[Senate Report 107-55]
[From the U.S. Government Publishing Office]
Calendar No. 143
107th Congress Report
SENATE
1st Session 107-55
======================================================================
SMALL BUSINESS INVESTMENT COMPANY AMENDMENTS ACT OF 2001
_______
August 28, 2001.--Ordered to be printed
Filed under authority of the order of the Senate of July 30, 2001
_______
Mr. Kerry, from the Committee on Small Business and Entrepreneurship,
submitted the following
R E P O R T
[To accompany S. 1196]
On July 19, 2001, the Senate Committee on Small Business
and Entrepreneurship considered S. 1196, ``the Small Business
Investment Company Amendments Act of 2001.'' The bill would
permit a moderate increase in the annual fee paid by the Small
Business Investment Companies to the Small Business
Administration (SBA) and would make other technical changes in
the Small Business Investment Company (SBIC) program. Having
considered S. 1196, the Committee reports favorably thereon
without further amendment and recommends that the bill do pass.
I. Introduction
In 1958, Congress created the SBIC program to assist small
business owners obtain investment capital. Forty-three years
later, small businesses continue to experience difficulty in
obtaining investment capital from banks and traditional
investment sources. Although investment capital is readily
available to large businesses from traditional investment
firms, small businesses seeking investments in the range of
$250,000 to $5 million have to look elsewhere. SBICs frequently
are the only sources of investment capital for growing small
businesses.
The SBIC program has helped some of our Nation's best-known
companies. It has provided a financial boost at critical points
in the early growth period for many companies that are familiar
to all of us. For example, the FedEx Corporation received a
needed infusion of capital from two SBA-licensed SBICs at a
critical juncture in its development stage. The SBIC program
also helped other well-known companies, when they were not so
well-known, such as Intel, Outback Steakhouse, America Online,
and Callaway Golf.
In 1992 and 1996, the Committee on Small Business worked
closely with the Small Business Administration to correct
earlier deficiencies in the Small Business Investment Act of
1958 in order to ensure the future of the program. In 1992, and
again in 1996, Congress enacted major changes to strengthen and
reform the SBIC program. Today, the SBIC program is expanding
rapidly in an effort to meet the growing demands of small
business owners for debt and equity investment capital. More
qualified investment teams are seeking license approval from
SBA than ever before. Since October 1998, the number of new
SBIC licensees has increased by more than 35 percent, as SBA
approved 53 new licenses in FY 1999 and 60 new licenses in FY
2000, bringing the total number of active SBIC licenses to 415.
At the same time the SBIC program is experiencing
significant growth, the investment groups that are receiving
guaranteed funds for investing in small businesses are
performing at an exceptionally high level. Each year the SBA
and the Office of Management and Budget (OMB) develop a credit
subsidy rate estimate, which is the cost of running the program
based largely on its projected future losses. Under the
Debenture and Participating Securities programs, the credit
subsidy rates have dropped dramatically. For example, the
credit subsidy rate for the Debenture program dropped from 3.19
percent in FY 1997 to zero (0.0%) in FY 2000, a milestone
achieved for the first time in the program's history. The
credit subsidy rate for the Debenture program dropped again in
FY 2001 and is projected to drop still further in FY 2002.
For FY 2002, the Bush Administration has recommended a
program level of $2.5 billion for the Participating Securities
program and increasing the annual interest fee paid by the
Participating Securities SBICs by thirty-seven basis points
(0.37%, taking the fee from 1 percent to 1.37 percent) in order
to cause the credit subsidy rate to drop to 0.0% and eliminate
all appropriations for the program. The Committee does not
agree that the program participants alone should pay for the
entire cost of running the program and believes the program
level should be $3.5 billion in order to meet the needs of the
market as projected by the National Association of Small
Business Investment Companies (NASBIC). Consequently, when the
Committee considered S. 1196, it agreed to increase the fee
from 1 percent up to no more than 1.28 percent, effectively
splitting the cost of running the program between the
Participating Securities SBICs and the Agency. By allowing the
annual interest fee to increase to no more than 1.28 percent,
the Committee assumed a level appropriation of $26.2 million,
which in FY 2001 provided for a program level of $2 billion,
and that the Participating Securities SBICs would pay the
difference with higher fees in order to increase the program
level for FY 2002 to $3.5 billion.
II. Description of Bill
SBIC fees
The ``Small Business Investment Company Amendments Act of
2001'' would permit the annual interest fee paid by
Participating Securities SBICs to increase from 1.0 percent to
no more than 1.28 percent. In addition, the bill would make
three technical changes to the Small Business Investment Act of
1958 ('58 Act) that are intended to make improvements in the
day-to-day operation of the SBIC program.
As stated in the introduction, the projected demand for the
Participating Securities SBIC program for FY 2002 is $3.5
billion, a significant increase over the FY 2001 program level
of $2.0 billion. It is imperative that Congress approve this
relatively small increase in the annual interest charge paid by
the Participating Securities SBICs before the end of the fiscal
year because without the increase, the program level would be
significantly below projected demands. This fee increase, when
combined with an appropriation of $26.2 million for FY 2002,
the same amount Congress approved for FY 2001, would support a
program level of $3.5 million.
The Committee elected to approve legislation that
maintained the requirement for an annual appropriation in part
because of the volatility the credit subsidy rate has
experienced over the past two years. Whereas, the credit
subsidy rate has declined dramatically in the recent fiscal
years leading up to FY 2002, the Administration's credit
subsidy rate estimate for FY 2002 for the Participating
Securities program would increase nearly 50% over FY 2001.
Administration officials explained to the Committee that
the estimated credit subsidy rate increase was not the result
of increased defaults in the program, but the result of a
decrease in the cost of money to the Federal government, which,
when included in the credit subsidy rate calculations, causes
the credit subsidy rate to increase. While this change on its
face may seem to be counter-intuitive, the Administration
officials explained that the lower cost of money would generate
less income in the financing account over the life of the FY
2002 cohort of loans made under the Participating Securities
program. The projected drop in interest income in the financing
account would necessitate an increase in principle paid into
the financing account for the FY 2002 cohort in order to
support the cost of the program.
Conflicts of interest
The ``Small Business Investment Company Amendments Act of
2001'' would also make some technical changes to the '58 Act
that are drafted to improve the operations of the SBIC program.
Section 3 would remove the requirement that the SBA take out
local advertisements when it seeks to determine if a conflict
of interest exists involving an SBIC. This section has been
recommended to the Committee by NASBIC, and the SBA, in light
of the fact that the Agency has never received a response to a
local advertisement and believes the requirement is
unnecessary.
Criminal penalties
The bill would amend Title 12 and Title 18 of the United
States Code to insure that false statements made to the SBA
under the SBIC program would have the same penalty as making
false statements to an SBIC. This section would make it clear
that a false statement to the SBA or to an SBIC for the purpose
of influencing their respective actions taken under the '58 Act
would be a criminal violation. The courts could then assess
civil and criminal penalties for such violations.
The purpose of this section is to correct a problem in 18
U.S.C. 1014 which makes it a crime to make a false statement or
representation for the purpose of trying to influence the
actions of an SBIC; however, it has not been interpreted to
also make it a crime for an SBIC or any person to make false
statements or representations intended to influence in any way
the actions of the SBA. As a result, the Department of Justice
lost a case seeking civil penalties against an individual in
control of an SBIC that was charged with making false
statements to the SBA for the purpose of obtaining millions of
dollars in funds guaranteed by the SBA and steering the SBA
away from prompt collection actions.
The charge of violation of 18 U.S.C. 1014 was dismissed in
the case because the statute does not mention the SBA by name,
and the court found the SBA was not among the generic types of
agencies listed in the statute. As a result, civil penalties
could not be imposed under 12 U.S.C. 1833a (FIRREA). The judge
also refused to award civil penalties under the general
criminal false statements provision, 18 U.S.C. 287, based on
his determination that the SBIC was not a ``federally insured
financial institution.'' The change would ensure that persons
who make false statements to an SBIC or the SBA would be
subject to the civil penalties set forth under FIRREA.
Section 4 would also add 15 U.S.C. 645(a) to the civil
penalty provision of FIRREA. The provision would provide fines
for violations of, or conspiracies to violate, certain criminal
statutes, including 18 U.S.C. 1001. For purposes of FIRREA, 18
U.S.C. 1001 must involve a false statement made to a federally
insured financial institution. Section 4 would add false
statements made to a federally-licensed financial institution
(such as an SBIC), a federal lending agency or a federal
guarantor, including the SBA. Because 15 U.S.C. 645(a) does not
require the showing of materiality necessary to establish a
violation of 18 U.S.C. 1001, it is often used in lieu of 18
U.S.C. 1001 by criminal prosecutors. Evidently, when the civil
penalty provision of FIRREA was enacted, it did not amend 15
U.S.C. 645(a). Accordingly, unless this provision is changed,
those who make false statements or conspire to make false
statements to the SBA and are charged under a more specific
statue, 15 U.S.C. 645(a), are subject to a lesser penalty than
others who commit similar crimes but are charged under 18
U.S.C. 1001.
Removal of management officials
Section 5 of the bill would amend Section 313 of the '58
Act to permit the SBA to remove or suspend key management
officials of an SBIC when they have willfully and knowingly
committed a substantial violation of the '58 Act, any
regulation issued by the SBA under the Act, a cease-and-desist
order that has become final, or committed or engaged in any
act, omission or practice that constitutes a substantial breach
of a fiduciary duty of that person as a management official.
The section expands the definition of persons covered by
Section 313 from officers and directors to ``management
officials,'' which includes not only officers and directors but
also general partners, managers, employees agents or other
participants in the management or conduct of the SBIC. At the
time Section 313 of the '58 Act was enacted in November 1966,
an SBIC was organized as a corporation, with directors or
officers built into the management structure. Since that time,
it has become more common for SBICs to organize as partnerships
and Limited Liability Companies (LLCs), with general partners
and other individuals taking an active role in the management
of the entity, and this amendment would take into account those
different organizations.
III. Committee Vote
In compliance with rule XXVI(7)(b) of the Standing Rules of
the Senate, the following vote was recorded on July 19, 2001. A
motion by Senator Bond to adopt S. 1196, the Small Business
Investment Company Amendments Act of 2001, was approved by a
recorded vote, 19-0, with the following Senators voting in the
affirmative: Kerry, Bond, Levin, Harkin, Lieberman, Wellstone,
Cleland, Landrieu, Edwards, Cantwell, Carnahan, Burns, Bennett,
Snowe, Enzi, Fitzgerald, Crapo, Allen, and Ensign.
iv. evaluation of regulatory impact
In compliance with rule XXVI(11)(b) of the Standing Rules
of the Senate, it is the opinion of the Committee that no
significant additional regulatory impact will be incurred in
carrying out the provisions of this legislation. There will be
no additional impact on the personal privacy of companies or
individuals who utilize the services provided.
v. changes in existing law
In the opinion of the Committee, it is necessary to
dispense with the requirement of section 12 of rule XXVI of the
Standing Rules of the Senate in order to expedite the business
of the Senate.
vi. cost estimate
In compliance with rule XXVI(11)(a)(1) of the Standing
Rules of the Senate, the Committee estimates the cost of the
legislation will be equal to the amounts discussed in the
following letter from the Congressional Budget Office.
U.S. Congress,
Congressional Budget Office,
Washington, DC, August 16, 2001.
Hon. John F. Kerry,
Chairman, Committee on Small Business and Entrepreneurship, U.S.
Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 1196, the Small
Business Investment Company Amendments Act of 2001.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Ken Johnson.
Sincerely,
Dan L. Crippen,
Director.
Enclosure.
S. 1196--Small Business Investment Company Act of 2001
Summary: S. 1196 would increase the maximum annual fee
charged by the Small Business Administration (SBA) for
guaranteeing loans under Small Business Investment Company
(SBIC) programs from 1 percent to 1.28 percent. The bill also
would create new civil and criminal penalties for knowingly
making false statements to the SBA regarding loan guarantees
offered under the SBIC and other loan programs.
CBO estimates that implementing S. 1196 would reduce the
cost of guaranteeing loans under the SBIC participating
securities program by about $125 million over the 2002-2006
period, assuming appropriation of the necessary amounts. By
creating new civil and criminal penalties, S. 1196 also would
increase receipts and direct spending by negligible amounts
each year. Therefore, pay-as-you-go procedures would apply.
S. 1196 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would not affect the budgets of state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 1196 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------
2001 2002 2003 2004 2005 2006
----------------------------------------------------------------------------------------------------------------
SPENDING SUBJECT TO APPROPRIATION
Spending Under Current Law for the SBIC Participating
Securities Program: \1\
Estimated Authorization Level \2\..................... 26 65 75 0 0 0
Estimated Outlays..................................... 23 35 54 53 26 0
Proposed Changes:
Estimated Authorization Level......................... 0 -58 -67 0 0 0
Estimated Outlays..................................... 0 -15 -40 -47 -23 0
Spending Under S. 1196 for the SBIC Participating
Securities Program: \1\
Estimated Authorization Level......................... 26 7 8 0 0 0
Estimated Outlays..................................... 23 20 14 6 3 0
----------------------------------------------------------------------------------------------------------------
\1\ Excludes administrative costs.
\2\ The 2001 level is the amount appropriated for that year. The 2002 and 2003 levels are estimates of the
appropriation that would be necessary to support the existing authorization levels for new loan guarantees in
those years.
Basis of estimate: CBO estimates that implementing S. 1196
would reduce the cost of guaranteeing loans under the two SBIC
programs about $125 million over the 2002-2006 period, assuming
appropriations are adjusted to reflect these savings. The bill
would create new civil and criminal penalties, but CBO
estimates that the effect on revenues and direct spending would
be insignificant.
Spending subject to appropriation
The Federal Credit Reform Act of 1990 requires
appropriation of the subsidy costs for operating credit
programs. The subsidy cost is the estimated long-term cost to
the government of a direct loan or loan guarantee, calculated
on a net present value basis, excluding administrative costs.
Through two SBIC programs, participating securities and
debentures, SBA guarantees 10-year loans made to venture
capital firms. To offset the subsidy cost of those guarantees,
SBA charges venture capital firms that participate in the
programs a fee of up to 1 percent of the loan amount each year.
Under current law, the annual fee cannot exceed the percentage
necessary to reduce the subsidy cost to zero.
S. 1196 would raise the maximum annual fee that SBA can
charge under the two SBIC programs for loan guarantees that are
obligated after October 1, 2001. Based on information from SBA,
CBO assumes that the agency will obligate all the amounts
previously appropriated for these guarantees by September 30.
Therefore, we estimate that this provision only would affect
the loan guarantees that are authorized under current law for
2002 and 2003.
Participating Securities. For fiscal year 2002, the
Administration estimates that it will charge venture capital
firms in the participating securities program the full 1
percent annual fee, yielding an estimated subsidy rate of 1.87
percent. (By comparison, the estimated subsidy rate for 2001 is
1.31 percent.) Because current law authorizes SBA to guarantee
$3.5 billion in new loans under the program in 2002 and $4
billion in 2003, CBO estimates that the subsidy cost of
guaranteeing these new loans under current law would be $140
million over the 2002-2005 period.
S. 1196 would increase the maximum annual fee for the
participating securities program from 1 percent to 1.28
percent. Although CBO estimates that it is likely that the fee
increase would reduce the subsidy to zero, there is some
possibility that the subsidy rate would remain above zero. Our
estimate reflects that uncertainty. CBO estimates that
implementing this provision would reduce the subsidy cost of
these loan guarantees by a total of $125 million over the 2002-
2005 period, assuming appropriations are adjusted downward to
reflect such savings.
Debentures. S. 1196 would raise the maximum annul fee that
the SBA can charge venture capital firms under the debentures
program to 1.28 percent. However, the subsidy cost of the
program is very likely to reach zero without assessing the full
1 percent annual fee allowed under current law. As a result,
CBO expects that the probability of charging the higher fees
authorized by the bill would be very small. Therefore, CBO
estimates that implementing the bill would not have any
significant impact on the debentures program.
Revenues and direct spending
CBO estimates that S. 1196 would increase governmental
receipts (revenues) by an insignificant amount each year
because the bill would create new civil and criminal penalties.
Collections of criminal fines are deposited in the Crime
Victims Fund and are available tobe spent without further
appropriation in the following year. Therefore, CBO estimates that
direct spending also would rise by a negligible amount each year
beginning in 2003.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. Because
S. 1196 would create new civil and criminal penalties, the bill
would increase both receipts and direct spending. However, CBO
estimates that these effects would not be significant.
Intergovernmental and private-sector impact: S. 1196
contains no intergovernmental or private-sector mandates as
defined in UMRA and would not affect the budgets of state,
local, or tribal governments.
Estimate prepared by: Federal Costs: Ken Johnson. Impact on
State, Local, and Tribal Governments: Susan Sieg Tompkins.
Impact on the Private Sector: Cecil McPherson.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.
VII. Section-by-Section Analysis
Section 1. Short title
This Act will be called the ``Small Business Investment
Company Amendments Act of 2001.''
Section 2. Subsidy fees
This section amends the Small Business Investment Act of
1958 to permit the SBA to collect an annual interest fee from
SBICs in an amount not to exceed 1.28 percent of the
outstanding Participating Security and Debenture balance. In no
case will SBA be permitted to charge an interest fee that would
reduce the credit subsidy rate to less than 0 percent, when
combined with other fees and congressional appropriations. This
section would take effect on October 1, 2001.
Section 3. Conflicts of interest
Section 3 would remove the requirement that SBA run local
advertisements when it seeks to determine if a conflict of
interest is present. SBA has informed the Committee that it has
never received a response to a local advertisement and believes
the requirement is unnecessary. SBA would continue to publish
these notices in the Federal Register. This section would not
prohibit the SBA from requiring a local advertisement should it
believe it is necessary; it is supported by the SBA.
Section 4. Penalties for false statements
This section would amend Title 12 and Title 18 of the
United States Code to insure that false statements made to SBA
under the SBIC program would have the same penalty as making
false statements to an SBIC. The section would make it clear
that a false statement to SBA or to an SBIC for the purpose of
influencing their respective actions taken under the Small
Business Investment Act of 1958 would be a criminal violation.
The courts could then assess civil and criminal penalties for
such violations.
Section 5. Removal or suspension of management officials
This section would amend Section 313 the Small Business
Investment Act of 1958 to expand the list of persons who could
be removed or suspended by the SBA from the management of an
SBIC to include officers, directors, employees, agents, or
other participants of an SBIC. The persons subject to this
section are called ``Management Officials,'' a new term added
by this amendment. The amendment does not change the legal or
practical effect of the provisions of Section 313; however, it
has been drafted to make its provisions easier to follow.
Sections 3, 4 and 5 would take effect on enactment of this
bill.