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                                                       Calendar No. 143
107th Congress                                                   Report
                                 SENATE
 1st Session                                                     107-55

======================================================================



 
        SMALL BUSINESS INVESTMENT COMPANY AMENDMENTS ACT OF 2001

                                _______
                                

                August 28, 2001.--Ordered to be printed

   Filed under authority of the order of the Senate of July 30, 2001

                                _______
                                

 Mr. Kerry, from the Committee on Small Business and Entrepreneurship, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 1196]

    On July 19, 2001, the Senate Committee on Small Business 
and Entrepreneurship considered S. 1196, ``the Small Business 
Investment Company Amendments Act of 2001.'' The bill would 
permit a moderate increase in the annual fee paid by the Small 
Business Investment Companies to the Small Business 
Administration (SBA) and would make other technical changes in 
the Small Business Investment Company (SBIC) program. Having 
considered S. 1196, the Committee reports favorably thereon 
without further amendment and recommends that the bill do pass.

                            I. Introduction

    In 1958, Congress created the SBIC program to assist small 
business owners obtain investment capital. Forty-three years 
later, small businesses continue to experience difficulty in 
obtaining investment capital from banks and traditional 
investment sources. Although investment capital is readily 
available to large businesses from traditional investment 
firms, small businesses seeking investments in the range of 
$250,000 to $5 million have to look elsewhere. SBICs frequently 
are the only sources of investment capital for growing small 
businesses.
    The SBIC program has helped some of our Nation's best-known 
companies. It has provided a financial boost at critical points 
in the early growth period for many companies that are familiar 
to all of us. For example, the FedEx Corporation received a 
needed infusion of capital from two SBA-licensed SBICs at a 
critical juncture in its development stage. The SBIC program 
also helped other well-known companies, when they were not so 
well-known, such as Intel, Outback Steakhouse, America Online, 
and Callaway Golf.
    In 1992 and 1996, the Committee on Small Business worked 
closely with the Small Business Administration to correct 
earlier deficiencies in the Small Business Investment Act of 
1958 in order to ensure the future of the program. In 1992, and 
again in 1996, Congress enacted major changes to strengthen and 
reform the SBIC program. Today, the SBIC program is expanding 
rapidly in an effort to meet the growing demands of small 
business owners for debt and equity investment capital. More 
qualified investment teams are seeking license approval from 
SBA than ever before. Since October 1998, the number of new 
SBIC licensees has increased by more than 35 percent, as SBA 
approved 53 new licenses in FY 1999 and 60 new licenses in FY 
2000, bringing the total number of active SBIC licenses to 415.
    At the same time the SBIC program is experiencing 
significant growth, the investment groups that are receiving 
guaranteed funds for investing in small businesses are 
performing at an exceptionally high level. Each year the SBA 
and the Office of Management and Budget (OMB) develop a credit 
subsidy rate estimate, which is the cost of running the program 
based largely on its projected future losses. Under the 
Debenture and Participating Securities programs, the credit 
subsidy rates have dropped dramatically. For example, the 
credit subsidy rate for the Debenture program dropped from 3.19 
percent in FY 1997 to zero (0.0%) in FY 2000, a milestone 
achieved for the first time in the program's history. The 
credit subsidy rate for the Debenture program dropped again in 
FY 2001 and is projected to drop still further in FY 2002.
    For FY 2002, the Bush Administration has recommended a 
program level of $2.5 billion for the Participating Securities 
program and increasing the annual interest fee paid by the 
Participating Securities SBICs by thirty-seven basis points 
(0.37%, taking the fee from 1 percent to 1.37 percent) in order 
to cause the credit subsidy rate to drop to 0.0% and eliminate 
all appropriations for the program. The Committee does not 
agree that the program participants alone should pay for the 
entire cost of running the program and believes the program 
level should be $3.5 billion in order to meet the needs of the 
market as projected by the National Association of Small 
Business Investment Companies (NASBIC). Consequently, when the 
Committee considered S. 1196, it agreed to increase the fee 
from 1 percent up to no more than 1.28 percent, effectively 
splitting the cost of running the program between the 
Participating Securities SBICs and the Agency. By allowing the 
annual interest fee to increase to no more than 1.28 percent, 
the Committee assumed a level appropriation of $26.2 million, 
which in FY 2001 provided for a program level of $2 billion, 
and that the Participating Securities SBICs would pay the 
difference with higher fees in order to increase the program 
level for FY 2002 to $3.5 billion.

                        II. Description of Bill

SBIC fees

    The ``Small Business Investment Company Amendments Act of 
2001'' would permit the annual interest fee paid by 
Participating Securities SBICs to increase from 1.0 percent to 
no more than 1.28 percent. In addition, the bill would make 
three technical changes to the Small Business Investment Act of 
1958 ('58 Act) that are intended to make improvements in the 
day-to-day operation of the SBIC program.
    As stated in the introduction, the projected demand for the 
Participating Securities SBIC program for FY 2002 is $3.5 
billion, a significant increase over the FY 2001 program level 
of $2.0 billion. It is imperative that Congress approve this 
relatively small increase in the annual interest charge paid by 
the Participating Securities SBICs before the end of the fiscal 
year because without the increase, the program level would be 
significantly below projected demands. This fee increase, when 
combined with an appropriation of $26.2 million for FY 2002, 
the same amount Congress approved for FY 2001, would support a 
program level of $3.5 million.
    The Committee elected to approve legislation that 
maintained the requirement for an annual appropriation in part 
because of the volatility the credit subsidy rate has 
experienced over the past two years. Whereas, the credit 
subsidy rate has declined dramatically in the recent fiscal 
years leading up to FY 2002, the Administration's credit 
subsidy rate estimate for FY 2002 for the Participating 
Securities program would increase nearly 50% over FY 2001.
    Administration officials explained to the Committee that 
the estimated credit subsidy rate increase was not the result 
of increased defaults in the program, but the result of a 
decrease in the cost of money to the Federal government, which, 
when included in the credit subsidy rate calculations, causes 
the credit subsidy rate to increase. While this change on its 
face may seem to be counter-intuitive, the Administration 
officials explained that the lower cost of money would generate 
less income in the financing account over the life of the FY 
2002 cohort of loans made under the Participating Securities 
program. The projected drop in interest income in the financing 
account would necessitate an increase in principle paid into 
the financing account for the FY 2002 cohort in order to 
support the cost of the program.

Conflicts of interest

    The ``Small Business Investment Company Amendments Act of 
2001'' would also make some technical changes to the '58 Act 
that are drafted to improve the operations of the SBIC program. 
Section 3 would remove the requirement that the SBA take out 
local advertisements when it seeks to determine if a conflict 
of interest exists involving an SBIC. This section has been 
recommended to the Committee by NASBIC, and the SBA, in light 
of the fact that the Agency has never received a response to a 
local advertisement and believes the requirement is 
unnecessary.

Criminal penalties

    The bill would amend Title 12 and Title 18 of the United 
States Code to insure that false statements made to the SBA 
under the SBIC program would have the same penalty as making 
false statements to an SBIC. This section would make it clear 
that a false statement to the SBA or to an SBIC for the purpose 
of influencing their respective actions taken under the '58 Act 
would be a criminal violation. The courts could then assess 
civil and criminal penalties for such violations.
    The purpose of this section is to correct a problem in 18 
U.S.C. 1014 which makes it a crime to make a false statement or 
representation for the purpose of trying to influence the 
actions of an SBIC; however, it has not been interpreted to 
also make it a crime for an SBIC or any person to make false 
statements or representations intended to influence in any way 
the actions of the SBA. As a result, the Department of Justice 
lost a case seeking civil penalties against an individual in 
control of an SBIC that was charged with making false 
statements to the SBA for the purpose of obtaining millions of 
dollars in funds guaranteed by the SBA and steering the SBA 
away from prompt collection actions.
    The charge of violation of 18 U.S.C. 1014 was dismissed in 
the case because the statute does not mention the SBA by name, 
and the court found the SBA was not among the generic types of 
agencies listed in the statute. As a result, civil penalties 
could not be imposed under 12 U.S.C. 1833a (FIRREA). The judge 
also refused to award civil penalties under the general 
criminal false statements provision, 18 U.S.C. 287, based on 
his determination that the SBIC was not a ``federally insured 
financial institution.'' The change would ensure that persons 
who make false statements to an SBIC or the SBA would be 
subject to the civil penalties set forth under FIRREA.
    Section 4 would also add 15 U.S.C. 645(a) to the civil 
penalty provision of FIRREA. The provision would provide fines 
for violations of, or conspiracies to violate, certain criminal 
statutes, including 18 U.S.C. 1001. For purposes of FIRREA, 18 
U.S.C. 1001 must involve a false statement made to a federally 
insured financial institution. Section 4 would add false 
statements made to a federally-licensed financial institution 
(such as an SBIC), a federal lending agency or a federal 
guarantor, including the SBA. Because 15 U.S.C. 645(a) does not 
require the showing of materiality necessary to establish a 
violation of 18 U.S.C. 1001, it is often used in lieu of 18 
U.S.C. 1001 by criminal prosecutors. Evidently, when the civil 
penalty provision of FIRREA was enacted, it did not amend 15 
U.S.C. 645(a). Accordingly, unless this provision is changed, 
those who make false statements or conspire to make false 
statements to the SBA and are charged under a more specific 
statue, 15 U.S.C. 645(a), are subject to a lesser penalty than 
others who commit similar crimes but are charged under 18 
U.S.C. 1001.

Removal of management officials

    Section 5 of the bill would amend Section 313 of the '58 
Act to permit the SBA to remove or suspend key management 
officials of an SBIC when they have willfully and knowingly 
committed a substantial violation of the '58 Act, any 
regulation issued by the SBA under the Act, a cease-and-desist 
order that has become final, or committed or engaged in any 
act, omission or practice that constitutes a substantial breach 
of a fiduciary duty of that person as a management official.
    The section expands the definition of persons covered by 
Section 313 from officers and directors to ``management 
officials,'' which includes not only officers and directors but 
also general partners, managers, employees agents or other 
participants in the management or conduct of the SBIC. At the 
time Section 313 of the '58 Act was enacted in November 1966, 
an SBIC was organized as a corporation, with directors or 
officers built into the management structure. Since that time, 
it has become more common for SBICs to organize as partnerships 
and Limited Liability Companies (LLCs), with general partners 
and other individuals taking an active role in the management 
of the entity, and this amendment would take into account those 
different organizations.

                          III. Committee Vote

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following vote was recorded on July 19, 2001. A 
motion by Senator Bond to adopt S. 1196, the Small Business 
Investment Company Amendments Act of 2001, was approved by a 
recorded vote, 19-0, with the following Senators voting in the 
affirmative: Kerry, Bond, Levin, Harkin, Lieberman, Wellstone, 
Cleland, Landrieu, Edwards, Cantwell, Carnahan, Burns, Bennett, 
Snowe, Enzi, Fitzgerald, Crapo, Allen, and Ensign.

                  iv. evaluation of regulatory impact

    In compliance with rule XXVI(11)(b) of the Standing Rules 
of the Senate, it is the opinion of the Committee that no 
significant additional regulatory impact will be incurred in 
carrying out the provisions of this legislation. There will be 
no additional impact on the personal privacy of companies or 
individuals who utilize the services provided.

                       v. changes in existing law

    In the opinion of the Committee, it is necessary to 
dispense with the requirement of section 12 of rule XXVI of the 
Standing Rules of the Senate in order to expedite the business 
of the Senate.

                           vi. cost estimate

    In compliance with rule XXVI(11)(a)(1) of the Standing 
Rules of the Senate, the Committee estimates the cost of the 
legislation will be equal to the amounts discussed in the 
following letter from the Congressional Budget Office.

                                     U.S. Congress,
                               Congressional Budget Office,
                                   Washington, DC, August 16, 2001.
Hon. John F. Kerry,
Chairman, Committee on Small Business and Entrepreneurship, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1196, the Small 
Business Investment Company Amendments Act of 2001.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Ken Johnson.
            Sincerely,
                                            Dan L. Crippen,
                                                          Director.
    Enclosure.

S. 1196--Small Business Investment Company Act of 2001

    Summary: S. 1196 would increase the maximum annual fee 
charged by the Small Business Administration (SBA) for 
guaranteeing loans under Small Business Investment Company 
(SBIC) programs from 1 percent to 1.28 percent. The bill also 
would create new civil and criminal penalties for knowingly 
making false statements to the SBA regarding loan guarantees 
offered under the SBIC and other loan programs.
    CBO estimates that implementing S. 1196 would reduce the 
cost of guaranteeing loans under the SBIC participating 
securities program by about $125 million over the 2002-2006 
period, assuming appropriation of the necessary amounts. By 
creating new civil and criminal penalties, S. 1196 also would 
increase receipts and direct spending by negligible amounts 
each year. Therefore, pay-as-you-go procedures would apply.
    S. 1196 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 1196 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credit).

----------------------------------------------------------------------------------------------------------------
                                                                  By fiscal year, in millions of dollars--
                                                           -----------------------------------------------------
                                                              2001     2002     2003     2004     2005     2006
----------------------------------------------------------------------------------------------------------------
                                        SPENDING SUBJECT TO APPROPRIATION

Spending Under Current Law for the SBIC Participating
 Securities Program:  \1\
    Estimated Authorization Level \2\.....................       26       65       75        0        0        0
    Estimated Outlays.....................................       23       35       54       53       26        0
Proposed Changes:
    Estimated Authorization Level.........................        0      -58      -67        0        0        0
    Estimated Outlays.....................................        0      -15      -40      -47      -23        0
Spending Under S. 1196 for the SBIC Participating
 Securities Program: \1\
    Estimated Authorization Level.........................       26        7        8        0        0        0
    Estimated Outlays.....................................       23       20       14        6        3        0
----------------------------------------------------------------------------------------------------------------
\1\ Excludes administrative costs.
\2\ The 2001 level is the amount appropriated for that year. The 2002 and 2003 levels are estimates of the
  appropriation that would be necessary to support the existing authorization levels for new loan guarantees in
  those years.

    Basis of estimate: CBO estimates that implementing S. 1196 
would reduce the cost of guaranteeing loans under the two SBIC 
programs about $125 million over the 2002-2006 period, assuming 
appropriations are adjusted to reflect these savings. The bill 
would create new civil and criminal penalties, but CBO 
estimates that the effect on revenues and direct spending would 
be insignificant.

Spending subject to appropriation

    The Federal Credit Reform Act of 1990 requires 
appropriation of the subsidy costs for operating credit 
programs. The subsidy cost is the estimated long-term cost to 
the government of a direct loan or loan guarantee, calculated 
on a net present value basis, excluding administrative costs.
    Through two SBIC programs, participating securities and 
debentures, SBA guarantees 10-year loans made to venture 
capital firms. To offset the subsidy cost of those guarantees, 
SBA charges venture capital firms that participate in the 
programs a fee of up to 1 percent of the loan amount each year. 
Under current law, the annual fee cannot exceed the percentage 
necessary to reduce the subsidy cost to zero.
    S. 1196 would raise the maximum annual fee that SBA can 
charge under the two SBIC programs for loan guarantees that are 
obligated after October 1, 2001. Based on information from SBA, 
CBO assumes that the agency will obligate all the amounts 
previously appropriated for these guarantees by September 30. 
Therefore, we estimate that this provision only would affect 
the loan guarantees that are authorized under current law for 
2002 and 2003.
    Participating Securities. For fiscal year 2002, the 
Administration estimates that it will charge venture capital 
firms in the participating securities program the full 1 
percent annual fee, yielding an estimated subsidy rate of 1.87 
percent. (By comparison, the estimated subsidy rate for 2001 is 
1.31 percent.) Because current law authorizes SBA to guarantee 
$3.5 billion in new loans under the program in 2002 and $4 
billion in 2003, CBO estimates that the subsidy cost of 
guaranteeing these new loans under current law would be $140 
million over the 2002-2005 period.
    S. 1196 would increase the maximum annual fee for the 
participating securities program from 1 percent to 1.28 
percent. Although CBO estimates that it is likely that the fee 
increase would reduce the subsidy to zero, there is some 
possibility that the subsidy rate would remain above zero. Our 
estimate reflects that uncertainty. CBO estimates that 
implementing this provision would reduce the subsidy cost of 
these loan guarantees by a total of $125 million over the 2002-
2005 period, assuming appropriations are adjusted downward to 
reflect such savings.
    Debentures. S. 1196 would raise the maximum annul fee that 
the SBA can charge venture capital firms under the debentures 
program to 1.28 percent. However, the subsidy cost of the 
program is very likely to reach zero without assessing the full 
1 percent annual fee allowed under current law. As a result, 
CBO expects that the probability of charging the higher fees 
authorized by the bill would be very small. Therefore, CBO 
estimates that implementing the bill would not have any 
significant impact on the debentures program.

Revenues and direct spending

    CBO estimates that S. 1196 would increase governmental 
receipts (revenues) by an insignificant amount each year 
because the bill would create new civil and criminal penalties. 
Collections of criminal fines are deposited in the Crime 
Victims Fund and are available tobe spent without further 
appropriation in the following year. Therefore, CBO estimates that 
direct spending also would rise by a negligible amount each year 
beginning in 2003.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. Because 
S. 1196 would create new civil and criminal penalties, the bill 
would increase both receipts and direct spending. However, CBO 
estimates that these effects would not be significant.
    Intergovernmental and private-sector impact: S. 1196 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Federal Costs: Ken Johnson. Impact on 
State, Local, and Tribal Governments: Susan Sieg Tompkins. 
Impact on the Private Sector: Cecil McPherson.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                    VII. Section-by-Section Analysis

Section 1. Short title

    This Act will be called the ``Small Business Investment 
Company Amendments Act of 2001.''

Section 2. Subsidy fees

    This section amends the Small Business Investment Act of 
1958 to permit the SBA to collect an annual interest fee from 
SBICs in an amount not to exceed 1.28 percent of the 
outstanding Participating Security and Debenture balance. In no 
case will SBA be permitted to charge an interest fee that would 
reduce the credit subsidy rate to less than 0 percent, when 
combined with other fees and congressional appropriations. This 
section would take effect on October 1, 2001.

Section 3. Conflicts of interest

    Section 3 would remove the requirement that SBA run local 
advertisements when it seeks to determine if a conflict of 
interest is present. SBA has informed the Committee that it has 
never received a response to a local advertisement and believes 
the requirement is unnecessary. SBA would continue to publish 
these notices in the Federal Register. This section would not 
prohibit the SBA from requiring a local advertisement should it 
believe it is necessary; it is supported by the SBA.

Section 4. Penalties for false statements

    This section would amend Title 12 and Title 18 of the 
United States Code to insure that false statements made to SBA 
under the SBIC program would have the same penalty as making 
false statements to an SBIC. The section would make it clear 
that a false statement to SBA or to an SBIC for the purpose of 
influencing their respective actions taken under the Small 
Business Investment Act of 1958 would be a criminal violation. 
The courts could then assess civil and criminal penalties for 
such violations.

Section 5. Removal or suspension of management officials

    This section would amend Section 313 the Small Business 
Investment Act of 1958 to expand the list of persons who could 
be removed or suspended by the SBA from the management of an 
SBIC to include officers, directors, employees, agents, or 
other participants of an SBIC. The persons subject to this 
section are called ``Management Officials,'' a new term added 
by this amendment. The amendment does not change the legal or 
practical effect of the provisions of Section 313; however, it 
has been drafted to make its provisions easier to follow.
    Sections 3, 4 and 5 would take effect on enactment of this 
bill.