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It seemed to us because of that that it might tend to cause the very thing that have indicated you That is, you do not want to cause. do no want a slackening of this program so far as making money available to the borrower, to the small business borrower.

Senator PROXMIRE. Has your experience indicated there is some tendency to do this?

Mr. HORNE. There has been no agitation on it, Senator.

Mr. FINE. If I can add to that, this question first came up when the rates on short-term Government notes dropped. There was no talk of this prior to that time.

You recall 2 years ago or so the rates were fairly high.

Senator PROXMIRE. Yes.

Mr. FINE. I think the last 90-day notes were 2.2 percent or something in that area. As the rates dropped, you heard the agitation in this area from the SBIC's.

The problem from our point of view is that we do not allow an SBIC to, for example, put their money into a certificate of deposit or into a time savings deposit in a bank, because we want the money to be made use of, to be invested in small businesses.

If we allow them to go into long-term Governments, we might just as well let them go into the other ones.

We think the better way is to require them to keep their money liquid so there is incentive on their part to take it out of cash and invest it in the purposes the act intended.

Senator PROXMIRE. As a matter of prudent management, it is certainly desirable to encourage an institution like this to manage their funds as efficiently as they can. Where you have a discrepancy in interest rates between short- and long-term obligations and they can get 4 or 5 percent on long-term obligations and 1 or 2 percent on short-term obligations, if you can give them that discretion it would seem to me the incentive for putting this money into small business as soon as they can find any kind of attractive opportunity would be very great.

But management must take time to explore thoroughly the opportunities and to be cautious and careful about where they make the investment.

I cannot see that any substantial abuse should develop because they have to pay interest on all the money they secure from the Government. The money they could make out of turning around and putting it into long-term Government obligations, and so forth, would be pretty limited, would it not?

Mr. FINE. They can put it into long-term Government obligations insured by an instrumentality of the Government. For example, if they were to buy FNMA or buy VA or FHA paper, they can get 6 percent or more now. That is more than the interest they are paying to the SBA for the money they borrowed.

Actually, Senator, on the smaller sized company they do not draw down the Government funds until after they have invested their original funds, so that they are paying no interest to the Government during the period between the time that they first become a small business investment company and the time that they draw down the subordinate debentures. They have a year to do this.

During that period of time there is no interest payment to anyone. Senator PROXMIRE. They cannot use that money, they cannot invest that money until they draw it down, can they?

Mr. FINE. They draw it down as they need it.

Senator PROXMIRE. I see.

You talk about stock options, and this is a kind of ambiguous statement-one of the few in your presentation. It is a straightforward presentation. But it would seem to me the argument that is made by the proponents of the bill-that as long as other people can take advantage of stock options why should you restrict these people. When you do restrict SBIC's that are under the 1940 act you hurt this institution, and this is a pretty tough argument to answer.

Mr. HORNE. Well, Senator, part of the reason I answered it this way is the fact that we are seriously considering it. We have had some difference of feeling on our own part. We have not come to a definite conclusion in our own thinking.

One of the reasons we have not come to a definite conclusion, to be perfectly honest with you, is that there are other Government agencies that are somewhat involved in this, and there has not been a complete meeting of the minds on our part and their part as of this time.

Senator PROXMIRE. All right.

Further on you say that 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.

Has there been an experience of violations?

Mr. HORE, Mr. Fine, do you want to answer that?

Mr. FINE. Yes, sir. The first action taken by the new administration coming in was to establish an examination procedure whereby unannounced examiners for the Small Business Administration visited the premises of SBIC's.

We have now conducted some 20 or 25 field audits and field exami

nations. They are done in two forms. First there is a summary audit examination, certainly not as complete as would be done by a bank examiner, but a general audit. Secondly, a compliance examination, to determine that the SBIC's are complying with the regulations and with the legislation.

We have found violations. We have found one or two that are of a serious nature. We found others that were inadvertent.

We have felt that there was a lack of attention paid to this problem in the past and that it requires more attention in the future.

Unfortunately, we have been limited. We only have one choice under the existing legislation. We may go to the Federal court and ask that they determine that there is a violation, and then our only procedure is to revoke a license.

You can understand where there is a publicly held company with thousands of stockholders involved that you may not want to revoke the license. You may want to take some other action which is more appropriate to protect both the interest of the Government and of the public stockholders.

That is the reason for suggesting this, which would also apply, of course, in the smaller privately held companies.

Senator PROXMIRE. All right.

You recommend support of the increased limitation from $250,000 to $350,000. I was very much concerned when the Congress decided to go to $350,000 on the regular SBA loans. I have heard more criticism of the tendency of SBA to loan to what, in most communities, is considered a big business and then I'm sure in most cases for necessary reasons not to loan to the small business.

This is a small business program. While $350,000 may seem moderate and modest in many areas, it seems to most Americans that is a tremendous amount of money to loan.

It would take a fairly substantial company to be able to borrow that efficiently, and repay it.

How do you justify this?

Mr. HORNE. Well, Senator, there are two or three comments perhaps that it would be appropriate for me to make.

One is that SBA shares your concern that the small businessman who needs a small loan not be discriminated against simply because he is trying to get a small loan.

It is true that the costs frequently of administering and handling an extremely small loan are just about as great as handling one of $350,000.

Senator PROXMIRE. That is right. That is why we are providing all these advantages and incentives for trying to get this program going. Otherwise, I do not think it would be necessary to have this kind of program.

Mr. HORNE. I agree with that, sir.

Now, secondly, because of the type of loan that we are authorized to make, there are many, many instances in which $350,000 is not an excessive loan.

For example, if I may, just let me read this. The Administration may, in addition to its authority under section 501, make loans for plant construction, conversion, or expansion, including acquisition of land, for State and local development companies, and such loans may be made or effected either directly or in cooperation with banks or other lending institutions.

Well, the type of loan that is described here would indicate that there are times when $350,000 is not an excessively large loan.

Senator PROXMIRE. What proportion of your loans exceed $200,000? Mr. HORNE. I was going to give you this figure. I do not know if I can answer it the way you have asked it, but as evidence of the fact that we do share your concern for the small borrower, the truth is that our average loan, in spite of the $350,000 limitation, is only about $46,000, which means that we are making a great many loans in the 5, 10, certainly the 15, 25, and 50 thousand dollar range. That helps to bring this average considerably down.

Senator PROXMIRE. I meant to ask the proportion, if you have any study or any indication at all, of the loans made by the SBIC's. Do you have any information on that? Perhaps that is not available, but it would be helpful to know whether or not they were crowding this $250,000.

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Mr. HORNE. I will ask Mr. Fine if he has any figures on that that might answer your question.

But keep this in mind in that regard: The legislation does require that no SBIC can lend more than 20 percent of its capitalization, so to speak, to any one borrower.

Senator PROXMIRE. Yes.

Mr. HORNE. Of course, now, this $350,000 that we are talking about here, Mr. Chairman, is only the section 501 and 502 programs, not the SBIC program. This is a different program we are discussing here. Senator PROXMIRE. I see.

Mr. FINE. On your question on the SBIC's, Senator, the figures will be available shortly, as of the close of business March 31. We receive annual reports.

Mr. Horne pointed out to you that by regulation we limit an SBIC's loan or investment in any particular company to 20 percent of the total capital. With 90 percent approximately of the SBIC's that would mean their loans or investments would be under $60,000, at 90 percent of the SBIC's are minimum size.

Let me go over for 1 minute to the section 502 question on the $350,000. I think you recall some time back I spoke before a group that you had here from your home State, and you will be interested to know that the bulk of the questions

Senator PROXMIRE. You did a very fine job too. They were mayors from Wisconsin cities and towns.

Mr. FINE. Thank you. The bulk of the inquiries we get after speaking before a group of that type, as there have been from many States, is on the 502 program.

You cannot build much of a factory nowadays for $300,000. You cannot build much of a factory for $250,000 when you figure the square foot cost, the cost of equipment, and such.

We have many applications coming in for funds above the $250,000 figure, and that is the reason for proposing this to you.

We feel that this program, which has provided well over 7,000 new jobs in the economy during the past few years, needs this as a further stimulus to aid the economy.

Mr. HORNE. Also, Mr. Chairman

Senator PROXMIRE. Let me just say at this point that the limitation in the increase would be for this kind of loan, the section 502 loan? Mr. HORNE. Yes, sir. That is what this pertains to.

Also this would get it in keeping with the maximum that is under our regular business loan program. It would simply make the two conform.

Senator PROXMIRE. I see.

Did you want to add something?

Mr. HORNE. No, sir. I was just going to say something I am sure you already know. We really have three things here so far as our lending activities are concerned.

One is the regular lending program which is administered by Mr. Lanman with whom I think you have also talked.

Secondly, we have the section 502 program which is the local development company program to which this recommendation here pertains.

Thirdly, we have the SBIC program, in which SBIC's loan the money to small businesses, after they get the money from us and from private sources.

But that is a private company operation, and, as Mr. Fine pointed out, our regulations do require that they not lend more than 20 percent of their capitalization to any one borrower.

Senator PROXMIRE. Mr. Horne, I will insert in the record later a copy of a letter the committee received from the National Association of Small Business Investment Companies. This association urges the committee to adopt the amendments to the Investment Company Act of 1940 that are proposed by Congressman Patman, of Texas, in H.R. 6672.

Would you like to comment on that?

Mr. HORNE. By the way, we testify before the House Banking and Currency Committee on that measure day after tomorrow. I am not as familiar with all the details of that measure as I expect to be at the time I testify on it.

Senator PROXMIRE. All right. Why do you not defer the answer till then?

Mr. HORNE. But I am glad to make this comment: In many ways. the measures of Congressman Patman's bill are similar or are in some respects the same as the measure for which I am testifying now.

Mr. Fine has made a study also of Congressman Patman's bill, and I believe he has a comment he would like to make on it.

Senator PROXMIRE. Fine. But if you gentlemen would like to defer it, it is all right.

Mr. FINE. I think I can answer you, Mr. Chairman, on three of the sections which are not contained within S. 902, but are in Mr. Patman's bill.

Those are sections at the end of the bill beginning with section 10 with reference to exemptions from SEC regulations.

Beginning early in April we started conversations and conferences with Mr. Cary and other members of the Commission's staff, and I am informed by Mr. Cary that exemptions are being prepared and will be published this week or certainly next week at the latest with regard to sections 17(a), 17(d), and 18(c) of the Investment Company Act of 1940 for small business investment companies.

We feel that if Mr. Cary and the Commission publish these regulations that there will be no need for the legislation for these three sections.

The SEC has not gone along with, and we concur with their view, the last section, which is 30(f), I believe, in which the National Association of Small Business Investment Companies has asked for exemption from the insider trader rule. I believe that the SEC will not prepare or file an exemption on that and we will oppose the legislation.

Senator PROXMIRE. One final question, Mr. Horne. The committee has received a letter from the First Capital Corp. of Chicago, which will also appear in the record. This company recommends that section 302(b) of the Small Business Investment Act be amended to permit national banks, other member banks of the Federal Reserve System, and nonmember insured banks, to the extent permitted by State law, to invest 5 percent of their capital and surplus in SBIC's.

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