We don't believe that that kind of an inducement is necessary in this field in order to make these small business investment companies attractive. Secondly, we feel that it really isn't that necessary to have an investment banker on the board. Third, we don't feel that it is absolutely necessary that that particular investment banker be the only one who is making the market for the stock.

We believe the market can be made, and indeed is being made in some cases we have made a study to this effect-by other persons. Therefore, under all these circumstances we would very much regret seeing any relaxation in a provision which has stood up and which really represents one of our cardinal principles in all of our acts, which is designed to prevent the abuse of insider knowledge.

Mr. MOORHEAD. Thank you, Mr. Cary. I have no further questions, Mr. Chairman.

Mr. PATMAN. Thank you very much, Mr. Cary. We appreciate your testimony.

Mr. SCRANTON. Mr. Chairman, I have two letters from small business investment companies in Pennsylvania which, without objection, I would like to enter into the record.

Mr. PATMAN. Without objection, it is so ordered. (The letters referred to above are as follows:)

Hon. WILLIAM W. SCRANTON,

KEYSTONE SMALL BUSINESS INVESTMENT CO.,

House Office Building, Washington, D.C.

Scranton, Pa., July 28, 1961.

DEAR BILL: This will acknowledge receipt of your letter of July 25, 1961, in which you elicit comments on H.R. 6672, a bill which amends the Small Business Investment Companies Act of 1958.

I am happy to make the following observations:

Section 2: I approve of this amendment to section 302 (a) as it increases the amount of subordinated debentures the SBA can purchase from an SBIC in an amount not to exceed the lesser of $1 million or the amount of the capital and surplus of the SBIC raised from private sources. The original act limited the purchases to $150,000.

This amendment would provide an incentive to an SBIC to raise additional funds privately in order to secure the matching SBA investment and thus provide the SBIC with greater capital leverage and make possible a larger and more efficient operation. Please note that these debentures shall be considered part of the capital and surplus for 303 (b) loans.

Section 3: I also approve this amendment to section 303 (b) increasing the statutory limit on section 303 loans SBA may make to SBIC's from 50 percent of the company's capital and surplus to 100 percent.

However, this brings up an interesting point. Suppose an SBIC organizes without offering subordinated debentures to SBA under section 302 (a) above (which is the case of Keystone). Would Keystone then be limited to only a loan of 100 percent of its capital and surplus under section 303? If this is so interpreted, then this section 3 of the Patman Act should be further amended to permit SBIC's in the same position as Keystone to secure additional 303 loans to the extent that they did not take advantage of 302(a) debentures to SBA. If this is not corrected it would penalize SBIC's that operate with all private capital. Sections 4, 5, 6, are excellent amendments since they broaden the SBIC base of participation with other investors, private and public, in making equity and conventional long term loans to small businesses. I especially like section 5 which permits SBA to participate with us in making a loan under section 305 (b). We have had several requests for loans in excess of our loan limits (20 percent of our capital and surplus) and we believe, in some cases, that it might be quicker and more flexible to get the excess from SBA than to solicit other SBIC's. Although we are primarily interested in furnishing equity capital we believe that in order for the program to be successful the law should permit maximum flexibility. I believe that joint participation appears to be to the best interest of the SBA, SBIC's, and the small business concerns.

Section 7: This amendment is good. The original policy limiting our investments to obligations guaranteed by the United States was much too restrictive. The amendment will permit us to invest idle funds in other securities such as VA and FHA loans and securities of agencies of the U.S. Government such as FNAM and the Federal Home Loan Bank Board. This would give us greater opportunity for income without any great risk.

Section 8: This amendment permitting "restricted stock options" to executive personnel of SBIC's is purely academic with us since, at this time, none of our officers receive salaries let alone stock options. I do believe, however, that this is a salutary provision that will induce more capable and trained business executives to organize and participate in SBIC's and allow them to buy into the rewards of investments when they have proved well made.

Section 9: I am happy to note that this amendment will automatically extend the period for loans to community development corporations by eliminating the June 30, 1961, terminal date. This is certainly important to agencies such as Life-SLIB Co.

Section 10: Because of the fact that 18 regional banks are affiliated with Keystone I am particularly happy to see amendment K to the Investment Company Act of 1940 which would permit lending institutions affiliated with SBIC's to make loans to small business concerns to which the SBIC has provided equity capital.

There are two other suggestions that I would like to make:

1. I believe that some legislation should be enacted authorizing a statutory tax-deductible loss reserve similar to that granted savings and loan associations. Since SBIC's functions are to provide capital where normal finance channels are not available, it would seem that this is not an unreasonable request as it will allow us to build up a reserve before the SBIC pays any income tax on earnings. 2. Some positive tax concession should be given the individuals investing in SBIC's. At the moment they are purely negative. I would suggest that invest. ment in an SBIFC by an individual be chargeable against his ordinary income for tax purposes over a period of 5 years or more. Such charge should apply irrespective of the success of SBIC. If the investment is sold at a loss, after adjustment for prior charge-offs, the loss might be chargeable to ordinary income for tax purposes. If the equity is sold at a gain, then the gain might be considered a long-term capital gain for income tax purposes if held for more than 18 months. If the equity is held for less than 18 months, it might be considered a short-term capital gain. Since SBIC's operate in a highly speculative field, this type of tax concession would induce many more individuals to invest in SBIC's.

With regard to the operation of our own Keystone, we have had a rather slow start as indicated in the enclosed annual report of our company. I am happy, however, to inform you that since the report was issued we have made a debenture loan to Dancar Plastics, Inc. of Carbondale, Pa., a new venture, which we believe has growth potential. We have two other loans which are expected to be closed within the next 15 days-one to the Suburban Transit Co. of the conventional type, and the other a debenture loan to R. A. Davis Coal & Ice Co. We are also negotiating with three other small business concerns which could result in very substantial loans from our company.

I have very strong convictions, perhaps not shared by others, that the Small Business Act of 1958 will someday be recorded as one of the most important pieces of legislation on behalf of small business that Congress ever passed. This program is still in its infancy but it is beginning to show signs of having a substantial effect on our national economy. With kindest personal regards, I am,

Very truly yours,

ERNEST D. PREATE.

THE SMALL BUSINESS INVESTMENT Co. of Pennsylvania,

Hon. WILLIAM W. SCRANTON,

Philadelphia, Pa., July 27, 1961.

House of Representatives, House Office Building,

Washington, D.C.

DEAR REPRESENTATIVE SCRANTON: Thank you for the invitation extended to us in your letter of July 25 to present our views on H.R. 6672, a bill to amend the Small Business Investment Act.

As you requested, a copy of the president's report for this past fiscal year and the report of our auditors is enclosed for your information. I would be happy to answer any questions you might have after reviewing them.

Section 302 (a) of the act tends to encourage a minimum capitalization SBIC, while experience has proven that a minimum capitalization SBIC is an inefficient, uneconomic financing vehicle. The fact that the overwhelming proportion of SBIC's licensed to date are minimum capitalization SBIC's constitutes a threat to the success of the SBIC program. Section 2 of the new bill corrects this

tendency.

Section 303 (b) failed to consider the fact that SBIC's would not be able to command credit lines from banks and institutional lenders until they had proven themselves. Section 3 corrects this problem by allowing more liberal credit from the SBA at the time when it is needed most.

Section 305 (b) permits SBIC's to participate with other lending institutions. SBA has interpreted this wording literally and section 5 clarifies the intent of Congress in allowing SBIC's a wider choice of participations.

Section 6 (see comments as to section 5).

Section 7 amends section 308(b) to allow SBIC's slightly wider latitude in the investment of idle funds in direct U.S. obligations or in banks insured by the FDIC.

Section 8 specifically authorizing restricted stock options is a highly constructive step to help obtain for larger SBIC's the caliber of top management in whose hands the small business investment company program should best be placed. Although there is little criticism of the caliber of SBIC management today, many SBIC officers have undertaken their positions at levels of compensation below those which they were able to command elsewhere with the hope that Congress would soon see to the liberalization of the act and the authorization of restricted stock options for public companies. Unless this portion of the act is approved in this session of Congress, certain SBIC officers will listen more seriously to offers from the outside and it will be increasingly difficult to maintain high-caliber talent in the SBIC field.

SBA regulations now permit stock options to officers, employees, and others rendering a service to an SBIC. SBIC's registered under the Investment Company Act of 1940, however, are prohibited from taking advantage of this stock option provision.

Section 9: No comment.

Section 10 appears to be a well thought out piece of corrective legislation about which, to the best of my knowledge, there has been no negative comment, which would appear to make any detailed affirmative comment unnecessary. As to section 10's application to section 30 of the act, in public owned SBIC's insider trading is sometimes necessary in order to maintain an orderly market in SBIC securities. Section 10 removes a harsh penalty applicable to this insider trading which would result from the maintenance of the orderly market so necessary for the public investor.

You have my permission to make use of this letter or any portion thereof in connection with the hearings on H.R. 6672.

Cordially and sincerely,

HOWARD I. GREEN, President.

Mr. PATMAN. I have a letter here from the Association of Registered Bank Holding Companies, including a statement from Mr. Mills B. Lane, Jr., of the Citizens & Southern Capital Corp. Without objection, I will insert it in the record at this point.

ASSOCIATION OF REGISTERED BANK HOLDING COMPANIES,
Washington, D.C., July 31, 1961.

Hon. WRIGHT PATMAN,

Chairman, Subcommittee No. 2, House Committee on Banking and Currency, Washington, D.C.

DEAR MR. CHAIRMAN: Enclosed is the statement of Mills B. Lane, Jr., chairman of the Citizens & Southern Capital Corp., on behalf of our association in support of your bill, H.R. 6672, to amend the Small Business Investment Act. Unfortunately, Mr. Lane will be unable to testify in person and, therefore, we would appreciate your making his statement a part of the record of the hearings on your bill.

We would like to call your attention particularly to the suggested amendment to increase the maximum amount a bank may invest in a small business investment company from 1 to 2 percent of the bank's capital and surplus. We believe this amendment would encourage banks and bank holding companies to invest additional funds in SBIC's.

Sincerely yours,

DONALD L. ROGERS.

STATEMENT OF MILLS B. LANE, JR., CHAIRMAN, THE CITIZENS & SOUTHERN CAPITAL CORP., ATLANTA, GA., ON BEHALF OF THE ASSOCIATION OF REGISTERED BANK HOLDING COMPANIES, AUGUST 1, 1961

Mr. Chairman and members of the subcommittee, I am Mills B. Lane, Jr., chairman of the board of the Citizens & Southern Capital Corp., Atlanta, Ga., and I am presenting this statement on behalf of the Association of Registered Bank Holding Companies.

The Association of Registered Bank Holding Companies represents 19 companies registered with the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956. Six of our member companies have established small business investment companies and another company is currently preparing an application to form one. The names of the six companies are the Citizens & Southern Capital Corp., Atlanta; First Wisconsin Investment Co., Milwaukee; First Bancstock Equity Corp., Minneapolis; Marine Capital Corp., Milwaukee; Midland Capital Corp., Buffalo; and Northwest Growth Fund, Inc., Minneapolis. These six companies began operations with capital of $22 million. Subsequently, four of them have had public stock issues and their total capitalization now is approximately $31 million. The companies have made 54 investments, totaling $92 million.

Our companies believe in the Small Business Investment Act program and know it will work to benefit small business. Before commenting specifically on the pending bill, I would like to discuss briefly the operations of the Citizens & Southern Capital Corp. which, as you know, was one of the first two SBIC's licensed. The Citizens & Southern Capital Corp.

The Citizens & Southern Capital Corp., was licensed to do business on March 19, 1959, under the name, The Citizens & Southern Small Business Investment Co. We made our first investment on August 13, 1959. Altogether we have made a total of 20 investments for $804,000. Currently, we have outstanding commitments on an additional four investments involving a total of $525,000, which makes for a total of investments and commitments in 24 companies for $1,329,000.

We have purchased debentures or stock in the following types of businesses: cabinet manufacturers, lumber wholesaler, manufacturer of aluminum and glass patio doors, steel warehouser, printing company, chain restaurant, wholesaler of floor coverings, hardware retailer, manufacturer of paper dolls and paper products for the toy industry.

Although we have never kept a complete record of the inquiries received (by personal visit, by letter, and by telephone), we find that our activity today is greater than it has ever been since we were organized, with the average now being three inquiries daily. It is estimated that one inquiry out of three results in some form of request for financing and requires investigation on our part.

Amounts requested have ranged from $5,000 to our maximum legal limit which currently is $390,000. Most investments have been on an unsecured basis, with only three investments (or commitments for investments) requiring some form of capital security. Most loans have been for a period of 10 years, with payments on the entire amount being made at the end of such period. However, lately we have arranged for the maturities to be spread over a period of 7 or 8 years, with the loans being amortized by the final maturity.

The average net worth of the companies in which we have made investments, or for which we have made commitments, amounts to approximately $120,000. Sales volume ranges from $60,000 per year to $2,600,000 per year, with the average being $900,000. Some of our investments have proven to be quite attractive and most promising. On the other hand, we have already had two of our companies to become financially involved possibly resulting in a loss of our entire investment. These losses, we feel, will be more than offset by the increase in value of other items in our portfolio.

In addition to providing financing for applicants, we have rendered other types of services. In many respects, our company has acted as a clearinghouse for qualified executives who are looking for a new business connection. Thus, in some instances, we have been able to provide both the capital and the management which the company sorely needed. In other cases in which our company is not interested, without fee or compensation, we have made efforts to put the company or individual in touch with a suitable private investor.

At this date, our company maintains its own private offices with two full-time men and a secretary, although it continues to draw on various officers of the Citizens & Southern National Bank as needed in special situations. We have invested 41 percent of our funds, have commitments for another 27 percent, and have applications pending which would take up the remainder. The flood of applications has created a backlog of work for us, and the only change we would anticipate would be such as to require additional personnel.

We believe that we have accomplished the purpose of the Small Business Investment Act, namely, to provide equity capital for the growth, modernization, and expansion of small businesses, and we intend to continue to do so in the future.

Association endorses H.R. 6672

The association fully endorses the provisions of H.R. 6672. However, in order to avoid duplication of testimony you will receive from other witnesses at this hearing, we will limit our comments to those proposals in the bill which we believe are of particular significance.

Sections 2 and 3: Borrowing from SBA

Experience has shown that SBIC's operating with a minimum capital of $300,000 are not large enough to do the job intended by the Congress. Sections 2 and 3 of the bill would encourage the formation and growth of SBIC's with larger capital.

Section 2 authorizes the SBA to purchase the debentures of an SBIC in an amount equal to the capital supplied by private sources up to a maximum of $1 million. Existing law limits the purchase of such debentures by the SBA to $150,000. Section 3 increases the amount the SBA may lend to an SBIC from 50 to 100 percent of the SBIC's capital and surplus.

The effect of these amendments would be to give SBIC's greater leverage in their operations. Although the SBIC's affiliated with our member companies at the present time are not borrowing from the SBA, it may be necessary to do so in the future as the demand for investment funds for small business grows. Section 7: Investment of idle funds

Section 7 would liberalize somewhat the present restrictions on the investment of idle funds held by an SBIC. Section 308(b) of the Small Business Investment Act now limits the investment of idle funds to direct obligations of, or obligations guaranteed by, the United States. Section 7 of the bill would permit investment in obligations insured by instrumentalities of the United States. This amendment will permit SBIC's to earn a slightly higher return on idle funds while waiting for a suitable opportunity to invest these funds more profitably in a small business concern.

Section 8: Stock options

Stock options are being used extensively in industry to compensate key employees. The SBA has recognized this by issuing regulations permitting SBIC's to grant restricted stock options. However, the Investment Company Act of 1940 prohibits such stock options to SBIC's that are required to register under that act. Section 8 would remove the prohibition of the Investment Company Act for restricted stock options qualifying under section 421 of the Internal Revenue Code. This amendment will enable SBIC's to compete on an equal basis in attracting the technical personnel necessary to operate a successful investment program.

Section 10: Investment Company Act

It has been found that the Investment Company Act is unduly restrictive in its application to the normal operations of an SBIC. Section 10 contains amendments to correct four specific problem situations that have arisen. We would like to comment in detail on the amendment contained in section 10(a) of the bill which would add a new subsection (k) to section 17 of the Investment Com