It is believed that currently unused funds should not be frozen into long-term investments and thus made unavailable when the opportunity for lending to and investing in small businesses arises.

In my opinion the present provisions of section 308 (b) assure the necessary liquidity of currently unused funds and, in addition provide some market for short-term notes. Consequently, I do not favor the amendment proposed in section 8 of the bill.

SECTION 9

Section 9 of the bill provides, in substance, that nothing in the Investment Act of 1940 shall be construed as preventing SBIC's from issuing restricted stock options, as defined under the Internal Revenue Code of 1954, to their employees.

SBIC's not offering their securities publicly are permited to issue stock options. However, SBIC's offering their securities for public sale place themselves within the purview of the Investment Act of 1940 which prohibits the granting of stock options without special permission from the Securities and Exchange Commission. The Commission has refused to grant such exemptions on the ground that the ban on stock options is essential for the protection of public investors in SBIC's.

In the competition to recruit and retain executive talent, corporations commonly offer their key employees the tax benefits embodied in restricted stock options. The view has been expressed that, as long as such benefits can be utilized by other business concerns for this purpose, they should be made available to all SBIC's. Otherwise, it is said, the latter may be severely handicapped in establishing and maintaining efficient management.

I wish to reserve my position on this matter until it can be evaluated in the light of further operating experience. Consequently, I do not favor the enactment, at the present time, of section 9 of the bill.

As to SBA proposals to amend the Small Business Investment Act of 1958, as I indicated at the beginning of this statement, I am recommending a number of amendments to the act which are not contained in S. 902. These are the additional changes I have in mind:

1. Enforcement procedures: Present enforcement provisions found in section 308 of the act require SBA to apply to the Federal courts for remedial action but do not provide the range of remedies nor the procedures necessary to insure compliance with the act and regulations thereunder.

To provide SBA with authority for intermediate compliance measures which do not necessitate resort to a Federal court, it is recommended that SBA be authorized to hold hearings to determine alleged violations and, in appropriate cases, to obtain compliance with the act and regulations thereunder by issuing cease and desist orders against offenders or by revoking, or suspending for a limited period of time, their authority to transact business as small business investment companies.

It is further recommended that the Federal courts be authorized in appropriate cases, upon the request of SBA, to take possession of the assets of violators and appoint trustees or receivers to manage the affairs of such SBIC's.

2. Transfer of administrative expenses for Small Business Investment Act functions from revolving fund: The revolving fund under section 4(c) of the Small Business Act includes authorizations for appropriations for lending activities under that act and for functions. under the Small Business Investment Act of 1958.

At present, funds to cover administrative expenses for such lending activities are made available annually by means of transfers of funds from the revolving fund authorized in section 4 (c) of the Small Business Act under the general authority of section 20 of that act.

Appropriations for administrative expenses under the Small Business Investment Act of 1958 are expressly authorized under section. 202 (b) of that act. This has been construed to bar transfers from the revolving fund for such expenses.

In order to permit uniform treatment for appropriations and budgetary purposes, it is recommended that the provisions of section 202 (b) be amended to conform to section 20 of the Small Business Act, thereby permitting transfers from the revolving fund to be made for administrative expenses under our Investment Act in the same manner now permitted to cover administrative expenses for lending activities under the Small Business Act.

3. Loans to local development companies: The authority of SBA to make loans to local development companies to assist identifiable small business concerns contained in section 502 of the Small Business Investment Act of 1958 has been extended permanently by section 26 of Public Law 87-27. This authority was due to expire on June 30,

1961.

It is believed that the loan program authorized by section 502 will be of material assistance not only to strengthen numerous small business concerns but, equally important, to strengthen the economy of the communities in which they are located.

Also, it is expected that loans to local development companies for the described purposes will play a significant role in the efforts of the Federal Government to rehabilitate the depressed areas of the country.

In order to enhance further the usefulness of the program authorized by section 502, it is also recommended that the loan limitation of $250,000 for each identifiable small business concern (section 502 (3)) be increased to $350,000, and that the maximum term for such loans be increased from 10 years (sec. 502 (5)) to 25 years.

The first change would conform the dollar limitation of this lending authority to the ceiling prescribed under SBA's present authority to make business loans under section 7(a) of the Small Business Act.

The other change extending maturity of section 502 loans to 25 years would authorize the agency to make loans for a term commensurate with the depreciation period for the facilities financed by such loans, and also would more closely approximate commercial lending practices with respect to the maturity (a minimum of 20 years) of loans for the construction of such facilities.

4. Required increase in revolving fund authorization: The provisions of section 3 of S. 902, modified as I have recommended, together with the increase which I have proposed in the dollar maximum governing loans to local development companies, will require a corresponding increase in the amount of the funds authorized by section

4(c) of the Small Business Act to be appropriated for the exercise of the functions of SBA under the Small Business Investment Act of 1958.

The amount so authorized for this purpose under the existing provisions of section 4(c) is $250 million. Fiscal year 1962 budget estimates as amended by House Document 179, dated May 29, 1961, anticipated that loans or investments outstanding against the $250 million limitation would total approximately $186 million, as of June 30, 1962, leaving a balance of $64 million.

Revising the projection to reflect the probably results of the proposed changes which I have described, it is my estimate that loans and investments outstanding or committed on June 30, 1962, will total $298 million, or $48 million in excess of the $250 million now authorized.

However, because of the uncertainties as to the impact of this legislation, it is considered advisable that we be authorized to obtain appropriations which will provide us with an adequate reserve to meet unexpected demands. Consequently, it is recommended that the authorization be increased by $150 million.

Accordingly, I recommend that section 4 (c) of the Small Business Act be amended to increase from $250 million to $400 million the authorization for appropriations for the exercise of the functions of SBA under the Small Business Investment Act of 1958, and that the section also be amended to increase the total amount of the revolving fund authorization from $1 to $1.150 billion.

Mr. Chairman, that completes my formal statement.

I have with me at the table, on my left, Mr. Jerome S. Plapinger, who is Deputy General Counsel. On my right is Mr. Phil David Fine, who is Deputy Administrator for the Investment Division. On his right is Keith Hanna, Assistant Administrator, who is in charge of our budget and comptroller activities.

I know that the committee will have some technical questions that you wish to pose, and I brought them along knowing that it would be all right with the committee for them to participate with me in answering any questions that you may have.

Senator PROXMIRE. Thank you, Mr. Horne, for a very competent and impressive statement.

Senator Sparkman?

Senator SPARKMAN. Mr. Chairman, I would rather you go ahead and ask some questions.

I think it is a very good statement. It seems to me that the proposed amendments that have been offered are quite logical. I may have a statement a little later.

Senator PROXMIRE. Senator Tower?

Senator TOWER. No questions at this time, Mr. Chairman.

Senator PROXMIRE. Mr. Horne, how many SBIC's are there now; that have been licensed?

Mr. HORNE. We have actually licensed, Mr. Chairman, 328 companies.

Senator PROXMIRE. Will you give me a little breakdown? This is July 31. How many were there at the beginning of this year? How many were there at the beginning of 1960, at the beginning of 1961, and today? To date there are 328?

Mr. HORNE. At the beginning of 1960 according to the chartSenator PROXMIRE. Give me any date that is convenient to you. Mr. HORNE. May I ask Mr. Fine, Mr. Chairman, to do that? He has a chart here before him that he helped to prepare.

Senator PROXMIRE. Very good. Perhaps those charts ought to go in the record. Without objection, they will be inserted. (The charts referred to appear below.)