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We would appreciate your replies as soon as possible so that the printing of the record will not be unduly delayed. Sincerely yours,
JEROME S. ADLERMAN, General Counsel.
NATIONAL ASSOCIATION OF SMALL BUSINESS INVESTMENT Cos.,
Washington, D.C., August 18, 1966. JEROME S. ADLERMAN, Esq., General Counsel, Permanent Subcommittee on Investigations, Senate Office
Building, Washington, D.C.
DEAR MR. ADLERMAN: I appreciate the opportunity to expand my statement as requested in your letter of August 10.
Your first question concerns the accuracy of the estimate of losses to the Government, as made by former Deputy Administrator Richard E. Kelley. I know of no way in which I, or anyone outside Government, can make an estimate of such losses, or comment intelligently upon the accuracy of Mr. Kelley's figures.
Your second question pertains to NASBIC's Code of Ethics and asks specifically about Frontiers Capital Corporation and Putnam Investors, Inc.
Frontiers Capital Corporation is a member of NASBIC. Putnam Investors, Inc., is not a member, although it formerly belonged to the Association.
NASBIC had no information on irregularities in either of these companies prior to the disclosures at your hearings. As a result of those disclosures, NASBIC notified Frontiers Capital Corporation in writing on August 8, 1966 that a hearing will be convened here in Washington on Friday, August 19, at which Frontiers Capital Corporation is invited to be represented for purposes of reviewing the disclosures contained in the transcript of your hearing in the light of our Code of Ethics.
You also ask what power and authority NASBIC possesses to enforce selfpolicing and request any statistics available as to enforcement actions taken by NASBIC.
I enclose a copy of the NASBIC Organization Manual. Our Code of Ethics, Trade Practice Rules and Procedures for Enforcement of the Code of Ethics and Trade Practice Rules are set forth beginning on page 19 of the Manual. (See pp. 301-302.)
Admittedly, the Association's power and authority to enforce self-policing is limited. Our only present sanctions are as set forth in the Procedures, namely censure, suspension or expulsion from membership.
Our Code of Ethics was developed over a period of several months beginning in late 1960, and it was formally approved and adopted by the membership of the Association at our Mid-Year Meeting in Chicago in June, 1961. In the process of developing the Code of Ethics, we consulted frequently with the Small Business Administration, recognizing the need for close collaboration with the Agency in the exchange of information coming within the purview of the Code. After much thought and study, the appropriate SBA officials informed us that they could not legally disclose to NASBIC information in its files bearing on our Code of Ethics.
Consequently, we have had to depend upon industry sources by and large in obtaining, investigating and processing information relating to the Code. As a result of this process, we have had one formal proceeding which resulted in the censure of the chief executive officer of a member company.
Membership in the association is on an annual, renewable basis. In approxi. mately a score of instances, reliable information has come to our attention raising ethical questions which prompted our Executive Committee to withhold invitations to member companies to renew their memberships in the Association.
* In short, due to the Association's lack of the financial resources and man power necessary to investigate thoroughly applicants for membership in the Association, we have been obliged to rely in large part on SBA's approval of Licensees as evidence of their eligibility for membership in the Association. As I suggested in my prepared statement, we would much prefer to have specific information from the Agency where it obtains evidence regarding any Licensee or any principal of a Licensee coming within the purview of our Code of Ethics.
Only then could the Association feel reasonably assured that its entire membership was in fact abiding by the Code of Ethics and Trade Practice Rules.
Absent effective economic sanctions, it is the hope of our Association that membership in it will at least carry with it a seal of integrity and responsibility consonant with the principles set forth in our Code of Ethics.
Finally, your third question asks if there is a conflict between my statement that the SBIC industry is a successful industry and the statement that private funds are leaving the program faster than they are coming in.
As noted on page 3 of my statement, I say that we are a successful industry in terms of accomplishing the congressional goal of supplying long-term loan funds and equity capital to small business concerns. I point out that we have advanced over $1 billion to some 20,000 small concerns in the relatively brief span of less than eight years. I believe we SBICs have been successful in proving that a need and an effective demand exists which we have filled to the limit of our resources.
On the other hand, at the conclusion of my remarks, I pointed out that "present inducements to investors . . . are not sufficient to ensure the success of the program" and then said that more funds had left the program than had been brought in during the past year. This is fact, and I hope that the Senate Permanent Subcommittee on Investigations will give its backing to our efforts to assure that the industry has the resources to meet the capital needs of small business which are not being met by any other institution. Sincerely yours,
GROGAN LORD, President.
NASBIC CODE OF ETHICS; TRADE PRACTICE RULES; AND PROCEDURES FOR ENFORCE
MENT OF THE CODE OF ETHICS AND TRADE PRACTICE RULES; AS THEY APPEAR IN THE NASBIC ORGANIZATION MANUAL
CODE OF ETHICS
1. The business of each SBIC shall be conducted at all times in full compliance with the Small Business Investment Act of 1958, any amendments thereto, and the Regulations issued thereunder by the Small Business Administration, and in accordance with high standards of commercial honor and just and equitable principles of conduct.
2. The constant goal of each SBIC shall be to improve the welfare of the small business concerns which it serves.
3. Each SBIC shall promote and maintain ethical standards of conduct and deal fairly and honestly with all small business concerns seeking its assistance, with all companies to or with whom it makes loans or investments, with all other SBICs, with the Small Business Administration and other Government agencies having jurisdiction.
4. Each SBIC shall require its officers, employees, designees, and representatives to abide by the Code, the Trade Practice Rules, the Procedures for their Enforcement, and all rulings and orders issued pursuant to them; and all such officers, employees, designees and representatives are as individuals hereby so bound.
5. In the administration of the Code and the Trade Practice Rules, it shall be the purpose and object of this Association not to discriminate against any member or licensee, nor to engage in any practices which may be considered as being in restraint of trade.
6. Each SBIC shall comply with the Code, the Trade Practice Rules and the Procedures for their Enforcement as they may from time to time be adopted or amended and all rulings and orders made pursuant to them.
7. Unethical conduct shall be deemed to include any evasive device intended to cloak noncompliance with the Act, Regulations, Code, Trade Practice Rules or Procedures for their Enforcement.
TRADE PRACTICE RULES
1. It shall be the duty and obligation of each SBIC to strive at all times to uphold the integrity, honor and reputation of the industry.
2. No SBIC shall malign, defame or unfairly criticize any other SBIC in any dealings with proposed client companies or otherwise.
3. If one SBIC asks another SBIC whether it has negotiated or is negotiating with a proposed client company, the second SBIC shall disclose whether it has
or is and whether the matter is still open. Any further disclosures on the part of the second SBIC shall be within its own discretion, and the decision of the first SBIC to proceed with its own negotiation shall likewise be at its own discre tion, it being intended to foster free competition.
4. No SBIC may be used or permit itself to be used to promote the welfare of or assist its officers, directors, stockholders, employees, designees or representatives except insofar as they may benefit from the success of the SBIC. This rule shall not be deemed however to proscribe any investment or relationship which has been approved in writing by the Small Business Administration, nor the establishment of normal banking, business or professional relationships ; nor shall this rule be deemed to proscribe or prohibit the payment of professional fees, directors' fees or other compensation for services, provided that a full disclosure thereof is made in advance in writing to the officers and directors of the SBIC and to the officers and directors of all participating SBIC's and other associates in the investment.
5. Where two or more SBIC's participate in a loan or investment, the sponsoring SBIC and all other participating SBIC's shall make full disclosure of all facts known to them about the proposed client company and all relationships between the proposed client company, its officers, directors, stockholders, employees, designees or representatives with the sponsoring SBIC and other participating SBIC's or any of their officers, directors, stockholders, employees, designees or representatives.
6. SBIC's collaborating in a proposed loan or investment are bound not to compete with each other for that loan or investment and may not deal directly with the proposed client company except on behalf of the group.
PROCEDURES FOR ENFORCEMENT OF THE CODE OF ETHICS AND TRADE PRACTICE RULES
1. Complaints of violations shall be forwarded to the Chairman of the Committee on Ethics and Trade Practices, who will have the responsibility, in consultation with counsel to NASBIC, of deciding if there is an initial basis for further investigation and action.
2. If the decision is affirmative, a 3-man ad hoc investigating committee shall be constituted to consist of the Chairman of the Committee on Ethics and Trade Practices (or his designee), the President of the Regional Association having jurisdiction over the SBIC or person complained against (or his designee), and if either such Chairman or such President or their companies are involved in the complaint then the President of NASBIC shall appoint such members; and the two members so designated shall select a third.
3. The ad hoc committee shall promptly investigate and consider the facts. The accused SBIC or person shall be under the affirmative duty to cooperative fully and supply all facts and evidence requested, and may be required to do so under oath; the accused SBIC or person complained against shall have the right to counsel at all stages of the proceedings.
4. The committee shall reach its determination with all due diligence and shall render a confidential report to the Chairman of the Committee on Ethics and Trade Practices, who shall forward the report to the Executive Committee of NASBIC for such action as may be appropriate, together with his recommendation. To the extent feasible, but bearing in mind the need to avoid publicity, the Chairman shall consult with other members of the Committee on Ethics and Trade Practices before making his recommendations ,
5. The Executive Committee of NASBIC shall make the final determination which shall be either dismissal of the complaint, censure, suspension or expulsion, and shall also determine whether its rulings shall be kept private or made public and whether to report them to the Small Business Administration.
DEPARTMENT OF JUSTICE,
Washington, August 25, 1966. Hon. John L. MCCLELLAN, U.S. Senate, Washington, D.C. .
DEAR SENATOR: Your letter to the Attorney General dated August 18, 1966, transmitting stenographic transcripts of the hearings of the Senate Permanent Subcommittee on Investigations of the Committee on Government Operations held on August 2, 3 and 4, 1966, has been referred to me for appropriate reply.
I have instructed members of my staff most familiar with the organization and operation of small business investment companies to review the transcripts and determine if the testimony discloses evidence of prosecutable criminal violations.
Your cooperation in furnishing this material to the Department of Justice is greatly appreciated. Sincerely,
FRED M. VINSON, Jr., Assistant Attorney General.
FEDERAL DEPOSIT INSURANCE CORPORATION,
Washington, August 26, 1966. Hon. JOHN L. MCCLELLAN, Chairman, Senate Permanent Subcommittee on Investigations, Committee on
Government Operations, New Senate Office Building, Washington, D.O. DEAR MR. CHAIRMAN : We are in receipt of the stenographic transcript of hear. ings on the organization and operation of Small Business Investment Companies which the Subcommittee transmitted to us by letter on August 18, 1966.
We sincerely appreciate the fine work done by the Subcommittee in developing the materials in this investigation. The excellence of the Subcommittee's accomplishment in this regard has persuaded us to make available to our local counsel at both Chicago and Miami pertinent parts of the transcript for their reading. We shall particularly invite counsel's attention to the new matter which the Subcommittee was able to develop. I am sure that they will find this matter of real interest to them as it was to us.
Thank you very much for sending us the transcript. If we can be of any further assistance to you in this or in any other matter, please let us know. Sincerely yours,
K. A. RANDALL, Chairman.
SMALL BUSINESS ADMINISTRATION,
Washington, D.C. August 23, 1966. Hon. JOHN L. MOCELLAN, Chairman, Permanent Subcommittee on Investigations, Committee on Govern
ment Operations, U.S. Senate, Washington, D.C. DEAR SENATOR MCCLELLAN : Thank you very much for your letter of August 18, 1966, which was signed also by Senator Harris. I, too, believe that the hearings will have a healthy effect on the program due, in no small measure, to the Subcommittee's approach.
The interest of the Subcommittee in our intensive examination program is, indeed, recognized. At the conclusion of the examinations, a complete report on our findings will be submitted, showing the information desired by the Subcommittee.
At Mr. Adlerman's suggestion, we will begin a study shortly relating to the minimum size which would enable a small business investment company to have a reasonable expectation of a profitable operation. When we have the results of this study, we will forward the information to the Congress for appropriate use.
Your support and gracious comments on my efforts are appreciated. I hope developments in the program will continue to merit them. Sincerely yours,
BERNARD L. BOUTIN, Administrator.