[Federal Register Volume 59, Number 183 (Thursday, September 22, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-23338] [[Page Unknown]] [Federal Register: September 22, 1994] ======================================================================= ----------------------------------------------------------------------- SMALL BUSINESS ADMINISTRATION 13 CFR Part 107 Small Business Investment Companies; Leverage AGENCY: Small Business Administration. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This final rule allows Small Business Investment Companies licensed under sections 301 (c) and (d) of the Small Business Investment Act of 1958 (Licensees) having no immediate need for SBA financial assistance (Leverage) to reserve the future availability of such financial assistance by obtaining SBA's conditional commitment to guarantee Debentures or Participating Securities (collectively ``pooled securities''), or to purchase Preferred Securities, that will be offered in the future as the Licensee draws against SBA's commitment. EFFECTIVE DATE: This final rule is effective September 22, 1994. FOR FURTHER INFORMATION CONTACT: Saunders Miller, Office of Program Development; Telephone (202) 205- 6510. SUPPLEMENTARY INFORMATION: On August 8, 1994, SBA published a proposed rule which contemplated allowing Licensees to apply for a conditional commitment from SBA to reserve Leverage for their future use. See 59 FR 40315. The amount of Leverage that could be reserved by any Licensee was proposed to be not less than $1,000,000, and not more than 50 percent of the Licensee's Regulatory Capital. The public was afforded a 30-day period in which to submit comments on the proposed rule. SBA received six comment letters during that time, all of which strongly supported the underlying concept of an Agency commitment of future financial assistance to Licensees but which also made several suggestions for improving the proposal. One recurring suggestion was that SBA eliminate the restriction on the amount that could be reserved on behalf of any one Licensee. As stated above, the proposed rule would have established a commitment ceiling equal to 50% of a Licensee's Regulatory Capital. Although SBA's rationale for the ceiling was not discussed in the proposed rule, most of the commenters understood that the ceiling was proposed in an attempt to fairly distribute scarce resources and to prevent the hoarding of committed funds by any one Licensee. SBA did realize, as the comment letters pointed out, that even if there were no ceiling in the regulations, the Agency would still have the authority to allocate commitment authority among interested Licensees. Nevertheless, SBA believed that given: (i) A probable timetable for the funding of an average Licensee's investors' commitments of 25% a year for 4 years (thereby converting the Licensee's Regulatory Capital into Leverageable Capital) and (ii) an ideal Leverage ratio during those 4 years of 2:1, the average Licensee's need for committed Leverage funds would be adequately met by an annual limit of 50% of Regulatory Capital. SBA has reconsidered its position and has concluded that the regulation should be broad enough to accommodate, without resort to an Agency waiver, those Licensees with investor-funding schedules that are more compressed than the average. SBA still believes that some ceiling is desirable administratively, but a ceiling set at 50% of Regulatory Capital may be too low, particularly in years when demand for reserved funds does not exceed the supply. Accordingly, in this final rule, SBA has increased the ceiling to 100% of Regulatory Capital. A second suggestion submitted during the comment period addressed the documentation proposed to be required pre- and post-funding of draws under SBA's commitment. Under the proposed rule, every Licensee with an outstanding commitment from SBA would be required to submit a Financial Statement on SBA Form 468 (Short Form) within 30 days of the close of each of its fiscal quarters. A Licensee submitting a draw request within that 30-day period would be required to submit the Short Form Financial Statement, or a statement of no adverse change since its most recent Short Form 468, with the draw request. A few of the comment letters objected to quarterly financial reporting as burdensome and unnecessary. SBA disagrees. The preparation of a quarterly short form financial statement becomes a simple matter if performed on a personal computer, using readily-available bookkeeping software together with reporting software provided by SBA. Furthermore, the commitment funding process as proposed by SBA was not intended to put SBA at a disadvantage relative to where it would have been if it were considering a request for Leverage under the traditional funding mechanism. Since Leverage requests outside of the commitment process must be accompanied by a Short Form 468 for the most recent fiscal quarter, and since the draw down of funds under the SBA commitment is the issuance of Leverage, SBA should receive a Short Form 468 for the most recent quarter in order to evaluate a draw request. Under the commitment funding process, decisions on requests for draws will have to be made quickly by SBA staff, more quickly than decisions on requests for Leverage under the traditional funding process. SBA staff will need to monitor more closely the financial status of a Licensee with an outstanding SBA commitment in order to be able to respond in a timely fashion to the Licensee's draw requests. The filing of quarterly financial statements on Short Form 468 by all Licensees with outstanding SBA commitments will allow SBA to perform that function as promised. As mentioned above, in the event the draw request is made within 30 days of the end of the Licensee's fiscal quarter, SBA had proposed to accept a statement of no adverse change in lieu of the Short Form 468. Most of the comment letters argued in favor of adopting the more familiar standard of ``no material adverse change''. SBA agrees that adverse changes which are immaterial to the Licensee's financial status should not be a barrier to consideration for a draw of Leverage. Accordingly, Sec. 107.215(f)(3)(i)(A) has been finalized with the suggested change. Most of the comment letters also contained an objection to the requirement for specific deal information both pre- and post-draw. SBA reaffirms its position that while a Licensee need not have specific transactions under consideration in order to obtain SBA's commitment, draws under that commitment must be intended for use in a particular transaction with a particular small concern. To ease the paperwork burden on Licensees, however, the statement evidencing the Licensee's need for the funds no longer requires that the Licensee provide the small concern's Standard Industrial Classification code number or a summary of the proposed financing. See proposed Sec. 107.215(f)(2)(i)(B), finalized as Sec. 107.215(f)(3)(i)(B). Instead, the statement must include only the name and address of the small concern, the amount of the proposed financing, and the scheduled closing date. SBA is also extending by 30 days the due date for the written explanation of the failure to close a transaction. In summary, if the intended transaction closes, the Licensee must submit a Form 1031 (``Portfolio Financing Report'') within 30 days of the actual closing date. If the transaction fails to close, however, a written explanation must be filed with SBA within 60 days (instead of 30 days, as proposed) after the scheduled closing date. Penalties for the failure to file the Form 1031 or the written explanation remain unchanged from the proposed rule. The final documentation matter addressed in some of the comment letters concerns the requirement that a Licensee submit a certified statement with each draw request representing that it is in compliance with applicable regulations. The suggestion was made that SBA be permitted to accept draw requests in the event violations are disputed or are not material in nature. SBA has considered the suggestion and believes a clarification of the subject matter is in order. SBA did not intend to apply a different standard to draw requests than it currently applies to Leverage requests. A Licensee with an unresolved regulatory violation that would not be cause for automatic disqualification for Leverage under the traditional funding process should not, for the same violation, be disqualified automatically from drawing down Leverage under the commitment funding process. In practice, there are two separate circumstances under the traditional funding process where SBA would consider favorably the Leverage request of a Licensee with an outstanding violation: (1) If the Licensee's violation is of a non-substantive provision of the Act or regulations and the Licensee has not repeatedly violated non- substantive provisions; or (2) if the Licensee has agreed with SBA on a course of action for the resolution of its violation, and if the terms of the agreement do not preclude the Licensee from obtaining Leverage prior to the resolution of the violation. In each case, the determination as to whether a violation exists is made by SBA, as is the decision to provide Leverage notwithstanding the violation. SBA has revised the proposed rule to allow for favorable consideration of a draw request under those two circumstances. See new paragraph 107.215(f)(2) ``Conditions to draws.'' Proposed Sec. 107.215(f)(2) has been renumbered as Sec. 107.215(f)(3), and now permits a Licensee to submit a certification that, to the best of its knowledge and belief, it is in compliance with applicable regulations (i.e., it has no unresolved regulatory violations) or an explanation as to the specific nature of any outstanding violations. One additional change has been made to the proposed rule. The amount of the commitment fee was not set forth in the proposal. This final rule fixes -he commitment fee at 3% of the face amount of the pooled securities and 1% of the issue price of the Preferred Securities reserved under the commitment. As explained below, when pooled securities are issued by a Licensee as a draw against SBA's commitment, the 2% guaranty fee ordinarily due pursuant to Sec. 107.210(d)(1) will be offset against the 3% commitment fee already paid. No additional payment will be necessary. With the exception of some minor changes in wording, the proposed rule is otherwise adopted without change. Effective immediately, any Licensee may submit an application for SBA's conditional commitment to reserve Leverage. The Application must be accompanied by the same financial information and other documentation as is required of Licensees applying for Leverage, except that no securities forms should accompany an application for SBA's commitment. For a Licensee wishing to participate in the next scheduled pooling of Leverage securities, and also wishing to obtain SBA's conditional commitment for future Leverage, separate applications should be filed. A determination to grant a Licensee's request for a commitment will be made only after SBA reviews the applicant's financial and regulatory status as well as its representation as to projected needs. The actual amount of a commitment which SBA will approve for a particular Licensee will depend in part on factors other than the applicant Licensee's own financial and regulatory situation, including such matters as the anticipated need for Leverage by all other Licensees making Leverage requests and the amount of program authority appropriated by Congress for the fiscal year. The commitment, when granted, will represent a conditional agreement on SBA's part to permit a Licensee to make draws against an agreed upon reserved amount of Leverage over a fixed period of time. As a condition to a commitment's taking effect, the Licensee must pay a non-refundable commitment fee in the amount discussed above. Payment must be received within thirty days following SBA's issuance of the commitment, or prior to any draw against the commitment if requested within such thirty day period. When a Licensee issuing pooled securities draws against SBA's commitment, the amount of the user fee associated with the guarantee of the Licensee's security or securities will be debited against an account holding the commitment fees and credited against an account holding guaranty fees. Failure to make timely and full payment of the commitment fee will preclude any draws against the commitment, and will cause SBA's commitment to lapse automatically at 5:00 p.m. Eastern Time on the thirtieth calendar day following SBA's issuance of the commitment. In any case, as mentioned above, SBA's commitment will also lapse at 5:00 p.m. Eastern Time on the 60th calendar day preceding the close of the next full Federal fiscal year following issuance of such commitment. Under present law, the Federal fiscal year ends on September 30. Therefore, depending upon when within a given Federal fiscal year a commitment was extended, the term of the commitment may be as short as ten months or as long as twenty-two months. Requests for a draw may be submitted at any time during the term of the commitment. It is contemplated that requests for a draw of pooled securities will, eventually, be funded as frequently as twice a month. Requests for a draw of preferred securities may be funded at any time. The minimum amount of any draw of pooled securities will be $1,000,000, with integral multiples of $100,000 permitted thereafter. Requests for draws of preferred securities may be in any amount. As was explained in the proposed rule, SBA's present general practice, which is not proposed to be changed (and which SBA is extending to Participating Securities) is to extend invitations to Licensees to participate in the creation of a pool of SBA-guaranteed Debentures, against which a public offering of SBA-guaranteed trust or pool certificates, each evidencing a fractional interest in the pool, is made to long-term investors. Such pools are formed and certificates sold every three months, give or take a few days. Preceding the closing of the sale of the pool certificates there is a ten-day period during which no more Debentures may be considered for inclusion in the pool. During that ten-day period, the rate of interest on Debentures or of Prioritized Payments on Participating Securities is determined. When a Licensee requests a draw, it will be deemed to have authorized SBA to guarantee its security immediately, and to have authorized SBA, acting as the Licensee's agent, to sell such security to a short-term investor that will agree to hold the Licensee's security until the Licensee's security is put into the next pool, or is repurchased by the Licensee, or is repurchased by SBA because of a definitive determination based on subsequently-received adverse information concerning the Licensee's credit or regulatory status. If the security is a Debenture, it will be sold to a short-term investor at a discount, calculated as if the maturity date of the Debenture were the next scheduled closing date for the sale of pool certificates. The Licensee will also agree to the payment of additional interest to the short-term investor, at the same rate used to calculate the discount, for each day that the sale of pool certificates is delayed beyond the scheduled date. While payment to the short-term investor of all interest accrued from the date of sale to the actual closing date shall be the responsibility of the Licensee, it shall be guaranteed by SBA. The Licensee's failure to make full payment of such additional interest shall constitute an event giving rise to a condition affecting the Licensee's good standing under SBA's regulations. If the Licensee's security is a Participating Security, the same conditions will apply, however, the Participating Security will be sold to a short-term investor at a price equal to the face amount thereof. Although SBA guarantees the Licensee's undertaking to the short- term investor concerning payment of interest on a Debenture or Prioritized Payments on a Participating Security on the date such Debenture or Participating Security is pooled, the Licensee does not warrant, nor does SBA guarantee, that pooling will take place on any specific date. The short-term investor assumes the risk that the recovery of its invested principal and the receipt of interest or Prioritized Payments will be delayed to the extent that the pool closing is delayed. Based on historical experience, it is unlikely that any such delay will occur and if it does, the duration of the delay should be minimal. The rate at which the Licensee's Debenture will be discounted or at which the Prioritized Payments will accumulate on a Participating Security when either of these securities are sold to a short-term investor will, in both cases, be determined with reference to the current average market yield on obligations of the United States with comparable periods to maturity. However, for the purpose of determining the rate of interest or of Prioritized Payments payable to a short-term investor, ``maturity'' refers to the next scheduled pooling date, not the stated maturity date of the security in question. In the normal course of events, when the sale of pool certificates closes, the Licensee's security will be included in the pool, having been purchased, as previously agreed, from the short-term investor with the Licensee's share of the proceeds of the sale of SBA guaranteed certificates issued against the pool. The sale of the Licensee's security to a short-term investor with SBA's guaranty does not obligate SBA to include that security in a pool of long-term securities in disregard of subsequently-obtained information calling into question either the Licensee's financial soundness or the Licensee's compliance with applicable regulations. If SBA determines to withhold its guarantee of the Licensee's security to the pool, SBA will purchase the Licensee's security from the short-term investor on or before the pool closing date. Sale of the Licensee's security to a short-term investor with SBA's guaranty does not cut off the Licensee's right to withdraw its security from entering into the pool by repurchasing it directly from the short- term investor if notice is given to SBA at least ten days prior to the pool cut-off date. However, since the sale of the Licensee's security to a short-term investor, and not the subsequent pooling of the security, is the event that discharges SBA from its reservation obligation to the extent of the security's face amount, the Licensee's subsequent repurchase of its security from the short-term investor does not re-obligate SBA under the terms of its commitment, or restore SBA's guarantee authority to the extent of the face amount of the repurchased security. SBA's approval of an application for a commitment does not lock in any interest or Prioritized Payment rate, nor does SBA's guarantee of a security sold to a short-term investor indicate in any way what the Licensee's interest or Prioritized Payment rate will be when the security is pooled and certificates are sold to long-term investors. Once in the hands of the pool trustee, the Licensee's Debenture or Participating Security will assume all the terms and characteristics of the other securities in the pool, including an interest or Prioritized Payment rate recalculated with reference to the maturities of the other securities being pooled. Compliance With Executive Orders 12866, 12612, and 12778, and With the Regulatory Flexibility and Paperwork Reduction Acts Executive Order 12866 and Regulatory Flexibility Act This final rule will not constitute a significant regulatory action for the purposes of Executive Order 12866 because it is not likely to have an annual impact on the national economy of $100 million or more, and, for purposes of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., it will not have a substantial impact upon a significant number of small entities. 1. The legal basis for this final regulation is section 308(c) of the Small Business Investment Act, 15 U.S.C. 687(c), and section 20(a)(2) of the Small Business Act, 15 U.S.C. 631 (note) as amended by section 414 of Pub. L. 102-366. 2. The potential benefits of this final regulation have been set forth in the discussion above, under Supplementary Information. 3. The potential cost of this final regulation cannot be quantified or estimated. 4. There are no Federal rules which duplicate, overlap, or conflict with this final rule. 5. SBA is not aware of regulatory alternatives that could achieve the same objectives at lower cost. This rule was not reviewed under Executive Order 12866. Executive Order 12612 SBA certifies that this final regulation has no federalism implications warranting the preparation of a Federalism Assessment in accordance with Executive Order 12612. Executive Order 12278 For the purposes of Executive Order 12278, SBA certifies that this final rule is drafted, to the extent practicable, in accordance with the standards set forth in Section 2 of that Order. Paperwork Reduction Act This final regulation will impose an additional record-keeping requirement on those Licensees that voluntarily avail themselves of the benefit of this final rule. Viewing the matter from the Licensee's standpoint, the additional burden of preparing a quarterly short-form financial statement is offset by the assurance of the future availability of Leverage and the reduction of cost resulting from elimination of the need to draw down Leverage funds long before they may be invested in Small Concerns. From SBA's standpoint, the additional record-keeping is necessary if SBA is not to rely upon out- dated financial information when its funds draws against its commitment. [Catalog of Federal Domestic Assistance Program No. 59.011 Small Business Investment Companies] List of Subjects in 13 CFR Part 107 Investment companies, Loan programs-business, Reporting and record- keeping requirements, Small businesses. For the reasons set forth above, part 107 of Title 13, Code of Federal Regulations is amended as follows: PART 107--SMALL BUSINESS INVESTMENT COMPANIES 1. The authority citation for Part 107 continues to read as follows: Authority: Title III of the Small Business Investment Act, 15 U.S.C. 681 et seq.; 15 U.S.C. 683; 15 U.S.C. 687(c); 15 U.S.C. 687b; 15 U.S.C. 687d; 15 U.S.C. 687g; 15 U.S.C. 687m, as amended by Pub. L. 102-366. 2. Part 107 is amended by adding a new Sec. 107.215 to read as follows: Sec. 107.215 Commitments by SBA. (a) General. A Licensee may apply for SBA's conditional commitment to reserve an amount of Leverage against which SBA may purchase its Preferred Securities or guarantee its Debentures or Participating Securities as and when offered for future public sales. The amount of any such commitment shall be not less than $1,000,000 but not more than 100 percent of Regulatory Capital. Applications shall be prepared and submitted in accordance with Sec. 107.210(b), as amended from time to time, except to the extent that this Sec. 107.215 is inconsistent therewith. (b) Commitment fees. The Licensee shall pay to SBA a nonrefundable fee of 3% of the face amount of the Debentures or Participating Securities reserved under the commitment or, in the case of Preferred Securities reserved under a commitment, 1% of the issue price of such Preferred Securities. No request for a draw will be approved unless this fee has been paid in full. The 2% fee required to be paid by issuers of Debentures or Participating Securities pursuant to Sec. 107.210(d) shall be credited against the 3% commitment fee paid pursuant to this paragraph (b). (c) Automatic cancellation of commitment. Unless the full amount of the commitment fee is paid by 5:00 p.m. Eastern Time on the 30th calendar day following SBA's issuance of its commitment, the commitment shall be automatically cancelled. (d) Lapse of commitment. Notwithstanding payment of the commitment fee, SBA's commitment shall automatically lapse at 5:00 p.m. Eastern Time on the 60th calendar day preceding the close of the next full Federal fiscal year following issuance of such commitment. (e) Additional record-keeping requirements. Following notification that SBA's commitment has been granted, a Licensee shall submit a Financial Statement on SBA Form 468 (Short Form) as of the close of each quarter of its fiscal year to SBA within 30 days after the close of the quarter, or with any request for a draw that is made within such 30-day period. If a Licensee is not in compliance with this paragraph, no draw request shall be considered. (f) Draws. (1) Minimum amount of draw. The minimum face amount of Debentures or Participating Securities that may be issued in connection with a draw against SBA's commitment is $1,000,000; plus multiples of $100,000 above $1,000,000. Preferred Securities may be issued in any amount. (2) Conditions to draws. No Licensee shall be eligible to make a draw against SBA's commitment unless it is in compliance with all applicable provisions of the Act and SBA regulations (i.e., no unresolved statutory or regulatory violations); Provided, however, that a Licensee that is not in compliance may nevertheless be eligible for draws if SBA determines that (i) The Licensee's outstanding violations are of non-substantive provisions of the Act or regulations and that the Licensee has not repeatedly violated non-substantive provisions of the Act or regulations or (ii) The Licensee has agreed with SBA as to a course of action for the resolution of its violations and such agreement does not preclude the issuance of Leverage by the Licensee. (3) Procedures for funding draws. (i) General. A request for a draw, which may be submitted at any time, is submitted in the form of a request that the Licensee's Preferred Security be purchased by SBA; or that its Debenture or Participating Security be guaranteed by SBA, sold to a short-term investor and subsequently included in the next pool for which the Licensee's securities are eligible. The following documentation shall accompany each such request for a draw: (A) If such request is submitted within 30 days following the close of the Licensee's fiscal quarter, the request shall be accompanied by a Financial Statement on SBA Form 468 (Short Form) reflecting the Licensee's condition as of the close of that fiscal quarter; otherwise, the request shall be accompanied by a formal statement of no material adverse change in financial condition since the filing of the most recent SBA Form 468 (Long or Short Form). (B) A certified statement executed by an officer of the Licensee or of a corporate general partner of the Licensee, or by an individual that is authorized to act as or for a general partner of the Licensee, as the case may be, representing that to the best of its knowledge and belief the Licensee is in compliance with all provisions of the Act and SBA regulations (i.e., no unresolved regulatory or statutory violations) or a statement as to the specific nature of any violations of which it is aware. (C) A statement that the proceeds are needed to fund a particular Small Concern, which statement shall also include the name and address of the Small Concern, the amount of the Licensee's proposed Financing, and the scheduled closing date thereof. Within 30 calendar days after the actual closing date, the Licensee shall submit an SBA Form 1031 confirming the closing of the transaction(s) with the proceeds of the draw or, within 60 calendar days after the scheduled closing date, the Licensee shall submit a written explanation of the failure to close. Failure to submit an accurate Form 1031 or satisfactory written explanation of failure to close will preclude consideration of any subsequent draw requests, and may be deemed an event affecting the Licensee's good standing or constituting consent to restricted operations, as the case may be. (ii) Draw process. (A) General. By submitting a request for a draw, a Licensee is conclusively presumed to have authorized SBA to purchase its Preferred Security, or to have authorized SBA or any agent or trustee designated by SBA to guaranty its Debenture or Participating Security and to sell it with SBA's guarantee, to enter into any agreements (and to bind the Licensee to such agreements) that may be necessary to effect: (1) The sale of the Licensee's security to a short-term investor, (2) Its purchase on the Licensee's behalf (or by the Licensee itself), and (3) The subsequent pooling of that security with other securities with the same maturity date: Provided, however, That the Licensee shall retain the right to repurchase its securities upon notice to SBA at least 10 days prior to the cut-off date for the pool in which the Licensee's security is to be included by tendering the face amount of the Debenture, or the face amount of the Participating Security plus Earned Prioritized Payments, as the case may be, to the short-term investor. (B) Debentures. An SBA guaranteed Debenture shall be sold to a short-term investor at a discount calculated with reference to a rate determined by the Secretary of the Treasury in accordance with Section 303(b) of the Act (but without regard to any interest subsidy to which the Licensee may be otherwise entitled), as if the maturity date of the Debenture were the next scheduled date for the sale of pool certificates: Provided, however, That if the actual sale of pool certificates shall take place after the scheduled date, the Licensee shall pay to the short-term investor, on the actual sale date, an additional sum equal to daily interest as scheduled on the Debenture, at the same rate, from the scheduled sale date to the actual sale date. Failure to make such interest payment on the closing date shall constitute an event giving rise to a condition affecting the Licensee's good standing. (C) Participating securities. The Licensee's Participating Security shall be sold to a short-term investor for a sum equal to the face amount thereof. The Licensee shall undertake, with SBA's guarantee, to pay the short-term investor, at the closing of the next scheduled sale of pool certificates, Prioritized Payments as scheduled on the Security at a rate determined by the Secretary of the Treasury in accordance with Section 303(b) of the Act, as if the maturity date of the Participating Security were the next scheduled date for the sale pool certificates. Dated: September 15, 1994. Erskine B. Bowles, Administrator. [FR Doc. 94-23338 Filed 9-21-94; 8:45 am] BILLING CODE 8025-01-M