any, of its order, with the record of such additional evidence. The findings of fact by the Administration if supported by substantial evidence shall be concusive. No objection to an order of the Administration shall be considered by the court unless such objection shall have been urged before the Administration or, if it was not so urged, unless there were reasonable grounds for failure to do so. The judgment and decree of the court affirming, modifying, or setting aside any such order of the Administration, shall be subject only to review by the Supreme Court of the United States upon certification or certiorari as provided in 28 U.S.C. 1254.

"(f) If any licensee against whom an order is issued under this section fails to obey the order, the Administration may apply to the United States Court of Appeals, within the circuit where the licensee has its principal place of business, for the enforcement of the order, and shall file a transcript of the record, if any, upon which the order complained of was entered. Upon the filing of the application the court shall cause notice thereof to be served on the licensee. The evidence to be considered, the procedure to be followed, and the jurisdiction of the court shall be the same as provided in subsection (e) of this section for applications to set aside or modify orders. The proceedings in such cases shall be made a preferred cause and shall be expedited in every way.

"SEC. 311. The Administration may make such investigations as it deems necessary to determine whether a licensee or any other person has engaged or is about to engage in any acts or practices which constitute or will constitute a violation of any provision of this Act, or of any regulation thereunder, or of any order issued under this Act. The Administration shall permit any person to file with it a statement in writing, under oath or otherwise as the Administration shall determine, as to all the facts and circumstances concerning the matter to be investigated. For the purpose of any investigation, the Administration is empowered to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers and documents which are relevant to the inquiry. Such attendance of witnesses and the production of any such records may be required from any place in any State. In case of contumacy by, or refusal to obey a subpoena issued to, any person, including a licensee, the Administration may invoke the aid of any court of the United States within the jurisdiction of which such investigation or proceeding is carried on, or where such person resides or carries on business, in requiring the attendance and testimony of witnesses and the production of books, papers and documents. And such court may issue an order requiring such person to appear before the Administration, there to produce records, if so ordered, or to give testimony touching the matter under investigation; any failure to obey such order of the court may be punished by such court as a contempt thereof. All process in any such case may be served in the judicial district whereof such person is an inhabitant or wherever he may be found.

"SEC. 312. (a) Whenever in the judgment of the Administration a licensee or any other person has engaged or is about to engage in any acts or practices which constitute or will constitute a violation of any provision of this Act or of any regulation thereunder or of any order issued under this Act, the Administration may make application to the proper district court of the United States or a United States court of any place subject to the jurisdiction of the United States for an order enjoining such acts or practices, or for an order enforcing compliance with such provision, or regulation, and such courts shall have jurisdiction of such actions and, upon a showing by the Administration that such licensee or other person has engaged or is about to engage in any such acts or practices, a permanent or temporary injunction, restraining order, or other order, shall be granted without bond. The proceedings in such a case shall be made a preferred cause and shall be expedited in every way.

"(b) In any such proceeding the court, as a court of equity may, to such extent as it deems necessary, take exclusive jurisdiction of the licensee or licensees and the assets thereof, wherever located; and the court shall have jurisdiction in any such proceeding to appoint a trustee or receiver to hold or administer under the direction of the court the assets so possessed."

SEC. 11. Section 502 of the Act is amended

(1) by striking out "$250,000" in paragraph (3) and inserting in lieu thereof "$350,000"; and

(2) by striking out "ten" as it first appears in paragraph (5) and inserting in lieu thereof "twenty-five".

SEC. 12. Section 4 (c) of the Small Business Act, as amended, is amended(1) by striking out "$1,000,000,000" each place it appears and inserting in lieu thereof "$1,150,000,000"; and

(2) by striking out "$250,000,000" in the eighth sentence and inserting in lieu thereof "$400,000,000".

Hon. A. WILLIS ROBERTSON,

THE GENERAL COUNSEL OF THE TREASURY,
Washington, August 11, 1961.

Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: Reference is made to your request for the views of this Department on S. 902, to amend the Small Business Investment Act of 1958, and for other purposes.

Section 3 of the bill would increase the maximum amount of subordinated debentures which the Small Business Administration may purchase from a small business investment company to provide capital from $150,000 to the lesser of $1 million or the amount of capital and surplus of an investment company from other sources. Under the present limitation, a minimum size small business investment company may have difficulty in operating profitably and might therefore be unable to provide small business concerns with financial assistance as contemplated by the Small Business Investment Act of 1958. An increase in the amount of subordinated debentures that could be purchased by the Small Business Administration would provide additional funds for small business equity needs and would serve as an incentive to investors to put further funds in the program. However, the Department believes that an increase to $500,000, rather than $1 million as would be provided by the bill, would be adequate.

Section 4 of the bill would increase the amount of loans the Small Business Administration could make to a small business investment company from 50 to 100 percent of the capital of such company. The Department would be opposed to this section. The section, when coupled with section 3, would make it possible for an investment company with funds in the amount of $4 million to have obtained $3 million of the funds from the Small Business Administration ($1 million in subordinated debentures and $2 million in loans) and only $1 million from other sources. In other words, the Small Business Administration could furnish 75 percent of the funds of a $4 million investment company. We do not believe it would be desirable for the Government to furnish this high a percentage of the funds for a venture that is essentially a private enterprise and over which the Government would have little or no direct control. The Government's investment would be subject to all the risks of ownership without any of the advantages and this arrangement might lead to various abuses. Moreover, the increased capital participation that would be authorized by section 3 would appear to make unnecessary the proposed authority under section 4 of the bill.

Section 6 of the bill would authorize the Small Business Administration to participate in loans made by small business investment companies. The Department would be opposed to this provision. On the one hand, it was the purpose of the Small Business Investment Act to provide equity financing and long-term loans to small business concerns through small business investment companies. On the other hand, it was the purpose of the Small Business Act to provide short- and medium-term loans to such concerns through the Small Business Administration.

Consequently, the proposed loan participation by the Small Business Administration would not be consistent with the purposes for which the Administration was originally established. In addition, the degree of financial participation by the Small Business Administration could be as disproportionate to the degree of private participation as a ratio of 39 to 1. The Small Business Administration could, for example, furnish $39,000 and private sources $1,000 of a $40,000 loan. The $39,000 in such a case would consist of $36,000 as a 90-percent par

ticipation under section 7(a)(3) of the Small Business Act, $1,000 in subordinated debentures under section 302 of the Small Business Investment Act, and $2,000 in loans under the latter act.

Sections 5 and 7 of the bill, as well as section 6, use the phrase "public or private." The use of the word "public" could be construed to include the Small Business Administration. It is assumed that this result is not intended, but in order to remove any doubt in the matter it is suggested that the sections be clarified in that respect.

Section 8 of the bill would authorize small business investment companies to invest surplus funds in obligations insured by instrumentalities of the United States. The Department would be opposed to this section. The proposed amendment would permit small business investment companies to invest funds, for example, in FHA-insured mortgages. We do not believe that funds of the investment companies should be frozen in long-term investments and thus be unavailable when the opportunity arises for lending to, and investing in, small business concerns. Moreover, we feel that such investments would not be within, nor contribute to, the purposes for which the establishment of investment companies was authorized, i.e., to furnish financial assistance to small business concerns.

Section 9 of the bill would allow small business investment companies to issue restricted stock options under section 421 of the Internal Revenue Code. At present, small business investment companies generally cannot issue restricted stock options because if they sell their securities to the public they come within the scope of the Investment Company Act of 1940. The latter specifically prohibits investment companies from issuing long-term warrants or options, and from issuing securities for services. In addition, a registered closed end investment company is not permitted to sell its common stock at a price below current net asset value. These prohibitions were provided because of the abuses that had previously resulted in the use of stock options by investment companies. The Department believes that it would be inadvisable at this time to adopt legislation which would allow small business investment companies to issue restricted stock options, overriding the prohibition on the issuance of such options provided by the Investment Company Act. The stock option provision is one of a number of provisions which the Department has been asked to reexamine under the general tax reform program. The Department therefore recommends that consideration of legislative changes in this area, such as would be provided by section 9 of the bill, be deferred until this general reexamination has been completed, especially since there appears to be considerable question as to the desirability of allowing small business investment corporations to issue stock options.

Section 10 of the bill purports to repeal the expiration date of the authority of the Small Business Administration to make loans to State and local development companies. This has already been accomplished by section 26 of Public Law 87-27. Consequently, section 10 of the bill should be deleted.

The Department has been advised by the Bureau of the Budget that there is no objection from the standpoint of the administration's program to the submission of this report to your committee.

Sincerely yours,

ROBERT H. KNIGHT, General Counsel.

THE SECRETARY OF COMMERCE,
Washington, D.C., August S, 1961.

Hon. A. WILLIS ROBERTSON,

Chairman, Committee on Banking and Currency,

U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: This is in further reply to your letter of February 17, 1961, requesting views of the Department of Commerce with respect to S. 902, a bill to amend the Small Business Investment Act of 1958, and for other purposes.

Section 3 of the proposal would increase the amount of debentures which the Small Business Administration (SBA) might purchase from a small business investment company (SBIC) from $150,000 to $1 million or the amount of capital and surplus of the small business investment company from other sources, whichever is less. This should be considered in connection with section 4 of the bill which would increase the loans which SBA may make to an SBIC from 50 percent to 100 percent of the capital of such a company.

The hearings before the Select Committee on Small Business of the U.S. Senate, in February 1960, amply demonstrated that an SBIC with the minimum available capital of $300,000, though eligible to borrow an additional $150,000 from BA, finds it extremely difficult to operate effectively and profitably. The aggregate limitation on assistance by an SBIC to a single enterprise of 20 percent of the combined capital and surplus of the SBIC, which is found in section 306 of the Small Business Investment Act of 1958, provides another example of the difficulties facing an SBIC with the minimum capital of $300,000. We believe that because of these difficulties legislative action should be taken along the lines proposed by section 3 of S. 902.

We are advised that the Administrator of the Small Business Administration is of the view that a limitation of $500,000 instead of the $1 million presently provided by proposed section 3 would be appropriate. We concur in this recommendation. In view of this recommendation, we further suggest that the proposed section 4 authority not be enacted. Experience under section 3 should be evaluated before further steps are taken in this area.

Section 5 would authorize on SBIC to provide equity capital in cooperation with "other investors, public or private." This would allow institutions which do not now qualify as "banks or other financial institutions" so to participate. This could allow SBA itself to participate, a role which we do not favor as inconsistent with its general purpose of making loans not in excess of 10 years maturity and it would also place SBA in the position of owning interests in the small businesses assisted, a position which has been avoided and for which the SBIC's were created. The word "public" should, therefore, be deleted from this section. Similarly, SBA should be kept out of long-term loan activities authorized by section 6 of S. 902. The amount of SBA money which could be used in making such a loan could run to a very high percentage if account is taken of a maximum debenture purchase and loan to the SBIC which is joining in the venture. Such a high participation would appear contrary to the stated policy of the act with respect to maximum private financing.

Section 7 of the proposal is so closely tied into sections 5 and 6 that it appears that our adverse comments concerning these latter provisions, if accepted by the committee, would preclude favorable action insofar as section 7 is concerned. Section 8 of S. 902 would authorize on SBIC to invest funds not currently needed in obligations "insured by instrumentalities of" the United States. This would permit long-term investments of a type not consistent with a major purpose of the program to lend and have money available to lend to small businesses. Section 9 of S. 902 would authorize an SBIC to issue "restricted stock options" presently prohibited under certain circumstances by the Investment Company Act of 1940. The Department of Commerce defers to the views of the Department of Treasury and the Securities and Exchange Commission with respect to this section.

The provisions of section 10 are no longer appropriate since the expiration date provided by subsection 6 referred to therein was repealed by section 26 of the Area Redevelopment Act (Public Law 87-27).

The Bureau of the Budget advises there would be no objection to the transmission of this report to the Congress from the standpoint of the administration's program.

Sincerely yours,

Re S. 902, 87th Congress.

LUTHER H. HODGES, Secretary of Commerce.

SECURITIES AND EXCHANGE COMMISSION,
Washington, D.C., June 9, 1961.

Senator A. WILLIS ROBERTSON,

Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.

DEAR SENATOR ROBERTSON: Enclosed are six copies of a memorandum of comment on the above-enumerated bill. Time did not permit the receipt of advice from the Bureau of the Budget concerning the relation of our comments to the program of the President. As soon as advice has been received from the Bureau of the Budget, we shall transmit it to you.

Sincerely yours,

WILLIAM L. CARY, Chairman.

MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION TO THE COMMITTEE ON BANKING AND CURRENCY, U.S. SENATE, ON S. 902, 87TH CONGRESS

S. 902 is a bill which would amend certain provisions of the Small Business Investment Act of 1958. Among other things, the bill would authorize the issuing of restricted stock options by small business investment companies and would expand the class of persons who may participate with such companies in providing capital to small business concerns.

Section 18(d) of the Investment Company Act specifically prohibits longterm warrants or options, and sections 23 (a) specifically prohibits the issuance of securities for services. In addition, section 23(b) prohibits a registered closedend investment company from selling any common stock of which it is the issuer at a price below the current net asset value of such stock. These express prohibitions were embodied in the statute because of the abuses that had resulted in this area. The dangers inherent in the use of option warrants in the investment company context were made abundantly clear by the Commission's investment trust study which formed the basis for the statute.1

Because of the various forms of abuse which can arise in this area the Congress determined that managerial compensation should take a more direct and open form. Payment of compensation by an investment company for services rendered may be on a salary or a fee basis, but in either case it is precise and known and readily understood by the investor. On the other hand, options are a form of profit-sharing device in which the equity of the shareholders may be diluted to an unknown extent. Indeed the investment company industry itself recognized the need for the prohibition against options in the statute which was enacted with its endorsement.

The use of restricted stock options, which are not transferable, does not materially reduce the potentialities for abuse inherent in stock options generally. For example, the danger of dilution of the equity of shareholders remains an inherent problem. Options also introduce a speculate security into the capital structure of the issuing corporation. The existing of options, restricted or not, may impede the company in its efforts to raise additional capital on reasonable terms, particularly where there are no statutory limitations on the amount of stock which may be subject to options. For example, a company in need of funds which could otherwise be raised on reasonable terms by a public offering is, by virtue of outstanding options, subject to a call at a price below the current market price of the stock with consequent dilution of the stockholders' equity It is obvious, of course, that in these circumstances, appraisal and analysis of the securities involved becomes difficult. These factors can have serious consequences to a developing enterprise and could interfere seriously with its ability to generate sufficient funds to meet the needs of the small business concerns looking to it for financial assistance.

Furthermore, the fact that an option is restricted would not eliminate a tendency to "watch the market" and to take speculative risks contrary to the interests of investors. A holder of a restricted stock option is, of course, concerned with the price fluctuations of the underlying stock. A serious conflict of interest is thus present in this situation.

When restricted options are exercised by management and the stock is sold to realize capital gains, the possibility exists that management will no longer have the interest and incentives alleged to underlie the necessity for these options. If then, additional options are issued to overcome this problem, a new 'round of possible dilution and its attendant problems are set in motion.

The unavailability of stock options has not impeded the investment company industry as a whole, which has grown from $2.5 billion of assets in 1940 to approximately $25 billion currently. In fact, the unavailability of stock options does not appear to have impeded the growth of small business investment companies. Since December 17, 1958, 34 small business investment companies proposing to make public offerings of their securities have registered with this Commission securities in the amount of $242,679,848 for public sale. There does not appear to be any reason, therefore, why it is more essential that small business investment companies, rather than investment companies generally, be permitted to issue restricted stock options.

If notwithstanding the considerations mentioned above, the Congress should determine to allow small business investment companies to issue restricted

1 SEC, "Report on Investment Trusts and Investment Companies," pt. III, H. Doc. 279, 76th Cong., pp. 1922-1924 (1940).