an SBIC which has paid

‘‘excess’’ Profit Participation under

these conditions can treat the excess as

‘‘Unused Loss’’ at year end, thereby

reducing the Base which it will use the

next time it computes Profit

Participation. However, this approach

captures only a part of the SBIC’s loss;

the actual loss incurred between the

interim distribution date and the fiscal

year end is equal to the difference

between the interim and year-end Bases,

not just the Profit Participation

computed on that difference. For this

reason, SBA is concerned that the

current regulation may impose a

significant penalty on a Licensee which

chooses to make an interim distribution,

and may unduly distort an SBIC’s

decisions concerning the timing of

distributions. Proposed § 107.1530(c)

would allow a Licensee in the

circumstances described to treat the full

amount of the difference between its

interim and year-end Bases as Unused

Loss.

Most SBICs operate for a period of

time before issuing Participating

Securities; in some cases, companies are

already investing actively even before

they are licensed. In the computation of

the Base, the current regulations do not

address the question of whether net

income or loss from fiscal years prior to

the issuance of Participating Securities

may be included. Under proposed

§ 107.1530(c)(3), a Licensee would be

permitted to include prior losses in its

Base with SBA approval, which would

be required only once when the

Licensee computes the Base for the first

time. SBA expects to approve inclusion

of prior losses in most cases, but is

proposing the approval requirement to

cover unusual circumstances, such as a

company with non-Earmarked Assets or

one which has operated for an extended

period of time before issuing

Participating Securities. The proposed

rule does not discuss net income

realized in prior fiscal years because

SBA has not seen this situation in

practice; the Agency considers this an

unlikely occurrence which would be

handled on a case by case basis.

The Profit Participation Rate is

computed using a formula in which the

key variable is the ratio of Participating

Securities to Leverageable Capital (the

‘‘PLC ratio’’). Proposed § 107.1530(e)

would retain the basic definition of the

PLC ratio as the highest ratio of

outstanding Participating Securities to

Leverageable Capital that an SBIC has

ever attained, as well as the exception

which allows the ratio to be reduced if

Leverageable Capital increases above its

highest previous level, subject to certain

conditions. Proposed § 107.1530(e)(2) (i)

and (ii) would simplify the method for

recomputing the PLC ratio following an

increase in Leverageable Capital. The

new PLC ratio would equal the highest

dollar amount of Participating Securities

the SBIC has ever had outstanding,

divided by the SBIC’s current

Leverageable Capital. This computation

would replace the present three-step

method which is not only quite

complex, but also can produce

anomalous results when a Licensee’s

highest dollar amount of Participating

Securities outstanding does not coincide

with its highest ratio. SBA does not

believe that any Licensee would be

disadvantaged by this change.

After computing the Base and the

Profit Participation Rate, an SBIC

computes Profit Participation under

§ 107.1530(h). In the proposed rule, this

paragraph has been reworded to

improve its clarity. No substantive

changes are proposed.

Tax Distributions

Limited partnership SBICs which

have paid their Prioritized Payments in

full and still have remaining Retained

Earnings Available for Distribution are

permitted to make an annual ‘‘tax

distribution’’ to their investors, with

SBA also receiving a share. Both the Act

and § 107.1550 of the regulations use

the term ‘‘tax distribution’’, based on the

concept of allowing partnerships (or

other flow-through entities) to distribute

cash that investors can use to pay their

taxes on the income allocated to them

by the partnership. In practice, the

permitted tax distribution may or may

not correspond to a particular investor’s

actual tax liability, since the

computation uses assumed rather than

actual tax rates and does not distinguish

between taxable and tax-exempt

investors.

SBA is proposing one substantive

change in § 107.1550(a)(1), which would

be revised to include the 1 percent per

annum Charge on Participating

Securities issued on or after October 1,

1996 (except for those issued pursuant

to a commitment obtained from SBA

before that date). Under Public Law

104–208, Charges are payable as a

preferred return to SBA under the same

terms and conditions as Prioritized

Payments; therefore, a Licensee must

pay all its Prioritized Payments,

Adjustments and Charges before it can

make a distribution under § 107.1550.

The other proposed revisions in

§ 107.1550 are clarifications rather than

substantive changes. In the formula

used to compute a Licensee’s Maximum

Tax Liability, proposed § 107.1550(b)(1)

would specify that Prioritized Payments

allocated to SBA are to be excluded

from the net ordinary income and

capital gains allocated to partners.

Proposed § 107.1550(b)(2) would clarify

that while a Licensee may use either

individual or corporate tax rates to

compute Maximum Tax Liability, it

must apply the same type of rate, either

individual or corporate, to both ordinary

income and capital gains. Finally,

proposed § 107.1550(b)(3) would specify

that in computing combined Federal

and State tax rates to be used in the

Maximum Tax Liability formula, a

Licensee must assume that State income

taxes are deductible for Federal income

tax purposes. All of these changes are

consistent with SBA’s interpretation of

the current regulations.

Distributions Based on ‘‘Retained

Earnings Available for Distribution’’

As of the end of each fiscal year, if a

Participating Securities issuer has

Retained Earnings Available for

Distribution (‘‘READ’’) remaining after

paying all of its Prioritized Payments

and making a tax distribution (if

applicable), it must distribute the

balance of READ in accordance with

§ 107.1560. SBA is proposing two

clarifications to this section, as well as

one minor substantive change.

Proposed § 107.1560 (a)(4) and (b)(1)

would both be revised to clarify that the

amount of READ to be distributed is

determined after giving effect to any

preceding distributions of Prioritized

Payments under § 107.1540 and tax

distributions under § 107.1550. The

current regulation may not be clear on

this point, although SBA has always

interpreted it in a manner consistent

with the proposed rule.

Current § 107.1560(e) contains a table

which gives SBA’s percentage share of
53260 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

any distributions made under

§§ 107.1560 or 107.1570(a). The heading

of the first column refers to the

Licensee’s ‘‘ratio of Leverage to

Leverageable Capital as of the fiscal year

end’’. This heading is appropriate for

distributions under § 107.1560, which

are always computed as of the end of a

fiscal year, but may be confusing for

interim distributions under

§ 107.1570(a). If a Licensee makes an

interim distribution, the intent of the

regulations is to measure the ratio of

Leverage to Leverageable Capital as of

the end of the interim period for which

the distribution is made. The proposed

rule would clarify this point by

replacing ‘‘fiscal year’’ with ‘‘fiscal

period’’ in the column heading.

Proposed § 107.1560(a)(1) would be

revised to include the 1 percent per

annum Charge on Participating

Securities issued on or after October 1,

1996. Under Public Law 104–208,

Charges are payable as a preferred

return to SBA under the same terms and

conditions as Prioritized Payments;

therefore, a Licensee must pay all its

Prioritized Payments, Adjustments and

Charges before it can make any other

distribution under § 107.1560.

Optional Distributions Not Based on

READ

A Licensee which has no READ may

be able to make distributions to its

private investors and SBA in accordance

with § 107.1570(b). Distributions under

this section are at the option of the SBIC

and essentially constitute returns of

capital. The current regulation sets forth

conditions for making a distribution of

this type. Under the proposed rule, two

of these conditions would be revised.

First, § 107.1570(b)(1)(i) would require

an SBIC to pay any earned Charges,

along with its Earned Prioritized

Payments and earned Adjustments,

before distributing under § 107.1570(b).

This change is in accordance with

section 208(d)(6) of Public Law 104–

208; similar changes proposed in

§§ 107.1550 and 107.1560 are discussed

earlier in this preamble.

Second, under current

§ 107.1570(b)(1)(ii), a Licensee must

have ‘‘distributed all Profit Participation

computed under § 107.1530’’ before

distributing under § 107.1570(b). This

language may present a problem for an

SBIC because of the following

circumstances: Profit Participation is

computed only on the basis of realized

income or loss; however, the ability to

distribute Profit Participation depends

on the availability of READ, which also

takes into account unrealized losses in

a Licensee’s portfolio. Thus, it is

possible that a Licensee may compute

Profit Participation to be allocated to

SBA, but may be unable to pay it until

some later date. Under these conditions,

the Licensee would be blocked from

distributing under § 107.1570(b). To

remedy this situation, the proposed rule

would require a Licensee to distribute

Profit Participation only to the extent

permitted based on its READ. SBA

believes that the language in section

303(g)(10) of the Act, which requires

payment of all Profit Participation

‘‘due’’ to SBA before a Licensee can

return capital, provides sufficient

flexibility to support this interpretation.

Notice of Participating Securities

Distributions

The current regulations do not require

SBICs with Participating Securities to

notify SBA before making distributions.

In practice, Licensees generally have

sought SBA’s assistance with the

distribution calculations and have given

SBA sufficient opportunity to review

the results. Because of the complexity of

some of the required computations, and

the difficulty of correcting errors after a

distribution takes place, SBA is

proposing to formalize this practice. The

proposed rule would require an SBIC to

notify SBA 10 business days before a

planned distribution under §§ 107.1540

through 107.1570, unless SBA permits

otherwise. This language would give

SBA the flexibility to allow

distributions on shorter notice, if the

circumstances warrant, without

requiring Licensees to submit a formal

request for a written exemption. SBA

believes that this provision would not

unreasonably constrain a Licensee’s

freedom of action and would provide

important protection for Licensees as

well as the Agency.

Timing of Participating Securities

Distributions

The current regulations permit

Participating Securities issuers to make

distributions only on quarterly

‘‘Payment Dates’’ (February 1, May 1,

August 1 and November 1 of each year).

This structure was adopted to coincide

with the terms of the public fundings of

Participating Securities, under which

investors receive interest payments and

any returns of principal to which they

are entitled on these dates. In the

preamble to the final rule published on

January 31, 1996 (61 FR 3177), SBA

stated that it intended to seek a solution

that would provide Licensees with

greater flexibility in making

distributions, particularly distributions

in the form of securities.

Proposed § 107.1575 would allow an

SBIC to make distributions (either in

cash or in kind) on dates other than

Payment Dates with SBA’s prior written

approval. SBA wishes to provide SBICs

with as much flexibility as possible;

however, for administrative and

oversight purposes, the Agency feels

strongly that it must have an

opportunity to review planned

distributions in advance.

Distributions based on fiscal year end

results, such as required annual

distributions of Prioritized Payments,

would have to be made no later than the

second Payment Date following the

Licensee’s fiscal year end. This

requirement is consistent with the

current regulation, which requires such

distributions to be made on either the

first or second Payment Date.

For any distribution made on other

than a Payment Date, the distribution

date would be used as the cutoff date for

all the required computations

(Earmarked Profits, Prioritized

Payments, etc.). This approach may

require a Licensee to perform a midmonth closing of its financial

statements, which may not be as clean

or convenient as a month-end closing.

However, SBA believes it is the only

approach which will accommodate all

potential distributions, particularly

distributions of securities on which

realized gain cannot be recognized

before the distribution date.

If a distribution to SBA includes a

redemption of Participating Securities,

the proposed rule specifies that the

effective date of the redemption will be

the next Payment Date following the

distribution date. This provision is

necessary because Participating

Securities are funded through the

purchase by investors of Trust

Certificates, under which principal can

be returned only on Payment Dates.

Because of this structure, a Licensee

will also be responsible for Prioritized

Payments through the next Payment

Date on the amount of Participating

Securities to be redeemed.

In-Kind Distributions by Licensees

Participating Securities issuers are

permitted to make distributions to SBA

in the form of securities under the

conditions set forth in § 107.1580. The

current regulation limits in-kind

distributions to those distributions

required or permitted by §§ 107.1560

and 107.1570. Distributions of

Prioritized Payments, which are

governed by § 107.1540, must be made

in cash. Because Prioritized Payments

precede any other distributions, this

limitation can have a potentially

significant effect on the timing and

value of distributions in general. To

alleviate this concern, proposed

§ 107.1580(a) would allow distributions
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53261

under §§ 107.1540, 107.1560 and

107.1570 to be made in the form of

securities. Distributions under

§ 107.1550 would continue to be

permitted on a cash-only basis, since the

stated purpose of such distributions is

to provide investors in flow-through

entities with sufficient cash to pay their

anticipated tax liabilities.

Characteristics of SBA’s Leverage

Guarantee

Section 303(b) of the Act authorizes

SBA to guarantee the timely payment of

all principal and interest as scheduled

on Debentures or Participating

Securities, pursuant to regulations

issued by the Agency. In the final rule

published January 31, 1996 (61 FR

3177), the section of the regulations

which implemented this provision of

the Act was dropped inadvertently.

Proposed § 107.1720 would restore the

previous language setting forth the

unconditional nature and other

characteristics of SBA’s guarantee.

Capital Impairment

SBA is not proposing any substantive

changes in the Capital Impairment

computations set forth in §§ 107.1830

through 107.1850, but is proposing one

clarification. Current § 107.1830(a) has

caused some confusion by stating that

the current Capital Impairment

regulations apply to a Licensee if it has

outstanding Leverage issued on or after

April 25, 1994. While this statement is

true, it is incomplete. This is because

SBA Leverage is subject to the Capital

Impairment regulations in effect on the

date the Leverage is issued. Thus, a

Licensee must comply with the current

impairment rules if it has Leverage

issued on or after April 25, 1994;

however, if it has Leverage issued before

that date as well, it must also comply

with the impairment rules in effect

when such Leverage was issued.

Proposed § 107.1830(a) would clarify

this point by specifically linking the

applicability of the Capital Impairment

regulations to the Leverage issued. In

the same paragraph, the proposed rule

would also state that a Licensee must

comply with any specific conditions to

which it has agreed by contract with

SBA. This is not a substantive change,

but simply makes explicit a Licensee’s

obligation to abide by the terms of any

agreement it has made with the Agency.

Miscellaneous Corrections and

Editorial Changes

The definition of ‘‘Commitment’’ in

§ 107.50 would be reworded in the third

person (i.e., to refer to ‘‘a Licensee’’

instead of ‘‘you’’) to conform to the style

in which the other definitions are

written.

In current § 107.720(c), the SIC code

for Operative Builders is incorrect. The

proposed rule contains the correct 4-

digit code (1531).

Proposed § 107.1590 sets forth special

rules applicable to Participating

Securities issuers licensed on or before

March 31, 1993. The proposed rule

would eliminate the current paragraph

(c), which allows Licensees to repay

outstanding Debentures with the

proceeds of newly issued Participating

Securities, subject to certain conditions.

Since this paragraph properly applies to

all Licensees, regardless of licensing

date, its content would be transferred to

the new proposed § 107.1585. The

substance of § 107.1590 would remain

unchanged.

In § 107.1600, references to section

321 of the Act would be changed to

section 319, reflecting the amendment

of the Act by Public Law 104–208.

In the definition of Trust Certificate

Rate and in §§ 107.1240 and

107.1520(a)(1), certain technical

changes have been proposed to facilitate

the interim Leverage funding

mechanism currently under

consideration by SBA.

Limited Liability Companies

Section 208(b)(1) of Public Law 104–

208 amended the Act to permit SBICs to

organize as limited liability companies

(LLCs). SBA is studying the legal and

administrative issues which may arise

in connection with LLCs, and will

publish a proposed rule to implement

this form of organization by SBICs at a

later date.

Although SBA regulations do not yet

provide for LLC Licensees, SBA has the

statutory authority to license such

companies. SBA’s current policy is to

accept a license application from an

LLC only if the LLC is organized under

Delaware’s Limited Liability Company

Act and does not intend to issue

Participating Securities, which SBA has

not yet developed in a form suitable for

use by an LLC. SBA may reconsider

these limitations as SBA acquires

greater familiarity with the LLC form of

organization and as a body of case law

is created under the various state LLC

laws. The adoption of a Uniform LLC

Act by a significant number of states

also would induce SBA to reexamine its

current preference for Delaware law.

Until SBA regulations are revised to

accommodate LLC Licensees, such

Licensees should understand that SBA

regards the members of the LLC to be

equivalent to the general partners in a

partnership Licensee unless the LLC’s

operating agreement clearly indicates

otherwise. Thus, all members of an LLC

Licensee will automatically be

considered Control Persons and

Associates of the Licensee unless the

LLC’s operating agreement vests

management authority only in certain

members of the company.

Compliance With Executive Orders,

12612, 12778, and 12866, the

Regulatory Flexibility Act (5 U.S.C. 601,

et seq.), and the Paperwork Reduction

Act (44 U.S.C. Ch. 35)

SBA certifies that this proposed rule

would not be a significant regulatory

action for purposes of Executive Order

12866 because it would not have an

annual effect on the economy of more

than $100 million, and that it would not

have a significant economic impact on

a substantial number of small entities

within the meaning of the Regulatory

Flexibility Act, 5 U.S.C. 601, et seq. The

purpose of the proposed rule is to

implement provisions of Public Law

104–208 which relate to small business

investment companies, and to make

certain other changes, primarily

technical corrections and clarifications,

to the regulations governing SBICs.

For purposes of the Paperwork

Reduction Act, 44 U.S.C. Ch. 35, SBA

certifies that this proposed rule, if

adopted in final form, would contain no

new reporting or recordkeeping

requirements that have not already been

approved by the Office of Management

and Budget.

For purposes of Executive Order

12612, SBA certifies that this rule

would not have any federalism

implications warranting the preparation

of a Federalism Assessment.

For purposes of Executive Order

12778, SBA certifies that this rule is

drafted, to the extent practicable, in

accordance with the standards set forth

in Section 2 of that Order.

List of Subjects in 13 CFR Part 107

Investment companies, Loan

programs-business, Reporting and

recordkeeping requirements, Small

businesses.

For the reasons set forth above, SBA

hereby proposes to amend Part 107 of

Title 13 of the Code of Federal

Regulations as follows:

PART 107—SMALL BUSINESS

INVESTMENT COMPANIES

1. The authority citation for part 107

continues to read as follows:

Authority: 15 U.S.C. 681 et seq., 683,

687(c), 687b, 687d, 687g and 687m, Pub. L.

104–208.

2. Section 107.50 is proposed to be

amended by revising the definitions for
53262 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

Commitment, Common Control,

Preferred Securities, Section 301(d)

Licensee, and Trust Certificate Rate, and

adding a definition of Charge, to read as

follows:

§ 107.50 Definitions of terms.

* * * * *

Charge means an annual fee on

Leverage issued on or after October 1,

1996 (except for Leverage issued

pursuant to a commitment made by SBA

before October 1, 1996), which is

payable to SBA by Licensees, subject to

the terms and conditions set forth in

107.1130(d).

* * * * *

Commitment means a written

agreement between a Licensee and an

eligible Small Business that obligates

the Licensee to provide Financing

(except a guarantee) to that Small

Business in a fixed or determinable

sum, by a fixed or determinable future

date. In this context the term

‘‘agreement’’ means that there has been

agreement on the principal economic

terms of the Financing. The agreement

may include reasonable conditions

precedent to the Licensee’s obligation to

fund the commitment, but these

conditions must be outside the

Licensee’s control.

Common Control means a condition

where two or more Persons, either

through ownership, management,

contract, or otherwise, are under the

Control of one group or Person. Two or

more Licensees are presumed to be

under Common Control if they are

Affiliates of each other by reason of

common ownership or common officers,

directors, or general partners; or if they

are managed or their investments are

significantly directed either by a

common independent investment

advisor or managerial contractor, or by

two or more such advisors or

contractors that are Affiliates of each

other. This presumption may be

rebutted by evidence satisfactory to

SBA.

* * * * *

Preferred Securities means nonvoting

preferred stock or nonvoting limited

partnership interests issued to SBA

prior to October 1, 1996, by a Section

301(d) Licensee. Such securities were

issued at par value in the case of

preferred stock, or at face value in the

case of preferred limited partnership

interests.

* * * * *

Section 301(d) Licensee means a

company licensed prior to October 1,

1996 under section 301(d) of the Act as

in effect on the date of licensing, that

may provide Assistance only to

Disadvantaged Businesses. A Section

301(d) Licensee may be organized as a

for-profit corporation, as a non-profit

corporation, or as a limited partnership.

* * * * *

Trust Certificate Rate means a fixed

rate determined by the Secretary of the

Treasury at the time Participating

Securities or Debentures are pooled,

taking into consideration the current

average market yield on outstanding

marketable obligations of the United

States with maturities comparable to the

maturities of the Trust Certificates being

guaranteed by SBA, adjusted to the

nearest one-eighth of one percent.

* * * * *

§ 107.110 [Removed]

3. Section 107.110 is proposed to be

removed.

4. Section 107.120 is proposed to be

revised to read as follows:

§ 107.120 Special rules for a Section

301(d) Licensee owned by another

Licensee.

A Section 301(d) Licensee which was

licensed to operate as the subsidiary of

one or more Licensees (participant

Licensees) may continue to do so,

subject to the following:

(a) Each participant Licensee must

continue to own at least 20 percent of

the voting securities of the Section

301(d) Licensee.

(b) A participant Licensee must

continue to treat its entire capital

contribution to the subsidiary as a

reduction of its Leverageable Capital.

The participant Licensee’s remaining

Leverageable Capital must be sufficient

to support its outstanding Leverage.

(c) A participant Licensee may not

transfer its Leverage to a subsidiary

Section 301(d) Licensee.

5. In § 107.150, the introductory text

of paragraph (a)(1) is proposed to be

revised to read as follows:

§ 107.150 Management and ownership

diversity requirement.

* * * * *

(a) Requirement one. * * *

(1) At least 30 percent of your

Regulatory Capital and Leverageable

Capital must be owned by Persons

unrelated to management. To satisfy this

requirement, such Persons must not be

your Associates (except for their status

as your shareholders or limited

partners) and must not Control, be

Controlled by, or be under Common

Control with any of your Associates.

You must have as investors at least three

such Persons who are not Affiliates of

one another and whose investments are

significant in both dollar and percentage

terms, as determined by SBA. As an

alternative, you may substitute one

investor who is an acceptable

Institutional Investor for the three

investors who are otherwise required.

For purposes of this paragraph (a)(1),

the following Institutional Investors are

acceptable:

* * * * *

6. Section 107.210 is proposed to be

revised to read as follows:

§ 107.210 Minimum capital requirements

for Licensees.

(a) Companies licensed on or after

October 1, 1996. A company licensed on

or after October 1, 1996 must have

Leverageable Capital of at least

$2,500,000 and must meet the

applicable minimum Regulatory Capital

requirement:

(1) Licensees other than Participating

Securities issuers. A Licensee that does

not wish to be eligible to apply for

Participating Securities must have

Regulatory Capital of at least

$5,000,000. As an exception to this

general rule, SBA in its sole discretion

and based on a showing of special

circumstances and good cause may

license an applicant with Regulatory

Capital of at least $3,000,000, but only

if the applicant:

(i) Has satisfied all licensing

standards and requirements except the

minimum capital requirement, as

determined solely by SBA;

(ii) Has a viable business plan

reasonably projecting profitable

operations; and

(iii) Has a reasonable timetable for

achieving Regulatory Capital of at least

$5,000,000.

(2) Participating Securities issuers. A

Licensee that wishes to be eligible to

apply for Participating Securities must

have Regulatory Capital of at least

$10,000,000, unless it demonstrates to

SBA’s satisfaction that it can be

financially viable over the long term

with a lower amount. Under no

circumstances can the Licensee have

Regulatory Capital of less than

$5,000,000.

(b) Companies licensed before

October 1, 1996. A company licensed

before October 1, 1996 must meet the

minimum capital requirements

applicable to such company, as required

by the regulations in effect on

September 30, 1996. See

§ 107.1120(c)(2) for Leverage eligibility

requirements.

§ 107.220 [Removed]

7. Section 107.220 is proposed to be

removed.

8. Section 107.230 is proposed to be

amended by revising the introductory
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53263

text of paragraph (d)(4) to read as

follows:

§ 107.230 Permitted sources of Private

Capital for Licensees.

* * * * *

(d) Qualified Non-private Funds.

* * *

(4) Funds invested in or committed in

writing to any Section 301(d) Licensee

prior to October 1, 1996, from the

following sources: * * *

* * * * *

9. In § 107.503, paragraphs (a), (b) and

(e), and the heading and first sentence

of paragraph (c), are proposed to be

revised to read as follows:

§ 107.503 Licensee’s adoption of an

approved valuation policy.

(a) Valuation guidelines. You must

prepare, document and report the

valuations of your Loans and

Investments in accordance with the

Valuation Guidelines for SBICs issued

by SBA. These guidelines may be

obtained from SBA’s Investment

Division.

(b) SBA approval of valuation policy.

You must have a written valuation

policy approved by SBA for use in

determining the value of your Loans and

Investments. You must either:

(1) Adopt without change the model

valuation policy set forth in section III

of the Valuation Guidelines for SBICs;

or

(2) Obtain SBA’s prior written

approval of an alternative valuation

policy.

(c) Responsibility for valuations. Your

board of directors or general partner(s)

will be solely responsible for adopting

your valuation policy and for using it to

prepare valuations of your Loans and

Investments for submission to SBA.

* * *

* * * * *

(e) Review of valuations by

independent public accountant. (1) For

valuations performed as of the end of

your fiscal year, your independent

public accountant must review your

valuation procedures and the

implementation of such procedures,

including adequacy of documentation.

(2) The independent public

accountant’s report on your audited

annual financial statements (SBA Form

468) must include a statement that your

valuations were prepared in accordance

with your approved valuation policy

established in accordance with section

310(d)(2) of the Act.

10. Section 107.660 is proposed to be

amended by redesignating paragraph (d)

as paragraph (e) and by adding a new

paragraph (d) to read as follows:

§ 107.660 Other items required to be filed

by Licensee with SBA.

* * * * *

(d) Notification of criminal charges. If

any officer, director, general partner or

other Control Person is charged with or

convicted of any criminal offense other

than a misdemeanor involving a minor

motor vehicle violation, you must report

the incident to SBA within 5 calendar

days. Such report must fully describe

the facts which pertain to the incident.

* * * * *

11. Section 107.710 is proposed to be

amended by adding a sentence at the

end of paragraph (e) and by revising

paragraphs (b) and (c) to read as follows:

§ 107.710 Requirement to finance Smaller

Enterprises.

* * * * *

(b) Smaller Enterprise Financings. (1)

General rule. At the close of each of

your fiscal years, at least 20 percent of

the total dollar amount of the

Financings you extended since April 25,

1994 must have been invested in

Smaller Enterprises. If you were

licensed after April 25, 1994, the 20

percent requirement applies to the total

dollar amount of the Financings you

extended since you were licensed plus

any pre-licensing investments approved

by SBA for inclusion in your Regulatory

Capital.

(2) Phase-in for new Licensees. At the

close of your first full fiscal year after

licensing, at least 10 percent of the total

dollar amount of the Financings you

extended, including any pre-licensing

investments approved by SBA for

inclusion in your Regulatory Capital,

must have been invested in Smaller

Enterprises. At the close of each fiscal

year thereafter, you must meet the

requirement in paragraph (b)(1) of this

section.

(c) Special requirement for certain

leveraged Licensees. (1) This paragraph

(c) applies if you were licensed on or

before September 30, 1996, and you

issued Leverage after that date, and you

have Regulatory Capital of:

(i) Less than $10,000,000 if such

Leverage was Participating Securities; or

(ii) Less than $5,000,000 if such

Leverage was Debentures.

(2) At the close of each of your fiscal

years, at least 50 percent of the total

dollar amount of the Financings you

extended after September 30, 1996 must

have been invested in Smaller

Enterprises.

* * * * *

(e) Non-compliance with this section.

* * * However, you will not be eligible

for additional Leverage until you reach

the required percentage (see § 107.1120

(c) and (d)).

12. In § 107.720, paragraph (b)(2) and

the introductory text of paragraph (c)(1)

are proposed to be revised to read as

follows:

§ 107.720 Small Businesses that may be

ineligible for Financing.

* * * * *

(b) Passive businesses. * * *

(2) Exception for pass-through of

proceeds to subsidiary. You may finance

a passive business if it is a Small

Business and it passes substantially all

the proceeds through to one or more

subsidiary companies, each of which is

an eligible Small Business that is not

passive. For the purpose of this

paragraph (b)(2), ‘‘subsidiary company’’

means a company in which at least 50

percent of the outstanding voting

securities are owned by the Financed

passive business.

(c) Real estate businesses. (1) You are

not permitted to finance any business

classified under Major Group 65 (Real

Estate) or Industry No. 1531 (Operative

Builders) of the SIC Manual, with the

following exceptions: * * *

* * * * *

13. In § 107.730, paragraph (d)(3)(iv)

is proposed to be revised to read as

follows:

§ 107.730 Financings which constitute

conflicts of interest.

* * * * *

(d) Financings with Associates. * * *

(3) Exceptions to paragraphs (d)(1)

and (d)(2) of this section. * * *

(iv) Both you and your Associate are

non-leveraged Licensees, or you are a

non-leveraged Licensee and your

Associate is not a Licensee.

* * * * *

14. In § 107.740, paragraph (a) is

proposed to be revised to read as

follows:

§ 107.740 Portfolio diversification

(‘‘overline’’ limitation).

(a) General rule. This § 107.740

applies if you have outstanding

Leverage or want to be eligible for

Leverage. Without SBA’s prior written

approval, you may provide Financing or

a Commitment to a Small Business only

if the resulting amount of your aggregate

outstanding Financings and

Commitments to such Small Business

and its Affiliates does not exceed:

(1) 20 percent of your Regulatory

Capital as of the date of the Financing

or Commitment if you are a Section

301(c) Licensee; or

(2) 30 percent of your Regulatory

Capital as of the date of the Financing

or Commitment if you are a Section

301(d) Licensee.

* * * * *
53264 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

15. Section 107.855 is proposed to be

amended by revising paragraphs (c)(1),

(c)(4)(i) and (d)(4), redesignating

paragraphs (g)(1) through (g)(10) as

paragraphs (g)(2) through (g)(11), and

adding a new paragraph (g)(1) to read as

follows:

§ 107.855 Interest rate ceiling and

limitations on fees charged to Small

Businesses (‘‘Cost of Money’’)

* * * * *

(c) How to determine the Cost of

Money ceiling for a Financing. * * *

(1) Choose a base rate for your Cost of

Money computation. The base rate may

be either the Debenture Rate currently

in effect plus the applicable Charge

determined under § 107.1130(d)(1), or

your own ‘‘Cost of Capital’’ as

determined under paragraph (d) of this

section.

* * * * *

(4) * * *

(i) The current Debenture Rate plus

the applicable Charge determined under

§ 107.1130(d)(1);

* * * * *

(d) How to determine your Cost of

Capital. * * *

(4) For all qualified borrowings

outstanding at your last fiscal year or

fiscal quarter end, determine the

aggregate interest expense for the past

four fiscal quarters, excluding

amortization of loan fees. For the

purposes of this paragraph (d)(4):

(i) Interest expense on Debentures

includes the 1 percent Charge paid by

a Licensee under § 107.1130(d)(1); and

(ii) Section 301(d) Licensees with

outstanding subsidized Debentures are

presumed to have paid interest at the

rate stated on the face of such

Debentures, without regard to any

subsidy paid by SBA.

* * * * *

(g) Charges excluded from the Cost of

Money. * * *

(1) Discount on the loan portion of a

Debt Security, if such discount exists

solely as the result of the allocation of

value to detachable stock purchase

warrants in accordance with generally

accepted accounting principles.

* * * * *

16. In § 107.865, the first sentence of

paragraph (c)(2) and paragraph (d)(1) are

proposed to be revised to read as

follows:

§ 107.865 Restrictions on Control of a

Small Business by a Licensee.

* * * * *

(c) Rebuttals to presumption of

Control. * * *

(2) The management of the Small

Business can elect at least 40 percent of

the board members of a corporation,

general partners of a limited

partnership, or managers of a limited

liability company, as appropriate, and

the Investor Group can elect no more

than 40 percent. * * *

* * * * *

(d) Temporary Control permitted.

* * *

(1) Where reasonably necessary for

the protection of your existing

investment;

* * * * *

17. Section 107.1100 is proposed to be

revised to read as follows:

§ 107.1100 Types of Leverage and

application forms.

(a) Types of Leverageable available.

You may apply for Leverage from SBA

in one or both of the following forms:

(1) The purchase or guarantee of your

Debentures.

(2) The purchase or guarantee of your

Participating Securities.

(b) Application forms. Use SBA Form

1022 to apply for Debentures and SBA

Form 1022B to apply for Participating

Securities.

(c) Where to send your application.

Send all Leverage applications to SBA,

Investment Division, 409 Third Street,

S.W., Washington, DC 20416.

§ 107.1110 [Removed]

18. Section 107.1110 is proposed to be

removed.

19. Section 107.1120 is proposed to be

amended by revising paragraph (c),

redesignating paragraphs (d) through (f)

as paragraphs (e) through (g), and

adding a new paragraph (d) to read as

follows:

§ 107.1120 General eligibility requirements

for Leverage.

* * * * *

(c) Meet the minimum capital

requirements of § 107.210, subject to the

following additional conditions:

(1) If you were licensed after

September 30, 1996 under the exception

in § 107.210(a)(1), you will not be

eligible for Leverage until you have

Regulatory Capital of at least

$5,000,000.

(2) If you were licensed on or before

September 30, 1996, and have

Regulatory Capital of less than

$5,000,000 (less than $10,000,000 if you

wish to issue Participating Securities):

(i) You must certify in writing that at

least 50 percent of the aggregate dollar

amount of your Financings extended

after September 30, 1996 will be

provided to Smaller Enterprises (as

defined in § 107.710(a)); and

(ii) You must demonstrate to SBA’s

satisfaction that the approval of

Leverage will not create or contribute to

an unreasonable risk of default or loss

to the United States government, based

on such measurements of profitability

and financial viability as SBA deems

appropriate.

(d) Certify in writing that you are in

compliance with the requirement to

finance Smaller Enterprises in

§ 107.710(b).

* * * * *

20. Section 107.1130 is proposed to be

amended by revising the heading and

paragraphs (a) through (c), redesignating

paragraph (d) as paragraph (e), and

adding a new paragraph (d) to read as

follows:

§ 107.1130 Leverage fees and additional

charges payable by Licensee.

(a) Leverage fee. You must pay a

leverage fee to SBA for each issuance of

a Debenture or Participating Security.

The fee is 3 percent of the face amount

of the Leverage issued.

(b) Payment of leverage fee. (1) If you

issue a Debenture or Participating

Security to repay or redeem existing

Leverage, you must pay the leverage fee

before SBA will guarantee or purchase

the new Leverage security.

(2) If you issue a Debenture or

Participating Security that is not used to

repay or redeem existing Leverage, SBA

will deduct the leverage fee from the

proceeds remitted to you, unless you

prepaid the fee under § 107.1210.

(c) Refundability. The leverage fee is

not refundable under any

circumstances.

(d) Additional charge for Leverage.—

(1) Debentures. You must pay to SBA a

Charge of 1 percent per annum on the

outstanding amount of your Debentures

issued on or after October 1, 1996,

payable under the same terms and

conditions as the interest on the

Debentures. This Charge does not apply

to Debentures issued pursuant to a

Leverage commitment obtained from

SBA on or before September 30, 1996.

(2) Participating Securities. You must

pay to SBA a Charge of 1 percent per

annum on the outstanding amount of

your Participating Securities issued on

or after October 1, 1996, payable under

the same terms and conditions as the

Prioritized Payments on the

Participating Securities. This Charge

does not apply to Participating

Securities issued pursuant to a Leverage

commitment obtained from SBA on or

before September 30, 1996.

* * * * *

21. Section 107.1160 is proposed to be

amended by adding introductory text to

read as follows:
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53265

§ 107.1160 Maximum amount of Leverage

for a Section 301(d) Licensee.

This section applies to Leverage

issued by a Section 301(d) Licensee on

or before September 30, 1996. Effective

October 1, 1996, a Section 301(d)

Licensee may apply to issue new

Leverage, or refinance existing Leverage,

only on the same terms permitted under

§ 107.1150.

* * * * *

22. Section 107.1200 is proposed to be

amended by revising paragraphs (c) and

(d) to read as follows:

§ 107.1200 SBA’s Leverage commitment to

a Licensee—application procedure, amount,

and term.

* * * * *

(c) Limitations on the amount of a

Leverage commitment. The amount of a

Leverage commitment must be a

multiple of $5,000.

(d) Term of Leverage commitment.

SBA’s Leverage commitment will

automatically lapse on the expiration

date stated in the commitment letter

issued to you by SBA.

23. Section 107.1210 is proposed to be

revised to read as follows:

§ 107.1210 Payment of leverage fee upon

receipt of commitment.

(a) Prepayment of leverage fee. As a

condition of SBA’s Leverage

commitment, and before you draw any

Leverage, you must prepay the leverage

fee established under § 107.1130(a). The

fee is equal to 3 percent of the face

amount of the Debentures or

Participating Securities reserved under

the commitment.

(b) Automatic cancellation of

commitment. Unless you pay the full

amount of the leverage fee by 5 P.M.

Eastern Time on the 30th calendar day

following the issuance of SBA’s

Leverage commitment, the commitment

will be automatically canceled.

24. In § 107.1230, paragraphs (a) and

(b) are proposed to be revised to read as

follows:

§ 107.1230 Draw-downs by Licensee under

SBA’s Leverage commitment.

(a) Licensee’s authorization of SBA to

purchase or guarantee securities. By

submitting a request for a draw against

SBA’s Leverage commitment, you

authorize SBA, or any agent or trustee

SBA designates, to guarantee your

Debenture or Participating Security and

to sell it with SBA’s guarantee.

(b) Limitations on amount of draw.

The amount of a draw must be a

multiple of $5,000. SBA, in its

discretion, may determine a minimum

dollar amount for draws against SBA’s

Leverage commitments. Any such

minimum amounts will be published in

Notices in the Federal Register from

time to time.

* * * * *

25. Section 107.1240 is proposed to be

amended by revising paragraphs (a)(1),

(b), (c) and (d) to read as follows:

§ 107.1240 Funding of Licensee’s draw

request through sale to short-term investor.

(a) Licensee’s authorization of SBA to

arrange sale of securities to short-term

investor. * * *

(1) The sale of your Debenture or

Participating Security to a short-term

investor at a rate that may be different

from the Trust Certificate Rate which

will be established at the time of the

pooling of your security;

* * * * *

(b) Sale of Debentures to a short-term

investor. If SBA sells your Debenture to

a short-term investor:

(1) The sale price will be the face

amount.

(2) At the next scheduled date for the

sale of Debenture Trust Certificates,

whether or not the sale actually occurs,

you must pay interest to the short-term

investor for the short-term period. If the

actual sale of Trust Certificates takes

place after the scheduled date, you must

pay the short-term investor interest from

the scheduled sale date to the actual

sale date. This additional interest is due

on the actual sale date.

(3) Failure to pay the interest

constitutes noncompliance with the

terms of your Leverage (see § 107.1810).

(c) Sale of Participating Securities to

a short-term investor. If SBA sells your

Participating Security to a short-term

investor, the sale price will be the face

amount.

(d) Licensee’s right to repurchase its

Debentures before pooling. You may

repurchase your Debentures from the

short-term investor before they are

pooled. To do so, you must:

(1) Give SBA written notice at least 10

days before the cut-off date for the pool

in which your Debenture is to be

included; and

(2) Pay the face amount of the

Debenture, plus interest, to the shortterm investor.

26. Subpart I of Part 107 is proposed

to be amended by removing the

undesignated center heading ‘‘Exchange

of Outstanding Debentures for

Participating or Preferred Securities—

Section 301(d) Licensees’’, by

redesignating § 107.1350 as § 107.1585,

and by revising redesignated § 107.1585

to read as follows:

§ 107.1585 Exchange of Debentures for

Participating Securities.

You may, in SBA’s discretion, retire a

Debenture through the issuance of

Participating Securities. To do so, you

must:

(a) Obtain SBA’s approval to issue

Participating Securities;

(b) Pay all unpaid accrued interest on

the Debenture, plus any applicable

prepayment penalties, fees, and other

charges;

(c) Have outstanding Equity Capital

Investments (at cost) equal to the

amount of the Debenture being

refinanced; and

(d) Classify all your existing Loans

and Investments as Earmarked Assets.

27. In § 107.1400, the heading and

introductory text are proposed to be

revised to read as follows:

§ 107.1400 Dividends or partnership

distributions on 4 percent Preferred

Securities.

If you issued Preferred Securities to

SBA on or after November 21, 1989, you

must pay SBA a dividend or partnership

distribution of 4 percent per year, from

the date you issued Preferred Securities

to the date you repay them, both

inclusive. The dividend or partnership

distribution is:

* * * * *

28. Section 107.1420 is proposed to be

revised to read as follows:

§ 107.1420 Articles requirements for 4

percent Preferred Securities.

If you have outstanding 4 percent

Preferred Securities, your Articles must

contain all the provisions in §§ 107.1400

and 107.1410.

§ 107.1430 [Amended]

29. Section 107.1430 is proposed to be

revised by removing the last sentence.

30. In § 107.1500, paragraphs (b)(1)

and (b)(4), the last sentence of paragraph

(e), and paragraph (f)(2) are proposed to

be revised to read as follows:

§ 107.1500 General description of

Participating Securities.

* * * * *

(b) Special eligibility requirements for

Participating Securities. * * *

(1) Minimum capital (see § 107.210).

* * * * *

(4) Equity investing, as set forth in

this paragraph (b)(4). If you issue

Participating Securities, you must invest

an amount equal to the Original Issue

Price of such securities solely in Equity

Capital Investments, as defined in

§ 107.50.

* * * * *

(e) Mandatory redemption of

Participating Securities. * * * You

must pay the Redemption Price plus any

unpaid Earned Prioritized Payments and

any earned Adjustments and earned

Charges (see § 107.1520).
53266 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

(f) Priority of Participating Securities

in liquidation of Licensee. * * *

(2) Any Earned Prioritized Payments

and any earned Adjustments and earned

Charges (see § 107.1520); and

* * * * *

31. In § 107.1505, the last sentence of

paragraph (a) and paragraph (b) are

proposed to be revised to read as

follows:

§ 107.1505 Liquidity requirements for

licensees issuing Participating Securities.

(a) Definition of Liquidity Impairment.

* * * You are responsible for calculating

whether you have a condition of

Liquidity Impairment:

(1) As of the close of your fiscal year;

(2) At the time you apply for

Leverage, unless SBA permits

otherwise; and

(3) At such time as you contemplate

making any Distribution.

(b) Computation of Liquidity Ratio.

Your Liquidity Ratio equals your Total

Current Funds Available (A) divided by

your Total Current Funds Required (B),

as determined in the following table:

CALCULATION OF LIQUIDITY RATIO

Financial account

Amount reported on SBA

Form 468

Weight Weighted amount

(1) Cash and invested idle funds ............................................................................................. .......................... × 100 ..............................

(2) Commitments from investors .............................................................................................. .......................... × 1.00 ..............................

(3) Current maturities ............................................................................................................... .......................... × 0.50 ..............................

(4) Other current assets ........................................................................................................... .......................... × 1.00 ..............................

(5) Publicly Traded and Marketable Securities ........................................................................ .......................... × 1.00 ..............................

(6) Anticipated operating revenue for next 12 months (1) ....................................................... .......................... × 1.00 ..............................

(7) Total Current Funds Available ............................................................................................ .......................... A

(8) Current liabilities ................................................................................................................. .......................... × 1.00 ..............................

(9) Commitments to Small Businesses .................................................................................... .......................... × 0.75 ..............................

(10) Anticipated operating expense for next 12 months ......................................................... (1) × 1.00 ..............................

(11) Anticipated interest expense for next 12 months ............................................................. (1) × 1.00 ..............................

(12) Contingent liabilities (guarantees) .................................................................................... .......................... × 0.25 ..............................

(13) Total Current Funds Required .......................................................................................... .......................... B

1As determined by Licensee’s management under its business plan.

* * * * *

32. In § 107.1510, the introductory

text, the last sentence of paragraph (c)

and paragraph (d)(1)(ii) are proposed to

be revised to read as follows:

§ 107.1510 How a Licensee computes

Earmarked Profit (Loss).

Computing your Earmarked Profit

(Loss) is the first step in determining

your obligations to pay Prioritized

Payments, Adjustments and Charges

under § 107.1520 and Profit

Participation under § 107.1530.

* * * * *

(c) How to compute your Earmarked

Asset Ratio. * * * Otherwise, compute

your Earmarked Asset Ratio using the

following formula:

EAR = (EA)(LI) × 100

where:

EAR=Earmarked Asset Ratio

EA=Average Earmarked Assets (at

cost) for the fiscal year or interim

period

LI=Average Loans and Investments (at

cost) for the fiscal year or interim

period

(d) How to compute your Earmarked

Profit (Loss) if Earmarked Asset Ratio is

100 percent. * * *

(1) * * *

(ii) For the purpose of determining

Net Income (Loss), leverage fees paid to

SBA and partnership syndication costs

that you incur must be capitalized and

amortized on a straight-line basis over

not less than five years.

* * * * *

33. Section 107.1520 is proposed to be

revised to read as follows:

§ 107.1520 How a Licensee computes and

allocates Prioritized Payments to SBA.

This section tells you how to compute

Prioritized Payments, Adjustments and

Charges on Participating Securities and

determine the amounts you must pay.

To distribute these amounts, see

§ 107.1540.

(a) How to compute Prioritized

Payments and Adjustments—(1)

Prioritized Payments. For a full fiscal

year, the Prioritized Payment on an

outstanding Participating Security

equals the Redemption Price times the

related Trust Certificate Rate. For an

interim period, you must prorate the

annual Prioritized Payment. If your

Participating Security was sold to a

short-term investor in accordance with

§ 107.1240, the Prioritized Payment for

the short-term period equals the

Redemption Price times the short-term

rate.

(2) Adjustments. Compute

Adjustments using paragraph (f) of this

section.

(3) Charges. Compute Charges in

accordance with § 107.1130(d)(2).

(b) Licensee’s obligation to pay

Prioritized Payments, Adjustments and

Charges. You are obligated to pay

Prioritized Payments, Adjustments and

Charges only if you have profit as

determined in paragraph (d) of this

section.

(1) Prioritized Payments that you

must pay (or have already paid) because

you have sufficient profit are ‘‘Earned

Prioritized Payments’’.

(2) Prioritized Payments that have not

become payable because you lack

sufficient profit are ‘‘Accumulated

Prioritized Payments’’. Treat all

Prioritized Payments as ‘‘Accumulated’’

until they become ‘‘Earned’’ under this

section.

(3) Adjustments (computed under

paragraph (f) of this section) and

Charges (computed under

§ 107.1130(d)(2)) are ‘‘earned’’ according

to the same criteria applied to

Prioritized Payments.

(c) How to keep track of Prioritized

Payments. You must establish three

accounts to record your Accumulated

and Earned Prioritized Payments:

(1) Accumulation Account. The

Accumulation Account is a

memorandum account. Its balance

represents your Accumulated

Prioritized Payments, unearned

Adjustments and unearned Charges.

(2) Distribution Account. The

Distribution Account is a liability

account. Its balance represents your

unpaid Earned Prioritized Payments,

earned Adjustments and earned

Charges.
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53267

(3) Earned Payments Account. The

Earned Payments Account is a

memorandum account. Each time you

add to the Distribution Account balance,

add the same amount to the Earned

Payments Account. Its balance

represents your total (paid and unpaid)

Earned Prioritized Payments, earned

Adjustments and earned Charges.

(d) How to determine your profit for

Prioritized Payment purposes. As of the

end of each fiscal year and any interim

period for which you want to make a

Distribution:

(1) Bring the Accumulation Account

up to date by adding to it all Prioritized

Payments and Charges through the end

of the appropriate fiscal period.

(2) Determine whether you have profit

for the purposes of this section by doing

the following computation:

(i) Cumulative Earmarked Profit (Loss)

under § 107.1510(f); minus

(ii) The Earned Payments Account

balance; minus

(iii) All Distributions previously made

under §§ 107.1550, 107.1560 and

107.1570(a); minus

(iv) Any Profit Participation

previously allocated to SBA under

§ 107.1530, but not yet distributed.

(3) The amount computed in

paragraph (d)(2) of this section, if

greater than zero, is your profit. If the

amount is zero or less, you have no

profit.

(4) If you have a profit, continue with

paragraph (e) of this section. Otherwise,

continue with paragraph (f) of this

section.

(e) Allocating Prioritized Payments to

the Distribution Account. (1) If you have

a profit under paragraph (d) of this

section, determine the lesser of:

(i) Your profit; or

(ii) The balance in your Accumulation

Account.

(2) Subtract the result in paragraph

(e)(1) of this section from the

Accumulation Account and add it to the

Distribution Account and the Earned

Payments Account.

(f) How to compute Adjustments. You

must compute Adjustments as of the

end of each fiscal year if you have a

balance greater than zero in either your

Accumulation Account or your

Distribution Account, after giving effect

to any Distribution that will be made no

later than the second Payment Date

following the fiscal year end.

(1) Determine the combined average

Accumulation Account and Distribution

Account balances for the fiscal year,

assuming that Prioritized Payments

accumulate on a daily basis without

compounding.

(2) Multiply the average balance

computed in paragraph (f)(1) of this

section by the average of the Trust

Certificate Rates for all the Participating

Securities poolings during the fiscal

year.

(3) Add the amounts computed in this

paragraph (f) to your Accumulation

Account.

(g) Licensee’s obligation to pay

Prioritized Payments after redeeming

Participating Securities. This paragraph

(g) applies if you have redeemed all

your Participating Securities, but you

still hold Earmarked Assets and still

have a balance in your Accumulation

Account.

(1) You must continue to perform all

the procedures in this § 107.1520 as of

the end of each fiscal quarter and prior

to making any Distribution. You must

distribute any Earned Prioritized

Payments, earned Adjustments and

earned Charges in accordance with

§ 107.1540.

(2) After you dispose of all your

Earmarked Assets and make any

required Distributions in accordance

with § 107.1540, your obligation to pay

any remaining Accumulated Prioritized

Payments, unearned Adjustments and

unearned Charges will be extinguished.

34. Section 107.1530 is proposed to be

amended by removing paragraphs (e)(3)

and (e)(4) and revising paragraphs (c),

(e)(2) and (h) to read as follows:

§ 107.1530 How a Licensee computes

SBA’s Profit Participation.

* * * * *

(c) How to compute the Base. As of

the end of each fiscal year and any yearto-date interim period for which you

want to make a Distribution, compute

your Base using the following formula:

B = EP¥PPA¥UL

where:

B=Base

EP=Earmarked Profit (Loss) for the

period from § 107.1510

PPA=Prioritized Payments for the

period from § 107.1520(a)(1),

Adjustments (if applicable) from

§ 107.1520(f), and Charges (if

applicable) from § 107.1130(d)(2)

UL=‘‘Unused Loss’’ from prior

periods as determined in this

paragraph (c).

(1) If the Base computed as of the end

of your previous fiscal year (your

‘‘Previous Base’’) was less than zero,

your Unused Loss equals your Previous

Base.

(2) If your Previous Base was zero or

greater, your Unused Loss equals zero,

with the following exception: If you

made an interim Distribution of Profit

Participation during your previous fiscal

year, and your Previous Base was lower

than the interim Base on which your

Distribution was computed, then your

Unused Loss equals the difference

between the interim Base and the

Previous Base. For example, assume you

are computing your Base as of December

31, 1997, your fiscal year end. Your

Previous Base, computed as of

December 31, 1996, was $3,000,000.

During 1996, you made an interim

Distribution which was computed on a

Base of $3,500,000 as of June 30, 1996.

The $500,000 difference between the

1996 interim and year-end Bases would

be carried forward as Unused Loss in

the computation of your Base as of

December 31, 1997.

(3) If you had no Participating

Securities outstanding as of the end of

your last fiscal year, you may request

SBA’s approval to treat your

Undistributed Net Realized Loss, as

reported on SBA Form 468 for that year,

as Unused Loss. If you did not file SBA

Form 468 because you were not yet

licensed as of the end of your last fiscal

year, you may request SBA’s approval to

treat pre-licensing losses as Unused

Loss.

* * * * *

(e) Compute the ‘‘PLC ratio’’. * * *

(2) Exception. You may reduce the

ratio computed under paragraph (e)(1)

of this section if you have increased

your Leverageable Capital above its

highest previous level. The increase

must have taken place at least 120 days

before the date as of which your Base is

computed. In addition, the increase

must have been expressly provided for

in a plan of operations submitted to and

approved by SBA in writing, or must be

the result of the takedown of

commitments or the conversion of noncash assets that were included in your

Private Capital. If these conditions are

satisfied, compute your reduced PLC

ratio as follows:

(i) Divide the highest dollar amount of

Participating Securities you have ever

had outstanding by your increased

Leverageable Capital.

(ii) If the result in paragraph (e)(2)(i)

is lower than your PLC ratio currently

in effect, such result will become your

new PLC ratio.

* * * * *

(h) Computing SBA’s Profit

Participation. If the Base from paragraph

(c) of this section is greater than zero,

you must compute SBA’s Profit

Participation as follows:

(1) Multiply the Base from paragraph

(c) by the Profit Participation Rate from

paragraph (g).

(2) If your last Profit Participation

computation was for an interim period

during the same fiscal year and used a

higher Profit Participation Rate than the
53268 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

Rate you just used in paragraph (h)(1) of

this section, you must adjust the amount

computed in paragraph (h)(1) as follows:

(i) Determine the difference between

the Profit Participation Rate you just

used in paragraph (h)(1) and the Rate

used in your previous computation;

(ii) Multiply the difference by the

Base from your last Profit Participation

computation; and

(iii) Add the result to the amount you

computed in paragraph (h)(1).

(3) Reduce the Profit Participation

computed in paragraphs (h)(1) and

(h)(2) by any amounts of Profit

Participation that you distributed or

reserved for distribution to SBA, or its

designated agent or Trustee, for any

previous interim period(s) during the

fiscal year. The result is SBA’s Profit

Participation (unless it is less than zero,

in which case SBA’s Profit Participation

is zero).

* * * * *

35. Section 107.1540 is proposed to be

amended by adding a sentence at the

end of the introductory text to read as

follows:

§ 107.1540 Distributions by Licensee—

Prioritized Payment and Adjustments.

* * * You must notify SBA of any

planned distribution under this section

10 business days before the distribution

date, unless SBA permits otherwise.

* * * * *

36. Section 107.1550 is proposed to be

amended by adding a sentence at the

end of the introductory text and by

revising paragraphs (a)(1) and (b) to read

as follows:

§ 107.1550 Distributions by Licensee—

permitted ‘‘tax Distributions’’ to private

investors and SBA.

* * * You must notify SBA of any

planned distribution under this section

10 business days before the distribution

date, unless SBA permits otherwise.

(a) Conditions for making a tax

Distribution. * * *

(1) You have paid all your Prioritized

Payments, Adjustments, and Charges, so

that the balance in both your

Distribution Account and your

Accumulation Account is zero (see

§ 107.1520).

* * * * *

(b) How to compute the Maximum

Tax Liability. (1) Compute your

Maximum Tax Liability for a full fiscal

year only. Use the following formula:

M=(TOI × HRO) + (TCG x HRC)

where:

M=Maximum Tax Liability

TOI=Net ordinary income allocated to

your partners or other owners for

Federal income tax purposes for the

fiscal year immediately preceding

the Distribution, excluding

Prioritized Payments allocated to

SBA

HRO=The highest combined marginal

Federal and State income tax rate

for corporations or individuals on

ordinary income, determined in

accordance with paragraphs (b)(2)

through (b)(4) of this section

TCG=Net capital gains allocated to

your partners or other owners for

Federal income tax purposes for the

fiscal year immediately preceding

the Distribution, excluding

Prioritized Payments allocated to

SBA

HRC=The highest combined marginal

Federal and State income tax rate

for corporations or individuals on

capital gains, determined in

accordance with paragraphs (b)(2)

through (b)(4) of this section.

(2) You may compute the highest

combined marginal Federal and State

income tax rate on ordinary income and

capital gains using either individual or

corporate rates. However, you must

apply the same type of rate, either

individual or corporate, to both ordinary

income and capital gains.

(3) In determining the combined

Federal and State income tax rate, you

must assume that State income taxes are

deductible from Federal income taxes.

For example, if the Federal tax rate was

35 percent and the State tax rate was 5

percent, the combined tax rate would be

[35% × (1¥.05)]+5% = 38.25%.

(4) For purposes of this paragraph (b),

the ‘‘State income tax’’ is that of the

State where your principal place of

business is located, and does not

include any local income taxes.

* * * * *

37. In § 107.1560, in the first column

of the table in paragraph (e), the column

heading is proposed to be revised to

read ‘‘If your ratio of Leverage to

Leverageable Capital as of the fiscal

period end is:’’, a sentence is proposed

to be added at the end of the

introductory text, and paragraphs (a)(1),

(a)(4) and (b) are proposed to be revised

to read as follows:

§ 107.1560 Distributions by Licensee—

required Distributions to private investors

and SBA.

* * * You must notify SBA of any

planned distribution under this section

10 business days before the distribution

date, unless SBA permits otherwise.

(a) Conditions for making

distributions. * * *

(1) You must have paid all Prioritized

Payments, Adjustments and Charges, so

that the balance in both your

Distribution Account and your

Accumulation Account is zero (see

§§ 107.1520 and 107.1540).

* * * * *

(4) The amount you distribute under

this section must not exceed your

remaining Retained Earnings Available

for Distribution.

(b) Total amount you must distribute.

Unless SBA permits otherwise, the total

amount you must distribute equals the

result (if greater than zero) of the

following computation:

(1) Your Retained Earnings Available

for Distribution as of the end of your

fiscal year, after giving effect to any

Distribution under §§ 107.1540 and

107.1550; minus

(2) All previous Distributions under

this § 107.1560 and § 107.1570(a) that

were applied as redemptions or

repayments of Leverage; plus

(3) All previous Distributions under

§ 107.1570(b) that reduced your

Retained Earnings Available for

Distribution.

* * * * *

38. Section 107.1570 is proposed to be

amended by adding a sentence at the

end of the introductory text and by

revising the heading and paragraphs

(b)(1)(i) and (b)(1)(ii) to read as follows:

§ 107.1570 Distributions by Licensee—

optional Distributions to private investors

and SBA.

* * * You must notify SBA of any

planned distribution under this section

10 business days before the distribution

date, unless SBA permits otherwise.

* * * * *

(b) Other optional

Distributions. * * *

(1) Conditions for making a

Distribution. * * *

(i) You have distributed all Earned

Prioritized Payments, earned

Adjustments, and earned Charges, so

that the balance in your Distribution

Account is zero (see § 107.1520).

(ii) You have distributed all Profit

Participation computed under

§ 107.1530 which you are required to

distribute under § 107.1560 or permitted

to distribute under § 107.1570(a), as

appropriate, and you have made all

required Distributions under § 107.1560.

* * * * *

39. Section 107.1575 is proposed to be

added to subpart I to read as follows:

§ 107.1575 Distributions on other than

Payment Dates.

(a) Permitted distributions on other

than payment dates. Notwithstanding

any provisions to the contrary in

§§ 107.1540 through 107.1570, you may

make Distributions on dates other than

Payment Dates as follows:
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53269

(1) Required annual Distributions

under §§ 107.1540(a)(1), and any

Distributions under §§ 107.1550 and

107.1560, must be made no later than

the second Payment Date following the

end of your fiscal year;

(2) Required Distributions under

§ 107.1540(b) must be made no later

than the first Payment Date following

the end of the applicable fiscal quarter;

(3) Optional Distributions under

§ 107.1540(a)(2) and § 107.1570 may be

made on any date.

(b) Conditions for making

distribution. All Distributions under this

§ 107.1575 are subject to the following

conditions:

(1) You must obtain SBA’s written

approval before the distribution date;

(2) You must use the distribution date

as the ending date of the period for

which you compute your Earmarked

Profits, Prioritized Payments,

Adjustments, Charges, Profit

Participation, Retained Earnings

Available for Distributions, liquidity

ratio, Capital Impairment, and any other

applicable computations required under

§§ 107.1500 through 107.1570;

(3) If your Distribution includes an

amount which SBA will apply as a

redemption of Participating Securities,

the effective date of such redemption,

for all purposes including future

computations of Prioritized Payments,

will be the next Payment Date following

the distribution date.

40. In § 107.1580, the introductory

text of paragraph (a) is proposed to be

revised to read as follows:

§ 107.1580 Special rules for In-Kind

Distributions by Licensees.

(a) In-Kind distributions. A

Distribution under §§ 107.1540,

107.1560 or 107.1570 may consist of

securities (an ‘‘In-Kind Distribution’’).

Such a Distribution must satisfy the

conditions in this paragraph (a).

* * * * *

41. Section 107.1590 is proposed to be

amended by removing paragraph (c),

redesignating paragraph (d) as

paragraph (c), and revising paragraph

(a)(1) to read as follows:

§ 107.1590 Special rules for companies

licensed on or before March 31, 1993.

* * * * *

(a) Election to exclude pre-existing

portfolio. * * *

(1) The proceeds of your first issuance

of Participating Securities are not used

to refinance outstanding Debentures (see

§ 107.1585(a)). SBA will consider

payment or prepayment of any

outstanding Debenture to be a

refinancing unless you demonstrate to

SBA’s satisfaction that you can pay the

Debenture principal without relying on

the proceeds of the Participating

Securities.

* * * * *

42. In § 107.1600, the first sentence of

paragraph (a) and paragraph (b) are

proposed to be revised to read as

follows:

§ 107.1600 SBA authority to issue and

guarantee Trust Certificates.

(a) Authorization. Sections 319 (a)

and (b) of the Act authorize SBA or its

CRA to issue TCs, and SBA to guarantee

the timely payment of the principal and

interest thereon. * * *

(b) Periodic exercise of authority. SBA

will issue guarantees of Debentures and

Participating Securities under section

303 and of TCs under section 319 of the

Act at three month intervals, or at

shorter intervals, taking into account the

amount and number of such guarantees

or TCs.

* * * * *

43. Section 107.1720 is proposed to be

added to subpart I to read as follows:

§ 107.1720 Characteristics of SBA’s

guarantee.

If SBA agrees to guarantee a

Licensee’s Debentures or Participating

Securities, such guarantee will be

unconditional, irrespective of the

validity, regularity or enforceability of

the Debentures or Participating

Securities or any other circumstances

which might constitute a legal or

equitable discharge or defense of a

guarantor. Pursuant to its guarantee,

SBA will make timely payments of

principal and interest on the Debentures

or the Redemption Price of and

Prioritized Payments on the

Participating Securities.

44. In § 107.1820, paragraph (e)(9) is

proposed to be revised to read as

follows:

§ 107.1820 Conditions affecting issuers of

Preferred Securities and/or Participating

Securities.

* * * * *

(e) Restricted Operations

Conditions. * * *

(9) Failure to meet investment

requirements. You fail to make the

amount of Equity Capital Investments

required for Participating Securities

(§ 107.1500(b)(4)), if applicable to you;

or you fail to maintain as of the end of

each fiscal year the investment ratios or

amounts required for Leverage in excess

of 300 percent of Leverageable Capital

(§ 107.1160 (c)) or Preferred Securities

in excess of 100 percent of Leverageable

Capital (§ 107.1160(d)), if applicable to

you. In determining whether you have

met the maintenance requirements in

§ 107.1160(c) or (d), SBA will disregard

any prepayment, sale, or disposition of

Venture Capital Financings, any

increase in Leverageable Capital, and

any receipt of additional Leverage,

within 120 days prior to the end of your

fiscal year.

* * * * *

45. In § 107.1830, paragraph (a) is

revised to read as follows:

§ 107.1830 Licensee’s Capital

Impairment—definition and general

requirements.

(a) Applicability of this section. This

§ 107.1830 applies to Leverage issued on

or after April 25, 1994. For Leverage

issued before April 25, 1994, you must

comply with paragraphs (e) and (f) of

this section and the Capital Impairment

regulations in this part in effect when

you issued your Leverage. For all

Leverage issued, you must also comply

with any contractual provisions to

which you have agreed.

* * * * *

Dated: September 25, 1997.

Aida Alvarez,

Administrator.

[FR Doc. 97–26720 Filed 10–10–97; 8:45 am]

BILLING CODE 8025–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 97–NM–77–AD]

RIN 2120–AA64

Airworthiness Directives; Airbus Model

A310 Series Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

supersedure of an existing airworthiness

directive (AD), applicable to all Airbus

Model A310 series airplanes, that

currently requires measurement of the

force required to move the interior

control handle of the emergency exit

doors, and various follow-on corrective

actions, if necessary. This action would

add repetitive functional tests to

measure the force necessary to move the

interior control handle of the emergency

exit doors; and adjusting an emergency

exit door or replacing the bearing of the

door lifting mechanism, if necessary.

This proposal is prompted by reports of

seizure of a bearing and increased door

handle forces that were outside the

limits of the required hand forces due to