I
104TH CONGRESS
1ST SESSION
H. R. 2806
To amend the Small Business Investment Act of 1958 to create the Venture
Capital Marketing Association, to transfer certain functions of the Small
Business Administration to the Association, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
DECEMBER 18 (legislative day, DECEMBER 15), 1995
Mr. TORKILDSEN introduced the following bill; which was referred to the Com-
mittee on Small Business, and in addition to the Committees on Com-
merce and Banking and Financial Services, for a period to be subse-
quently determined by the Speaker, in each case for consideration of such
provisions as fall within the jurisdiction of the committee concerned
A BILL
To amend the Small Business Investment Act of 1958 to
create the Venture Capital Marketing Association, to
transfer certain functions of the Small Business Adminis-
tration to the Association, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Venture Capital Mar-
keting Association Charter Act’’.
SEC. 2. AMENDMENT TO TABLE OF CONTENTS; CONFORM-
ING AMENDMENT.
(a) AMENDMENT TO TABLE OF CONTENTS.—The
table of contents contained in section 101 of the Small
Business Investment Act of 1958 (15 U.S.C. 661 note)
is amended by inserting after the item relating to section
322 the following:
‘‘PART B—VENTURE CAPITAL MARKETING ASSOCIATION
‘‘Sec. 351. Purposes.
‘‘Sec. 352. Venture Capital Marketing Association.
‘‘Sec. 353. Common and preferred stock.
‘‘Sec. 354. Obligations and securities.
‘‘Sec. 355. Legal investments and exempt securities.
‘‘Sec. 356. Loan and investment operations.
‘‘Sec. 357. Servicing guaranteed securities and assets in liquidation.
‘‘Sec. 358. Qualification of small business investment companies.
‘‘Sec. 359. Operations of small business investment companies.
‘‘Sec. 360. Leverage formula.
‘‘Sec. 361. Audits of the Corporation.
‘‘Sec. 362. Regulation of financial safety and soundness.
‘‘Sec. 363. Government oversight and reports.
‘‘Sec. 364. Books and records.’’.
(b) CONFORMING AMENDMENT.—The Small Busi-
ness Investment Act of 1958 (15 U.S.C. 661 et seq.) is
amended by inserting before section 301 the following:
‘‘PART A—GENERAL PROVISIONS’’.
SEC. 3. VENTURE CAPITAL MARKETING ASSOCIATION.
Title III of the Small Business Investment Act of
1958 (15 U.S.C. 681–687m) is amended by adding at the
end the following:
‘‘PART B—VENTURE CAPITAL MARKETING
ASSOCIATION
‘‘SEC. 351. PURPOSES.
‘‘Congress hereby declares that the purposes of this
part are—
‘‘(1) to establish a Government-sponsored pri-
vate corporation which will serve as a source of pri-
vate 
capital 
and 
a 
secondary 
market 
and
warehousing facility for loans and investments in
small business investment companies, and will pro-
vide liquidity for small business loans and invest-
ments;
‘‘(2) to stimulate and supplement the orderly
and necessary flow of private equity capital and
long-term loan funds to improve the availability of
investment capital for small business concerns;
‘‘(3) to encourage the formation of new small
business investment companies; and
‘‘(4) to provide for an orderly transfer of cer-
tain functions of, and securities and assets guaran-
teed or owned by, the Administration to the Venture
Capital Marketing Association as constituted under
this part.
‘‘SEC. 352. VENTURE CAPITAL MARKETING ASSOCIATION.
‘‘(a) ESTABLISHMENT.—There is a hereby created a
body corporate to be known as the Venture Capital Mar-
keting Association (hereinafter in this part referred to as
the ‘Corporation’). The Corporation shall have succession
until dissolved. The Corporation shall establish and main-
tain its principal office in the Washington, D.C., metro-
politan area and shall be deemed, for purposes of venue
and jurisdiction in civil actions, to be a resident and citi-
zen of the jurisdiction of which it establishes its principal
office. Offices may be established by the Corporation in
such other place or places as it may deem necessary or
appropriate for the conduct of its business.
‘‘(b) TAX STATUS.—The Corporation, including its
franchise, capital, reserves, surplus, mortgages, and other
security holdings and income, shall be exempt from all tax-
ation now or hereafter imposed by any State, or by any
county, municipality, or local taxing authority, except that
any real property of the Corporation shall be subject to
State, county, municipal, or local taxation to the same ex-
tent according to its value as other real property is taxed.
‘‘(c) INTERIM BOARD
OF DIRECTORS.—Not later
than 60 days after the effective date of this part, the
President shall appoint an interim Board of Directors of
the Corporation, one of whom the President shall des-
ignate as the interim Chairman. The interim Board shall
consist of 5 members, one of whom shall be a representa-
tive of small business, 3 of whom shall be representatives
of small business investment companies, and one of whom
shall be a representative of the Administration. The in-
terim Board shall arrange for an initial offering of voting
common stock solely to small business investment compa-
nies and take whatever other actions are necessary to pro-
ceed with the operations of the Corporation.
‘‘(d) PERMANENT BOARD OF DIRECTORS.—The Cor-
poration shall have a permanent Board of Directors which
shall consist of 15 members. When small business invest-
ment companies have purchased and fully paid for
$20,000,000 of common stock of the Corporation, the
Board shall be constituted as follows:
‘‘(1) The holders of common stock shall elect 10
members to the Board of Directors.
‘‘(2) The President shall appoint, with the ad-
vice and consent of the Senate, the remaining 5 di-
rectors within 60 days of the stock purchase speci-
fied in this subsection.
‘‘(e) TRANSITION.—Upon the election of the 10 mem-
bers of the Board of Directors by the holders of common
stock of the Corporation, the interim Board shall turn over
the affairs of the Corporation to the permanent Board of
Directors, but the members of the interim Board shall
continue to serve in an interim capacity as the Presidential
appointees to the permanent Board until such time as the
permanent Presidential appointees are confirmed by the
Senate.
‘‘(f) TERMS.—(1) The members of the Board of Di-
rectors elected by the common shareholders shall be elect-
ed for a term ending on the date of the next annual meet-
ing of the common shareholders of the Corporation, and
shall serve until their successors have been elected and
have qualified. Any vacancy which occurs after the annual
election of the members shall be filled by the Board, but
only for the unexpired portion of the term.
‘‘(2) The members of the Board of Directors ap-
pointed by the President shall serve until their successors
have been appointed and have qualified. The terms of such
members shall be staggered as follows: one member shall
serve an initial term of one year, one member shall serve
an initial term of 2 years, one member shall serve an ini-
tial term of 3 years, one member shall serve an initial term
of 4 years, and one member shall serve an initial term
of 5 years. All subsequent appointments shall be for a
term of 5 years, except that any vacancy shall be filled
for the unexpired term of the vacancy. Such members shall
be removed only for cause. Of the Presidential appointees,
at least 2 members shall be representatives of small busi-
ness.
‘‘(g) OPERATIONS; EXECUTIVE
OFFICERS.—The
Board shall determine the general policies which will gov-
ern the operations of the Corporation. The Board shall
select, appoint, and compensate qualified persons to fill
such offices as may be provided for in the bylaws, with
such executive functions, powers, and duties as may be
prescribed by the bylaws or by the Board of Directors,
and such persons shall be the executive officers of the Cor-
poration and shall discharge all such executive functions,
powers, and duties.
‘‘(h) GENERAL POWERS.—The Corporation shall
have the power—
‘‘(1) to sue and be sued, complain and defend,
in its corporate name and through its own counsel;
‘‘(2) to adopt, alter, and use a corporate seal,
which shall be judicially noticed;
‘‘(3) to adopt, amend, and repeal by its Board
of Directors, such bylaws, rules, and regulations as
may be necessary for the conduct of its business;
‘‘(4) to conduct its business, carry out its oper-
ations, and have officers and exercise the powers
granted by this section in any State without regard
to any qualification, licensing, or similar law in any
State;
‘‘(5) to lease, purchase, or otherwise acquire,
own, hold, improve, use, or otherwise deal in and
with any property, real, personal, or mixed, or any
interest therein, wherever situated;
‘‘(6) to accept gifts or donations of services, or
of property, real, personal, or mixed, tangible or in-
tangible, in aid of any of the purposes of the Cor-
poration;
‘‘(7) to sell, convey, mortgage, pledge, lease, ex-
change, and otherwise dispose of its property and as-
sets;
‘‘(8) to appoint such attorneys, officers, employ-
ees, and agents as may be required, determine their
qualifications, define their duties, fix their com-
pensation, require bonds for them and fix the pen-
alty thereof; and
‘‘(9) to enter into contracts, to execute instru-
ments, to incur liabilities, and to do all things as are
necessary or incidental to the proper management of
its affairs and the proper conduct of its business.
‘‘(i) NOTICE.—When the permanent Board of Direc-
tors is duly constituted and the Corporation is ready to
conduct business, it shall so notify the Administration and
the Secretary of the Treasury.
‘‘SEC. 353. COMMON AND PREFERRED STOCK.
‘‘(a) VOTING COMMON STOCK.—(1) The Corporation
shall have voting common stock with such par value as
may be fixed by its Board of Directors from time to time.
Each share of voting common stock shall be vested with
all voting rights, each share being entitled to one vote with
rights of cumulative voting at all elections of directors.
‘‘(2) The initial number of shares of voting common
stock that the Corporation may issue and have outstand-
ing shall be established by the interim Board of Directors.
The number of shares of voting common stock may be in-
creased or decreased by the affirmative vote of the holders
of at least a majority of the total outstanding shares.
‘‘(3) The holders of the voting common stock shall
not have preemptive rights.
‘‘(4) Such dividends as may be declared by the Board
of Directors in its discretion shall be paid by the Corpora-
tion to the holders of its voting common stock.
‘‘(5) In order to accumulate funds for its capital sur-
plus account from small business investment companies—
‘‘(A) the Corporation shall require each small
business investment company to make payments of
nonrefundable capital contributions to the Corpora-
tion equal to 1 percent of the private capital of each
such company;
purchases. The authorities provided to the Secretary of
the Treasury by the preceding sentence shall be available
only to such extent and in such amounts as are provided
in advance in appropriations Acts. The Secretary of the
Treasury shall not at any time purchase any obligations
under this subsection if such purchase would increase the
aggregate principal amount of the Secretary’s then out-
standing holdings of such obligations under this sub-
section to an amount greater than $1,000,000,000. Any
purchase of obligations by the Secretary of the Treasury
under this subsection shall be made solely to prevent or
to enable the Corporation to correct an inability of the
Corporation to pay amounts required to be paid on ac-
count of obligations or securities issued or guaranteed by
the Corporation. Any purchase of obligations by the Sec-
retary of the Treasury under this subsection shall be on
such terms and conditions as shall be determined by the
Secretary of the Treasury. Each such purchase of obliga-
tions by the Secretary of the Treasury under this sub-
section shall take into consideration the current average
rate on outstanding marketable obligations of the United
States of comparable maturities as of the last day of the
month preceding the making of such purchase.
‘‘(2) The Secretary of the Treasury may, at any time,
sell on such terms and conditions and at such price or
prices as the Secretary may determine any of the obliga-
tions acquired by the Secretary under this section. All re-
demptions, purchases, and sales by the Secretary of the
Treasury of such obligations under this section shall be
treated as public debt transactions of the United States.
‘‘SEC. 355. LEGAL INVESTMENTS AND EXEMPT SECURITIES.
‘‘(a) LAWFUL INVESTMENTS.—All obligations issued
by the Corporation pursuant to sections 354 and 356, all
nonvoting common stock issued by the Corporation pursu-
ant to section 353(b), all preferred stock issued by the
Corporation pursuant to section 353(c), and all obligations
guaranteed by the Corporation pursuant to section 356
shall be lawful investments, and may be acceptable as se-
curity for all fiduciary, trust, and public funds, the invest-
ment or deposit of which shall be under authority or con-
trol of the United States or of any officer or officers there-
of.
‘‘(b) TREATMENT OF CORPORATION UNDER FED-
ERAL RESERVE ACT.—The Corporation shall, for the pur-
poses of section 14(b)(2) of the Federal Reserve Act (12
U.S.C. 355(b)(2)), be deemed to be an agency of the Unit-
ed States.
‘‘(c) TREATMENT OF OBLIGATIONS UNDER TITLE
31.—The obligations of the Corporation shall be deemed
to be obligations of the United States for purposes of sec-
tion 3124 of title 31, United States Code.
‘‘(d) TREATMENT OF CORPORATION UNDER TITLE
11.—For the purpose of section 101(27) of title 11, Unit-
ed States Code, the Corporation shall be deemed to be an
agency of the United States; however, for the purpose of
section 101(41) of title 11, United States Code, the Cor-
poration shall not be deemed to be a governmental unit,
but instead shall be deemed to be a corporation.
‘‘SEC. 356. LOAN AND INVESTMENT OPERATIONS.
‘‘(a) SMALL BUSINESS INVESTMENT SECURITIES.—
After the permanent Board of Directors has been duly
constituted, the Corporation is authorized, subject to the
provisions of this section, pursuant to commitments or
otherwise, to make advances on the security of, purchase
or repurchase, service, sell or resell, offer participations
or pooled interests in, act as an issuer or guarantor of,
or otherwise deal in, at prices and on terms and conditions
determined by the Corporation, small business investment
securities.
‘‘(b) REQUIREMENTS.—The Corporation is author-
ized to issue and guarantee securities based on the small
business investment securities specified under subsection
(a) of this section. Securities issued or guaranteed by the
Corporation pursuant to this subsection may be in the
form of debt obligations secured by pools of small business
investment securities, trust certificates of beneficial own-
ership in such pools of small business investment securi-
ties, or equity securities based on such small business in-
vestment securities or any combination thereof. Small
business investment securities set aside pursuant to the
issuance or guarantee of such debt obligations, trust cer-
tificates, or equity securities shall at all times provide for
payments that, in the reasonable judgment of the Corpora-
tion, are adequate to ensure payment of the obligations
on such securities.
‘‘(c) PERFECTION OF SECURITY INTERESTS.—Not-
withstanding the provisions of any State law to the con-
trary, including the Uniform Commercial Code as in effect
in any State, a security or ownership interest in small
business investment securities created by the Corporation
or by any eligible small business investment company may
be perfected either through the taking of possession of
such securities or by the filing of notice of such interest
in such securities in the manner provided by such State
law for perfection of security or ownership interests in ac-
counts.
‘‘SEC. 357. SERVICING GUARANTEED SECURITIES AND AS-
SETS IN LIQUIDATION.
‘‘(a) IN GENERAL.—To carry out the purposes set
forth in section 351, and notwithstanding any law, rule,
or regulation, the Administration is authorized and di-
rected to enter into a contract with the Corporation under
which the Corporation will manage and service all small
business investment company securities and commitments
outstanding on the effective date of this part and all assets
in default or in liquidation status held by the Administra-
tion on such effective date, or managed by any third party
on the Administration’s behalf, as the result of default or
liquidation proceedings by the Administration involving
small business investment companies. Such outstanding
small business investment company securities shall in-
clude, but are not limited to, all debentures and participat-
ing securities guaranteed or owned by the Administration
and all preferred stock issued to the Administration.
‘‘(b) DEADLINE.—The Administration and the Cor-
poration shall enter into a contract under subsection (a)
no later than 30 days following the appointment of the
interim Board of Directors under section 352(c).
‘‘(c) TERMS AND CONDITIONS.—The contract under
subsection (a) shall provide for the following:
‘‘(1) All such outstanding securities, commit-
ments, and assets, together with all of the docu-
mentation, files, and books and records pertaining
thereto, shall be transferred from the Administration
to the Corporation which shall act solely as the man-
aging and servicing agent on behalf of the Adminis-
tration for all such securities, commitments, and as-
sets.
‘‘(2) All of the obligations for which the Admin-
istration is responsible on all securities which are
transferred to the Corporation for management and
servicing shall remain in full force and effect as obli-
gations of the Administration, including, but not
limited to, guarantees of or commitments to deben-
tures or participating securities, or guarantees of
certificates of interest, or contracts for the purchase
of debentures or preferred stock.
‘‘(3) Except as provided in paragraph (6), all of
the benefits to which the Administration is entitled
on all securities which are transferred to the Cor-
poration for management and servicing shall remain
in full force and effect, including, but not limited to,
payments of principal and interest of debentures,
payments of priority payments and profit participa-
tions on, and redemptions of, participating securi-
ties, and payments of dividends and redemptions on
preferred stock.
‘‘(4) For purposes of managing and servicing
all such securities, commitments, and assets the Cor-
poration shall be considered the successor entity to
the Administration under all trust agreements, con-
tracts, and any other agreements relating to such se-
curities, commitments, and assets.
‘‘(5) All payments received by the Corporation
on the outstanding portfolio transferred to the Cor-
poration and all receipts from the liquidation of as-
sets transferred to the Corporation, net of manage-
ment and servicing fees, shall be immediately paid to
the Administration.
‘‘(6) Notwithstanding section 4(c)(5) of the
Small Business Act (15 U.S.C. 633(c)(5)), the fol-
lowing fees shall be paid to the Corporation for man-
aging and servicing the transferred securities, com-
mitments, and assets:
‘‘(A) On the portfolio of outstanding secu-
rities and commitments, a fee equal to 2 per-
cent per fiscal year of the aggregate balance
outstanding on the effective date of this part,
and 2 percent per fiscal year of the remaining
aggregate balance outstanding at the beginning
of each fiscal year thereafter. This fee shall be
paid in advance upon determination of the ag-
gregate balance outstanding at the beginning of
each period.
‘‘(B) On the portfolio of assets in default
or in liquidation, an incentive fee equal to 10
percent of the aggregate amount collected dur-
ing each fiscal year. This fee shall be deducted
from the amount collected by the Corporation
as such assets are liquidated.
‘‘(7) Notwithstanding section 4(c)(5) of the
Small Business Act (15 U.S.C. 633(c)(5)), control
over the outstanding balance in the fund established
under section 303(g)(2) of the Small Business In-
vestment Act (15 U.S.C. 683(g)(2)) shall be trans-
ferred from the Administration to the Corporation
for use in carrying out the Corporation’s manage-
ment and servicing functions.
‘‘(d) REPORT TO CONGRESS.—Not later than 60 days
after executing the contract to manage and service the se-
curities, commitments, and assets in default of liquidation,
the Corporation shall submit to the Committees on Small
Business of the Senate and the House of Representatives
a report describing the activities of the Administration,
the Corporation, and their representatives under this sec-
tion.
‘‘SEC. 358. QUALIFICATION OF SMALL BUSINESS INVEST-
MENT COMPANIES.
‘‘(a) ESTABLISHMENT OF CRITERIA.—The Corpora-
tion shall establish appropriate criteria for the qualifica-
tion of small business investment companies to conduct
business with the Corporation, and shall redetermine the
qualifications of any small business investment company
upon a change of control due to a transfer of ownership.
Such criteria may include, among other things, the general
business reputation and character of the owners and man-
agement of the small business investment company, and
the probability of successful operations of such small busi-
ness investment company, including adequate profitability
and financial soundness. Licensees in good standing which
make capital contributions and acquire common stock of
the Corporation pursuant to section 353(a), contract with
the Corporation pursuant to the provisions of section
359(a), and authorize the release of records to the Cor-
poration pursuant to section 323(d) shall be deemed to
be qualified under this section.
‘‘(b) MINIMUM AMOUNT
OF PRIVATE CAPITAL.—
Each small business investment company authorized to
operate under the authority of this part shall have private
capital of not less than $5,000,000, except that this provi-
sion shall not apply to licensees in good standing as of
the date the Administration receives notice pursuant to
section 352(i). In all cases, such private capital shall be
in an amount determined by the Corporation to be ade-
quate to assure a reasonable prospect that the company
will be operated soundly and profitably, and managed ac-
tively and prudently.
‘‘(c) BANK PURCHASES OF OWNERSHIP INTERESTS
IN SMALL BUSINESS INVESTMENT COMPANIES.—Not-
withstanding the provisions of section 23A of the Federal
Reserve Act (12 U.S.C. 371c), ownership interests in
small business investment companies shall be eligible for
purchase by national banks of the Federal Reserve System
and nonmember insured banks to the extent permitted
under applicable State law, except that in no event may
any such bank acquire ownership interests in any small
business investment company if, upon the making of that
acquisition, the aggregate amount of ownership interest
in small business investment companies then held by the
bank would exceed 5 percent of its capital and surplus.
‘‘(d) POWERS
OF SMALL BUSINESS INVESTMENT
COMPANIES.—Each small business investment company
shall have authority to purchase stock issued by the Cor-
poration and to borrow money and to issue debentures and
other obligations or securities under such conditions and
subject to such rules as the Corporation may prescribe.
‘‘(e) INAPPLICABILITY OF CERTAIN PROVISIONS TO
SMALL
BUSINESS
INVESTMENT
COMPANIES.—Thirty
days after the Administration receives notice from the
Corporation pursuant section 352(i), the provisions of sec-
tions 301 through 306, sections 308 through 318, and sec-
tions 320 through 322 shall not apply to small business
investment companies which qualify under section 358(a).
‘‘(f) REFERENCES.—All specific references to small
business investment companies operating under the Small
Business Investment Act of 1958 in any law of the United
States, or regulations promulgated thereunder by any
agency of the United States Government, or any law of
any State in effect on the effective date of this part, shall
be deemed to refer to and include small business invest-
ment companies operating under the provisions of this
part.
‘‘SEC. 359. OPERATIONS OF SMALL BUSINESS INVESTMENT
COMPANIES.
‘‘(a) RULES.—The Corporation shall contract with
small business investment companies qualified under sec-
tion 358 governing the operations of such companies in
accordance with the provisions and purposes of this title.
The Corporation shall adopt rules effectuating the provi-
sions of subsections (c) through (o) of this section and
such rules, or changes therein, shall be approved by a ma-
jority vote of the members of the Board of Directors, in-
cluding not less than a majority of the members appointed
by the President and confirmed by the Senate.
‘‘(b) PROVISION OF EQUITY CAPITAL AND LOANS.—
Each small business investment company is authorized to
provide equity capital and loans to small business concerns
in such manner and under such terms as the small busi-
ness investment company may fix in accordance with the
rules of the Corporation. Equity investments and loans
made under this section may be made directly or in co-
operation with other investors or lenders on a participation
or guaranteed basis. Each small business investment com-
pany may provide consulting and advisory services on a
fee basis and have on its staff persons competent to pro-
vide such services.
‘‘(c) PROHIBITION OF CERTAIN ACTIVITIES.—Small
business investment companies shall engage only in lawful
activities and those which are contemplated by this title
and in no other activities and the Corporation shall adopt
rules to so provide.
‘‘(d) CONFLICTS.—For the purpose of eliminating
conflicts of interest which may be detrimental to small
business concerns, to small business investment compa-
nies, to the shareholders or partners of either, to the Cor-
poration, or to the purposes of this part, the Corporation
shall adopt rules to govern transactions with any person
or concern, whether direct or indirect, financial or other-
wise, involving any small business investment company, or
any officer, director, shareholder, or partner of any small
business investment company, which would cause such
detrimental conflict of interest.
‘‘(e) RESTRICTION ON CONTROL OF SMALL BUSI-
NESS CONCERNS.—The Corporation shall adopt rules
which shall provide that small business investment compa-
nies, either singularly or jointly, shall not be permitted to
assume control over small business concerns except on a
temporary basis if reasonably necessary for the protection
of its investment and then only under rules adopted by
the Corporation.
‘‘(f) INVESTMENT IN SMALL BUSINESS CONCERNS.—
Except as otherwise provided by rules adopted by the Cor-
poration and approved by the Administration, small busi-
ness investment companies shall only invest in a small
business concern which, together with its affiliates, is inde-
pendently owned and operated, is not dominant, in its field
of operations, and—
‘‘(1) does not have a net worth in excess of
$18,000,000, and does not have average net income
after Federal income taxes (excluding any carry-over
losses) for the preceding 2 completed fiscal years in
excess of $6,000,000; or
‘‘(2) otherwise qualifies under size standards
for financial assistance established by the Adminis-
tration under the Small Business Act.
‘‘(g) MINIMUM PERIOD OF FINANCINGS.—Except as
otherwise provided by rules adopted by the Corporation,
financings of small business concerns by small business
investment companies shall be for a minimum period of
5 years.
‘‘(h) LIMITATION ON AMOUNT OF OBLIGATIONS AND
SECURITIES FOR SINGLE ENTERPRISE.—Except as other-
wise provided by rules adopted by the Corporation, the ag-
gregate amount of obligations and securities acquired and
for which commitments may be issued by any small busi-
ness investment company under the provisions of this title
for any single enterprise shall not exceed 20 percent of
the private capital of such company.
‘‘(i) PROHIBITION ON FINANCING OF CERTAIN AC-
TIVITIES.—Except as otherwise provided by rules adopted
by the Corporation, small business investment companies
shall not provide financing to a small business concern for
relending, foreign investments, passive investments, or for
the acquisition of real estate.
‘‘(j) DETERMINATION
OF
VALUE
OF
INVEST-
MENTS.—The Board of Directors, including not less than
a majority of the members appointed by the President,
shall adopt rules to require each small business investment
company to adopt written guidelines for determination of
the value of investments made by such company. The
board of directors of corporations and the general partners
of partnerships shall have the sole responsibility for mak-
ing a good faith determination of the fair market value
of the investments made by such company. Determina-
tions shall be made and reported to the Corporation not
less than semiannually or at more frequent intervals as
the Corporation determines appropriate: Provided, That
any company which does not have outstanding financial
assistance from the Administration or under the provi-
sions of this title shall be required to make such deter-
minations and reports to the Corporation annually, unless
the Corporation, in its discretion, determines otherwise.
‘‘(k) MINIMIZATION OF RISK OF LOSS.—The Board
of Directors, including not less than a majority of the
members appointed by the President, shall adopt rules to
minimize the risk of loss to the Corporation on the total
amount of securities issued by any individual small busi-
ness investment company or by small business investment
companies under common control.
‘‘(l) FINANCIAL AUDIT.—Each small business invest-
ment company shall have a financial audit conducted by
an independent certified public accountant certified or li-
censed by a regulatory authority of a State or other politi-
cal subdivision of the United States at least annually and
at such other times as may be required by the Corpora-
tion.
‘‘(m) COMPLIANCE AUDIT.—At least once every 2
years, each small business investment company shall have
an audit of such company’s compliance with the rules of
the Corporation conducted by an independent certified
public accountant selected by the Corporation or, in the
discretion of the Corporation, such audit may be con-
ducted by employees or agents of the Corporation.
‘‘(n) OTHER REPORTS.—Each small business invest-
ment company also shall make such other reports to the
Corporation at such times and in such form as the Cor-
poration may require.
‘‘(o) MEASURES TO ENSURE COMPLIANCE.—The
Corporation shall adopt appropriate measures to ensure
compliance by small business investment companies with
the provisions of this section. Failure of a small business
investment company to comply with the provisions of this
section shall entitle the Corporation to take corrective ac-
tion warranted under the circumstances which shall in-
clude, but is not limited to—
‘‘(1) loss of qualification by such company to do
business with the Corporation;
‘‘(2) suspension or termination of agreements
between the Corporation and such company;
‘‘(3) assessment of penalties against such com-
pany or its officers, directors, or general partners;
‘‘(4) removal or suspension of officers, direc-
tors, or general partners of such company; and
‘‘(5) assumption of control and operations of
such company by the Corporation.
In appropriate cases, the Corporation is authorized, in its
discretion, to refer violations of law to the Administration
for investigation or to refer such violations to the United
States Attorney in the jurisdiction in which such violations
may have occurred or in which the small business invest-
ment company, or its officers, directors, or general part-
ners, are located.
‘‘(p) STATE LAWS.—In order to facilitate the orderly
and necessary flow of long-term loans and equity funds
from small business investment companies to small busi-
ness concerns, the provisions of the Constitution or the
laws of any State expressly limiting the rate or amount
of interest, discount points, finance charges, or other
charges which may be charged, taken, received, or re-
served by lenders shall not apply to any business loan
made by a small business investment company pursuant
to provisions of this part. This subsection shall apply to
business loans made by a small business investment com-
pany in any State on or after the effective date of this
part, unless such State adopts a law or certifies that the
voters of such State have voted in favor of any provision,
constitutional or otherwise, which states explicitly and by
its terms that such State does not want the provisions of
this subsection to apply to business loans made in such
State. In any case in which a State takes an action de-
scribed in this subsection, such State law or constitutional
or other provision shall not apply to any business loan
made by a small business investment company pursuant
to a commitment to make such loan which was entered
into on or after the effective date of this part and prior
to the date on which such action was taken.
‘‘SEC. 360. LEVERAGE FORMULA.
‘‘(a) IN GENERAL.—The total amount of leverage
that may be provided by the Corporation to a small busi-
ness investment company shall not exceed 300 percent of
the private capital of such company: Provided, That noth-
ing in this subsection shall require any such company that
on the effective date of this part has outstanding leverage
in excess of 300 percent of its private capital to prepay
such excess.
‘‘(b) FORMULA.—After the effective date of this part,
the maximum amount of outstanding leverage made avail-
able to a small business investment company by the Cor-
poration shall be determined by the amount of such com-
pany’s private capital—
‘‘(1) if the company has private capital of not
more than $15,000,000, the total amount of lever-
age shall not exceed 300 percent of private capital;
‘‘(2) if the company has private capital of more
than $15,000,000 but not more than $30,000,000,
the total amount of leverage shall not exceed
$45,000,000 plus 200 percent of the amount of pri-
vate capital over $15,000,000; and
‘‘(3) if the company has private capital of more
than $30,000,000, the total amount of leverage shall
not exceed $75,000,000 plus 100 percent of the
amount of private capital over $30,000,000 but not
to exceed an additional $15,000,000.
‘‘(c) DEBT AND EQUITY TYPE SECURITIES.—Subject
to the foregoing dollar and percentage limits, a small busi-
ness investment company may issue to the Corporation
both debt and equity type securities: Provided, That the
total amount of equity type securities issued to the Cor-
poration shall not exceed 200 percent of the company’s
private capital.
‘‘(d) MAXIMUM AMOUNT OF OUTSTANDING LEVER-
AGE.—In no event shall the aggregate amount of out-
standing leverage of any such company or companies
which are commonly controlled as determined by the Cor-
poration exceed $90,000,000, unless the Corporation de-
termines on a case by case basis to permit a higher
amount for companies under common control and imposes
such additional terms and conditions as it determines ap-
propriate to minimize the risk of loss to the Corporation.
‘‘SEC. 361. AUDITS OF THE CORPORATION.
‘‘(a) ANNUAL AUDIT.—The accounts of the Corpora-
tion shall be audited annually. Such audits shall be con-
ducted in accordance with generally accepted auditing
standards by independent certified public accountants who
are certified or licensed by a regulatory authority of a
State or other political subdivision of the United States.
A report of each such audit shall be furnished to the Office
of Investment Oversight. The audit shall be conducted at
the place or places where the accounts are normally kept.
The representatives of the Office of Investment Oversight
shall have access to all books and records of the Corpora-
tion, and they shall be afforded full facilities for verifying
transactions with the balance or securities held by deposi-
tories, fiscal agents, and custodians.
‘‘(b) REPORTS BY OFFICE OF INVESTMENT OVER-
SIGHT.—A report of each such audit for a fiscal year shall
be made by the Office of Investment Oversight to the
President and to the Committees on Small Business of
the Senate and the House of Representatives not later
than 6 months following the close of such fiscal year. The
report shall set forth the scope of the audit and shall in-
clude a statement of assets and liabilities, capital and sur-
plus or deficit, a statement of surplus or deficit analysis,
a statement of income and expense, a statement of sources
and application of funds, and comments and information
as may be deemed necessary to keep the President and
the Congress informed of the operations and financial con-
dition of the Corporation, together with such recommenda-
tions with respect thereto as the Office of Investment
Oversight may deem advisable, including a report of any
impairment of capital or lack of sufficient capital noted
in the audit. A copy of each such report shall be furnished
to the Corporation at the same time it is submitted to
the President.
‘‘SEC. 362. REGULATION OF FINANCIAL SAFETY AND
SOUNDNESS.
‘‘(a) ESTABLISHMENT OF OFFICE OF INVESTMENT
OVERSIGHT.—There is hereby established in the Small
Business Administration an Office to be known as the Of-
fice of Investment Oversight, which shall have responsibil-
ity for reviewing the regulatory and financial performance
of the Corporation as provided herein. The Office shall
be headed by a Director who shall be appointed by the
Administrator, and shall receive compensation at the rate
provided by law for Associate Administrators of the Small
Business Administration.
‘‘(b) DEFINITIONS.—For purposes of this section, the
following definitions apply:
‘‘(1) The term ‘core capital’ means, with re-
spect to the Corporation, the sum of the following
(as determined in accordance with generally accepted
accounting principles):
‘‘(A) The par value of outstanding common
stock.
‘‘(B) The par value of outstanding pre-
ferred stock.
‘‘(C) Paid-in capital.
‘‘(D) Retained earnings.
‘‘(2) The term ‘regulatory capital’ means, with
respect to the Corporation, the core capital of the
Corporation plus an allowance for losses, as deter-
mined in accordance with generally accepted ac-
counting principles.
‘‘(c) RISK-BASED CAPITAL TEST.—Not later than 2
years after the effective date of this part, the Director of
the Office of Investment Oversight shall, by regulation, es-
tablish a risk-based capital test under this section for the
Corporation. When applied to the Corporation, the risk-
based capital test shall determine the amount of regu-
latory capital for the Corporation that is sufficient for the
Corporation to maintain positive capital during a 10-year
period in which both of the following circumstances occur:
‘‘(1) CREDIT RISK.—With respect to securities
representing an interest in, or obligations backed by,
a pool of qualified loans owned or guaranteed by the
Corporation and other obligations of the Corpora-
tion, losses on the underlying qualified loans occur
throughout the United States at a rate of default
and severity (based on any measurements of default
reasonably related to prevailing industry practice in
determining capital adequacy) reasonably related to
the rate and severity that occurred in contiguous
areas of the United States containing an aggregate
of not less than 5 percent of the total population of
the United States that, for a period of not less than
2 years (as established by the Director), experienced
the highest rates of default and severity of venture
investing losses in other such areas for any period
of such duration, as determined by the Director.
‘‘(2) INTEREST RATE RISK.—Interest rates on
Treasury obligations of varying terms increase or de-
crease over the first 12 months of such 10-year pe-
riod by not more than the lesser of (A) 50 percent
(with respect to the average interest rates on such
obligations during the 12-month period preceding
the 10-year period), or (B) 600 basis points, and re-
main at such level for the remainder of the period.
This paragraph may not be construed to require the
Director to determine interest rate risk under this
paragraph based on the interest rates for various
long-term and short-term obligations all increasing
or all decreasing concurrently.
‘‘(d) CONSIDERATIONS IN ESTABLISHMENT OF THE
TEST.—In establishing the risk based capital test under
subsection (c)—
‘‘(1) the Director shall take into account appro-
priate distinctions based on various types of venture
investing products, varying terms of Treasury obli-
gations, and any other factors the Director considers
appropriate;
‘‘(2) the Director shall conform loan and invest-
ment data used in determining credit risk to the
minimum diversification standards applicable to
pools of qualified loans;
‘‘(3) the Director shall take into account any
retained subordinated participating interests held by
the Corporation;
‘‘(4) the Director may take into account other
methods or tests to determine credit risk developed
by the Corporation; and
‘‘(5) the Director shall consider any other infor-
mation submitted by the Corporation in writing.
‘‘(e) REVISING THE TEST.—Upon the expiration of
the 6-year period beginning on the effective date of this
part, the Director shall examine the risk-based capital test
under subsection (c) and may revise the test. In making
revisions under this subsection, the Director shall take
into account that, before the effective date of this part,
the Corporation did not issue or guarantee securities
based on pools of qualified loans and investments. To the
extent that the revision of the risk-based capital test
causes a change in the classification of the corporation
within the enforcement levels established under subsection
(k), the Director shall waive the applicability of any addi-
tional enforcement actions available because of such
change for a reasonable period of time, to permit the Cor-
poration to increase the amount of regulatory capital of
the Corporation accordingly.
‘‘(f) RISK BASED CAPITAL LEVEL.—For purposes of
this section, the risk-based capital level for the Corpora-
tion shall be equal to the sum of the following amounts:
‘‘(1) CREDIT AND INTEREST RATE RISK.—The
amount of the regulatory capital determined by ap-
plying the risk-based capital test under subsection
(c) to the Corporation, adjusted to account for for-
eign exchange risk.
‘‘(2) MANAGEMENT AND OPERATIONS RISK.—
To provide for management and operations risk, 30
percent of the amount of regulatory capital deter-
mined by applying the risk-based capital test under
subsection (c) to the Corporation.
‘‘(g) REGULATIONS.—The regulations establishing
the risk-based capital test under this section shall contain
specific requirements, definitions, methods, variables, and
parameters used under the risk-based capital test and in
implementing the test (such as loan loss severity, float in-
come, loan-to-value ratios, taxes, yield curve slopes, de-
fault experience, prepayment rates, and performance of
pools of qualified loans and investments). The regulations
shall be sufficiently specific to permit an individual other
than the Director to apply the test in the same manner
as the Director.
‘‘(h) AVAILABILITY OF STATISTICAL MODEL.—The
Director shall make copies of the statistical model or mod-
els used to implement the risk-based capital test under
this section available for public acquisition and may
charge a reasonable fee for such copies.
‘‘(i) MINIMUM CAPITAL LEVEL.—For purposes of
this section, after the 6th year following the effective date
of this part the minimum capital level for the Corporation
shall be an amount of core capital equal to the sum of—
‘‘(1) 2.00 percent of the aggregate on-balance
sheet assets of the Corporation, as determined in ac-
cordance with generally accepted accounting prin-
ciples; and
‘‘(2) 0.30 percent of the unpaid principal bal-
ance of outstanding securities issued by the Corpora-
tion and backed by pools of qualified loans and in-
vestments and substantially equivalent instruments
issued or guaranteed by the Corporation, and other
off-balance sheet obligations of the corporation.
‘‘(j) CRITICAL CAPITAL LEVEL.—For the purposes of
this section, the critical capital level for the Corporation
shall be an amount of core capital equal to the sum of—
‘‘(1) 1.25 percent of the aggregate on-balance
sheet assets of the Corporation, as determined in ac-
cordance with generally accepted accounting prin-
ciples; and
‘‘(2) 0.20 percent of the unpaid balance of out-
standing securities guaranteed by the Corporation
and backed by pools of qualified loans and invest-
ments and substantially equivalent instruments is-
sued or guaranteed by the Corporation, and other
off-balance sheet obligations of the Corporation.
‘‘(k) ENFORCEMENT LEVELS.—The Director shall
classify the Corporation, for purposes of this section, ac-
cording to the following enforcement levels:
‘‘(1) LEVEL I.—The Corporation shall be classi-
fied as within level I if the Corporation—
‘‘(A) maintains an amount of regulatory
capital that is equal to or exceeds the risk-
based capital level established under section (c);
and
‘‘(B) equals or exceeds the minimum cap-
ital level established under subsection (i).
‘‘(2) LEVEL II.—The Corporation shall be clas-
sified as within level II if the Corporation—
‘‘(A)(i) maintains an amount or regulatory
capital that is less than the risk-based capital
level; and
‘‘(ii) equals or exceeds the minimum cap-
ital level; or
‘‘(B) is otherwise classified as within level
II under subsection (b)
‘‘(3) LEVEL III.—The Corporation shall be clas-
sified as within level III if the Corporation—
‘‘(A)(i) does not equal or exceed the mini-
mum capital level; and
‘‘(ii) equals or exceeds the critical capital
level established under subsection (j); or
‘‘(B) is otherwise classified as within level
III under subsection (b).
‘‘(4) LEVEL IV.—The Corporation shall be clas-
sified as within level IV if the Corporation—
‘‘(A) does not equal or exceed the critical
capital level; or
‘‘(B) is otherwise classified as within level
IV under subsection (b).
‘‘(l) DISCRETIONARY CLASSIFICATION.—If, at any
time, the Director determines in writing (and provides
written notification to the Corporation and the Adminis-
tration) that the Corporation is taking any action not ap-
proved by the Director that could result in a rapid deple-
tion of core capital or that the value of the property
securitized by the Corporation or subject to underlying se-
curities guaranteed by the Corporation has decreased sig-
nificantly, the Director may classify the Corporation—
‘‘(1) as within level II, if the Corporation is
otherwise within level I;
‘‘(2) as within level III, if the Corporation is
otherwise within level II; or
‘‘(3) as within level IV, if the Corporation is
otherwise within level III.
‘‘(m) SEMI-ANNUAL DETERMINATION.—After the
6th year following the effective date of this part, the Di-
rector shall determine the classification of the Corporation
for purposes of this part on not less than a semi-annual
basis.
‘‘(n) NOTICE.—Upon determining under subsection
(c) or (i) that the Corporation is within level II or III,
the Director shall provide written notice to the Congress
and to the Corporation—
‘‘(1) that the Corporation is within such level;
‘‘(2) that the Corporation is subject to the pro-
visions of subsection (o) or (q), as applicable; and
‘‘(3) stating the reasons for the classification of
the Corporation within such level.
‘‘(1) the Corporation shall, within the time pe-
riod determined by the Director, submit to the Di-
rector a capital restoration plan and, after approval,
carry out the plan; and
‘‘(2) the Corporation shall not make any pay-
ment of dividends that would result in the Corpora-
tion being reclassified as within level IV or make any
other payment of dividends unless the Director ap-
proves the payment before it is made.
‘‘(3) the Director may approve a payment of
dividends by the Corporation only if the Director de-
termines that the payment—
‘‘(A) will enhance the ability of the Cor-
poration to meet the risk-based capital level and
the minimum capital level promptly;
‘‘(B) will contribute to the long-term safety
and soundness of the Corporation; or
‘‘(C) is otherwise in the public interest.
‘‘(r) RECLASSIFICATION FROM LEVEL III TO LEVEL
IV.—The Director shall immediately reclassify the Cor-
poration as within level IV if—
‘‘(1) the Corporation is classified as within level
III; and
‘‘(2)(A) the Corporation does not submit a cap-
ital restoration plan that is approved by the Direc-
tor; or
‘‘(B) the Director determines that the Corpora-
tion has failed to make, in good faith, reasonable ef-
forts necessary to comply with such a capital res-
toration plan and fulfill the schedule for the plan ap-
proved by the Director.
‘‘(s) DISCRETIONARY SUPERVISORY ACTIONS.—In
addition to any other actions taken by the Director (in-
cluding actions under subsection (q)), the Director may,
at any time, take any of the following actions if the Cor-
poration is classified as within level III:
‘‘(1) Limit any increase in, or order the reduc-
tion of, any obligations of the Corporation, including
off-balance sheet obligations.
‘‘(2) Limit or prohibit the growth of the assets
of the Corporation or require contraction of the as-
sets of the Corporation.
‘‘(3) Prohibit the Corporation from making any
payment of dividends.
‘‘(4) Require the Corporation to acquire new
capital in any form and in any amount sufficient to
provide for the reclassification of the Corporation as
within level II.
‘‘(5) Require the Corporation to terminate, re-
duce, or modify any activity that the Director deter-
mines creates excessive risk to the Corporation.
‘‘(6) Appoint a conservator for the Corporation
consistent with this Act.
‘‘SEC. 363. GOVERNMENT OVERSIGHT AND REPORTS.
‘‘(a) COMMITTEES ON SMALL BUSINESS.—In order
to conduct legislative oversight of the Corporation’s activi-
ties, the Committees on Small Business of the Senate and
the House of Representatives shall have access to the
books and records of the Corporation at any time.
‘‘(b) GENERAL ACCOUNTING OFFICE.—At the re-
quest of either the Committee on Small Business of the
Senate or the House of Representatives, the books and
records of the Corporation shall be subject to examination
by the General Accounting Office.
‘‘(c) OFFICE OF INVESTMENT OVERSIGHT.—In order
to ensure that the public purposes of this part are carried
out, the Office of Investment Oversight shall have author-
ity to review the Corporation’s criteria for the qualification
of small business investment companies to conduct busi-
ness with the Corporation and the Corporation’s rules gov-
erning the operations of small business investment compa-
nies. The Office of Investment Oversight may examine the
books and records of the Corporation and may require the
Corporation to make such reports as the Administration
deems desirable. Not later than January 31st of each year,
the Office of Investment Oversight shall submit to the
Committees on Small Business of the Senate and the
House of Representatives a report containing findings
made by the Office under this section.
‘‘(d) ANNUAL REPORT BY CORPORATION.—The Cor-
poration shall, as soon as practicable after the end of each
fiscal year, transmit to the President, the Committees on
Small Business of the Senate and the House of Represent-
atives, and the Administration a report on its operations
and activities for such fiscal year.
‘‘(e) REPORT BY GENERAL ACCOUNTING OFFICE.—
Not later than 7 years after the effective date of this part,
the General Accounting Office shall prepare a report to
be transmitted to the Committees on Small Business of
the Senate and the House of Representatives. The report
shall review the impact that the Corporation has had in
achieving the purposes of the Venture Capital Marketing
Association Charter Act, including but not limited to an
assessment of the impact on small business concerns re-
ceiving funding through the Corporation’s activities and
the impact on small business investment companies as a
result of the Corporation’s activities. In preparing this re-
port, the General Accounting Office shall have access to
the books and records of the Corporation.
‘‘SEC. 364. BOOKS AND RECORDS.
‘‘The Administration shall furnish to the Corporation
all books and records of the Administration necessary to
carry out the provisions of this title within 30 days after
written request by the Corporation. Any such information
received by the Corporation shall be kept confidential by
the Corporation, its officers, agents, and employees under
the same provisions which would have been applicable if
it had been retained by the Administration.’’.
SEC. 4. TRANSFER AND PHASE-OUT.
(a) IN GENERAL.—Title III of the Small Business
Investment Act of 1958 is amended by inserting after sec-
tion 322 the following:
‘‘SEC. 323. TRANSFER AND PHASE-OUT.
‘‘(a) DEADLINE.—A licensee in good standing shall
have a period of 3 months from the date the Administra-
tion receives notice under section 352(i) in which to qual-
ify under section 358(a).
‘‘(b) ISSUANCE OF REGULATIONS.—Within 6 months
after receiving notice under section 352(i), the Adminis-
tration shall promulgate final rules and regulations to ef-
fect the orderly termination of operations of any license
in good standing which has not qualified under section
358(a), and the Administration shall enter into a contrac-
tual agreement with the Corporation which provides for
the administration of such rules and regulations by the
Corporation.
‘‘(c) REQUIREMENTS FOR REGULATIONS.—The final
rules and regulations adopted by the Administration for
termination of the operations of any licensee under sub-
section (b) of this section shall, among other things, sus-
pend such licensees’s authority to obtain financial assist-
ance from the Administration and shall require revocation
of the license of any such licensee effective within 2 years
after the publication of such rules and regulations, except
that the license revocation for any such licensee which has
outstanding debentures shall be within 2 years after such
debentures are due or paid, whether voluntarily or other-
wise.’’.
(b) CONFORMING AMENDMENT.—The table of con-
tents contained in section 101 of the Small Business In-
vestment Act of 1958 (15 U.S.C. 661 note), as amended
by section 2(a) of this Act, is further amended by inserting
after the item relating to section 322 the following:
‘‘Sec. 323. Transfer and phase-out.’’.
SEC. 5. DEFINITIONS.
Section 103 of the Small Business Investment Act
of 1958 (15 U.S.C. 662) is amended—