pany Act. This amendment is vital to any publicly owned SBIC in which a bank is a substantial shareholder. The Securities and Exchange Commission has indicated that where a bank owns more than 5 percent of the common stock of an SBIC and the SBIC is registered under the Investment Company Act of 1940, the bank may be restricted in lending to any small business in which the SBIC has invested. The SEC bases its opinion on section 17 (d) of the Investment Company Act which provides, in part, as follows: "It shall be unlawful for any affiliated person of *** a registered investment company *** to effect any transaction in which such registered company * * * is a joint or a joint and several participant with such person * * * in contravention of such rules and regulations as the Commission may prescribe for the purpose of limiting or preventing participation by such registered company or controlled company on a basis different from or less advantageous than that of such other participants." Pursuant to the authority contained in section 17 (d), the SEC has adopted ruling 17 (d)-1 which provides, in part, as follows: "(a) No affiliated person of *** any registered investment company ** ** shall participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement or profit-sharing plan in which any such registered company *** is a participant *** unless an application regarding such joint enterprise, arrangement, or profit-sharing plan has been filed with the Commission and has been granted by an order * * *." "(c) Joint enterprise or other joint arrangement or profit-sharing plan as used in this rule shall mean any written or oral plan, contract, authorization, or arrangement, or any practice or understanding concerning an enterprise or undertaking whereby a registered investment company * * * and any affiliated person of * * * such registered investment company * * * have a joint or a joint and several participation or share in the profits of such enterprise or undertaking **** Clearly, the Small Business Investment Act not only contemplates that national banks will enter into joint programs with SBIC's but strongly encourages such practice. However, in view of the position taken by the SEC, if the making of joint loans or other loans where the small business concern is a customer of both the bank and the SBIC is construed as a "joint enterprise," the practical effect will be to prohibit a major portion of the SBIC's business. This would violate the spirit and intent of the Small Business Investment Act. Section 10(a) of the bill would correct this situation by adding a new subsection (k) to section 17 of the Investment Company Act specifically authorizing lending institutions which are affiliated with an SBIC to make loans to small business concerns to which the SBIC has provided equity capital or made loans. Additional amendment Section 302(b) of the Small Business Investment Act limits the investment by a national bank in the stock of an SBIC to 1 percent of the capital and surplus of the bank. Similarly, the Federal Reserve Board has ruled that the 1-percent limitation applies to an investment by a bank holding company. We agree that there should be a limitation on the amount of a bank's investment. However, we believe the 1-percent limitation is too restrictive because this means that an institution must have at least $30 million in capital and surplus before it can organize an SBIC with the minimum capital of $300,000. We believe that banks and bank holding companies should be encouraged to invest more of their funds in this program and help reduce, to some extent, the amount the SBA is called upon to loan. We urge that the limitation be increased from 1 to 2 percent of capital and surplus. New SBA regulations On July 8, 1961, the SBA published a proposed recodification of all the regulations governing SBIC's. We believe the need for a general revision of these regulations is apparent and we certainly support this effort. However, the SBA has proposed a new provision in section 107.715, which states that no funds may be provided by an SBIC for "(g) A small business concern which is a customer of a vendor which owns or controls the licensee, if the funds (or funds of the small business concern released by such financing) are used by the small business concern to purchase items or services sold to the small business concern by such vendor." This proposed regulation would seemingly prohibit the formation of a small business investment company by a trade association for the purpose of financing its individual member businesses. For example, an association formed by a group of independent grocery stores for the purpose of combining their purchasing power could not set up a small business investment company to finance the operations of the individual members. It is our feeling that the companies who might look to this source for financing, are those (as might be true in the above example) who would find great difficulty obtaining funds elsewhere. Thus, we feel that this unnecessarily limits the assistance to small businesses which the act intended to provide. We realize this proposed regulation may be outside of the scope of your hearings, but we feel it is important to call it to your attention because as a matter of public policy it would seem that the SBA should encourage the use of funds by an SBIC in the manner which would be prohibited by this proposed regulation. We appreciate this opportunity to present our views to your subcommittee. Mr. PATMAN. Anything else, gentlemen? Without objection, we will stand in recess until 10 o'clock tomorrow morning. (Thereupon, at 11:45 a.m., the subcommittee adjourned, to reconvene Thursday morning, 10 a.m., August 3, 1961.) SMALL BUSINESS INVESTMENT ACT AMENDMENTS OF 1961 THURSDAY, AUGUST 3, 1961 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE No. 2, The subcommittee met at 10:15 a.m., the Hon. Wright Patman, chairman of the subcommittee, presiding. Present: Messrs. Patman, Gilbert, and Moorehead. Mr. PATMAN. The committee will come to order. We have as our first witness this morning Mr. Arthur F. Maxwell representing the American Bankers Association. Mr. Maxwell, you may identify yourself and also the gentleman accompanying you at the table and proceed in your own way, sir. STATEMENT OF ARTHUR F. MAXWELL, AMERICAN BANKERS ASSOCIATION; ACCOMPANIED BY CHARLES T. O'NEILL, JR., ASSISTANT TO GENERAL COUNSEL, ABA Mr. MAXWELL. Thank you. This is a very brief statement. If I may be permitted to read it Mr. PATMAN. It will be all right, sir. Mr. MAXWELL. This is Charles T. O'Neill, who is assistant general counsel of the American Bankers Association, on my left. My name is Arthur F. Maxwell. I am president, First National Bank of Biddeford, Biddeford, Maine, and chairman of the American Bankers Association's Small Business Credit Committee. The American Bankers Association appreciates this opportunity to express its views on H.R. 6672. The association supported the legislation which became the Small Business Investment Act of 1958 and has supported legislation which further improved the 1958 act. Section 2 of H.R. 6672 makes it possible for an SBIC to obtain up to $1 million in capital from the SBA. This is a considerable increase from the present $150,000 limitation. We feel that the $500,000 suggested by the Small Business Administration would certainly be adequate. Section 3 increases the amount that a SBIC can borrow from SBA from 50 percent of its capital and surplus, to 100 percent of its capital and surplus. This increase in borrowing authority would seem to be unnecessary in view of the increase in the amount of capital that SBA is authorized to extend by the purchase of subordinated debentures. Section 5 authorizes SBIC's to lend in participation with the Small Business Administration. We believe that it is unwise to permit 73359-61--8 101 SBIC's to participate in loans with SBA. The SBA confines its lending to small business, principally to short- and intermediateterm credit while SBIC's are designed to extend long-term credit as a means of providing capital funds to small business enterprises. They should concentrate in this area. If the SBA were permitted to participate in loans made by the SBIC, it would create tremendous leverage. For example, under H.R. 6672 if $1 million were invested in a SBIC by private investors, the SBA could invest an additional million dollars in the SBIC through purchase of subordinated debentures. If the SBIC authority to borrow from SBA is increased to 100 percent of capital and surplus, the SBA could lend the SBIC an additional $2 million, thereby providing $4 million of loanable funds with only $1 million provided by private investors. To then permit the SBIC to lend these funds in participation with the SBA on a 90-10 basis would involve a tremendous pyramiding of funds primarily furnished by the Federal Government. This would make it possible for an SBIC with $4 million in loanable funds to make loans in participation with SBA up to $40 million; $39 million would be furnished by SBA and only $1 million by private enterprise. Although H.R. 6672 does not at present contain a provision for increasing the maximum permissible capital ownership in SBIC's by commercial banks, we understand a proposal has been made to amend the bill so as to increase the maximum above 1 percent. Before an increase is made, we feel the Congress should have the benefit of advice from the Board of Governors of the Federal Reserve System, the Comptroller of the Currency; and the Federal Deposit Insurance Corporation, particularly with regard to amount of increase. However, an increase may be desirable for the following reasons: 1. At present smaller banks are so limited in the amount of capital they can contribute that it is difficult to set up a corporation large enough to be economically feasible. 2. Investment companies set up by banks under this present limitation in many cases will not be large enough to take care of the business needs of small business in the areas in which they plan to operate. This is applicable to both small and large banks. The tendency today is for the SBIC to purchase equity securities more or less as a permanent investment rather than make loans; and with the small amount of capital now available, the SBIC quite often I will run out of investment funds and will have to seek additional capital. It would seem better to increase the maximum percentage a bank may invest in a SBIC initially or provide additional capital as needed rather than to resort to some other means. 3. In many communities banks are urged to make commercial loans which are in reality capital loans. Being able to set up a larger SBIC would enable the banks to provide the needed financing which they could not properly do through regular commercial lending channels. Mr. PATMAN. Thank you very much, Mr. Maxwell. You have a very interesting statement here and one which we will certainly give consideration to. Mr. Spence, the chairman of the full committee, has already directed a letter to the Federal bank supervisory authorities which you indicated should be consulted. His letter requests a statement from each as to how they feel about this matter. I agree with you. We should confer with them before doing anything in that direction, and I am very pleased that Chairman Spence has acted to obtain their views. I see that you agree with Mr. Horne, the Small Business Administrator, who testified yesterday, as to limiting SBA's capital investment in an SBIC to $500,000 instead of $1 million. Your testimony is very much appreciated, sir, and we will give it consideration. Mr. Moorehead, do you want to ask any questions? Mr. MOOREHEAD. No, thank you. Mr. PATMAN. Mr. Multer, do you have any questions? Mr. PATMAN. Thank you very kindly, sir. Mr. MAXWELL. Thank you for letting us appear. It is good to see you again, sir. Mr. PATMAN. If you desire to submit additional information, you may do so when you correct the transcript. Our next witness was to be Mr. Salik of San Diego. He has informed the clerk that he will not be able to be here, but we have his statement which, without objection, we will incorporate in the record at this point. STATEMENT OF CHARLES E. SALIK, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS, ELECTRONICS CAPITAL CORP. I consider it a privilege to have this opportunity to present to you our comments with regard to the proposed further amendments to the Small Business Investment Act of 1958. Since Electronics Capital Corp., as you know, was the first small business investment company to offer its shares to the public through a national underwriting syndicate. This corporation is the largest small business investment company in the United States, having net assets slightly in excess of $40 million. we have been operating for over 2 years, I believe we have the longest active experience of any major company in this program. To the best of my knowledge, Electronics Capital Corp. has more dollars committed to small business than any other company operating under the Small Business Investment Act. The experience that we have gained in investing in and lending money to small businesses in accordance with the Small Business Investment Act as well as the rules and regulations of the Small Business Administration has, I believe, given us some insight as to the future potential of small business investment companies and some of the hazards as well as immense opportunities that await investment companies of this type. It is now quite clear to us that a small business investment company is an entirely different "breed of cat" than typical investment companies that have operated solely under the Investment Company Act of 1940 and which are regulated by the Securities and Exchange Commission. We believe that it was your intent that those investment companies organized under this act were to be something quite different from the standard investment company which existed prior to enactment of this legislation. The inability of small business to obtain long-term capital was always based upon the fact that small business was, of itself, an extremely risky undertaking and that long-term capital was extremely difficult to obtain unless some unusual incentives were given to those risk takers who were willing to invest their own assets for long periods in the hope of some future realized gain. These incentives, under this act, have been given and we believe that an intelligently operated small business investment company can, if it exercises patience and understanding, significantly stimulate the growth of small business and thereby serve the national interest, as contemplated by the act. Those of us who have had extensive experience as executives of small business investment companies and other investment companies are constantly aware that as the program develops the Small Business Administration, in attempting to meet the statutory objectives, is faced with many problems. It appears obvious that the role of the Small Business Administration must be clearly de |