where the population is under 100,000, and our target is that we will have 80 percent of that whole program in communities with under 50,000.

Senator MUNDT. When you are talking about that, I am not familiar with these numbers. You are talking about community development? Mr. BOUTIN. I am talking about local development programs. Senator MUNDT. I am talking about the SBIC program, whether it would be advisable to direct the Deputy Administrator for Investments to at least provide a certain minimum amount of the limited capital that you have in the revolving fund to help develop that part of America's economy.

Mr. BOUTIN. I think this is one of the points, Senator, that we have clearly missed in developing this program. I think that this is very valid and SBA, as a matter of fact, should devote substantial effort to at least telling the people in these smaller communities, smaller States, less-populated States, about the program and the advantages it can offer.

I think a good vehicle to use here is perhaps the Independent Bankers Association that has many banks of the small rural variety, as well as The American Bankers Association, particularly where the law provides that a bank can invest up to 2 percent of its capitalization in SBIC's. I think that this is where it could really work extremely well.

Senator MUNDT. Do you have anything in these new guidelines which you have evolved since you have been in-and you haven't been in very long; it takes a little time to get on top of an operation of this type-do you have anything in these new guidelines or do you anticipate putting anything in future guidelines which would tend to reserve for these less developed areas, and less populous communities, a certain percentage of the SBIC revolving fund so that we won't come out a year from now or 2 years from now with the same dislocation of a disproportionate amount of the money going to the metropolitan areas?

Mr. BOUTIN. Well, our guidelines, Senator, will be primarily to help those existing and those to be licensed SBIC's to run their SBIC's in a businesslike manner in accordance with the laws and regulations. I think as a completely separate thing, what we should do, and I agree with your statement, that apart from the SBIC's we have now, that we should develop new SBIC's in these more rural areas. I think that is a faster way to get there than to expect that an SBIC licensed in New York possibly is going to be making very many loans in rural areas hundreds of miles from the base of their operation.

Senator MUNDT. I am glad to hear you say that, Mr. Boutin, and I do hope that as you evolve those guidelines and you are quite right in first of all trying to find guidelines that would protect the Federal dollars that you will also crank into those guidelines something that will produce and protect a more balanced economy in this country. They are quite different problems, but they are under the aegis of your administration, and they are all involved in this whole picture of SBIC.

Mr. BOUTIN. Mr. Chairman, if I might, because it is germane to this point, but not to the purpose of this hearing, I think it would be interesting to the Senator to know that we have recently come up with a new system of handling SBA regular loan programs within a given

State, where we will divide that State up and assign specific people to each section of it, so that we, through a circuit rider technique, can get to these small areas.

I am talking of the communities of 1,000 and 2,000 that in the past have been overlooked and passed by. We can get in and service them as well as we can a metropolitan area. I think that this is going to work. I think it goes to the statement you have made.

Senator MUNDT. As a matter of fact, in your SBA program and your community development loan program, I know from my own personal experience in South Dakota where I have followed this thing in depth and in detail, you have done an excellent job of making them available to really small towns of less than 1,000 if they have the enterprising community need.

So I was shocked no end when I read this statistic that in the SBIC program, it seems to be concentrated to an undue degree in the larger metropolitan areas. I do hope that when you get these new guidelines set up for protecting the Federal dollar, you also put in some guidelines to make this more readily available and operative in the areas in which SBA operates.

Mr. BOUTIN. I agree.

Senator MUNDT. That is all.

Senator CURTIS. I have just a few questions.

You referred to the fact that there are a number of SBIC's that are in trouble or have problems. It does not necessarily follow, does it, that all of them that are in trouble or have problems-the individuals connected with them, collectively or individually-are guilty of intentional wrongdoing?

Mr. BOUTIN. That is exactly correct.

Senator CURTIS. And it is also possible that some of them may be in trouble or have problems where not only are they not guilty of intentional wrongdoing, but they may have followed a high degree of ethics?

Mr. BOUTIN. That is correct.

Senator CURTIS. Even though they weren't required to by the limited supervision in checking them; is that right?

Mr. BOUTIN. That is correct, sir.

Senator CURTIS. Now, you cited an example whereby $300,000 of money from individuals might result in them getting Government money and credit up to $3 million.

Mr. BOUTIN. That is correct.

Senator CURTIS. Suppose such an SBIC has a loss. Is the loss taken out of the private capital first, or last, or is the loss shared proportionately?

Mr. BOUTIN. No. Let me give you a rundown of how it would happen. This is the order of priority.

At the bottom of the heap would be the original investors. So they would have the lowest priority of all. So their money would go first. Senator CURTIS. In other words, their money would be taken to absorb the loss first.

Mr. BOUTIN. Yes. The next lowest in priority would be our subordinated debentures-the money we made available under section 302. So let us say that it was a company with $3 million and of the $3 million they had a deficit of $750,000. The investors' $300,000 would disappear, and SBA's 302 money would disappear. Then SBA funds of

$150,000 under section 303, would outrank those banks and individuals who had loaned money to the SBIC.

Senator CURTIS. In other words, when an SBIC is created-and I am relating this to the past also and assuming that they had sizable losses the private investors would lose all of their money before the Government lost any?

Mr. BOUTIN. That is correct, Senator.

Senator CURTIS. And where an additional problem comes in-where there have been some shenanigans, and in order for the individuals who appear to have put in their own money who have borrowed it from some other SBIC or some dummy group that has gotten their assets from the SBIC, in truth and in fact they have no money?

Mr. BOUTIN. That is exactly right. There aren't many of them, but where it occurred, that is correct.

Senator CURTIS. In any operation where those who are managing in truth and in fact have no money, so they can't lose, but where if the venture succeeds they make some money-that situation is an invitation for wrongdoing, isn't it?

Mr. BOUTIN. I couldn't agree more.

Senator CURTIS. And it is an invitation for taking highly speculative risks; is that not right?

Mr. BOUTIN. That is correct.

Senator CURTIS. Now, under the new set-up as you are doing it now, and in the way you expect to do it in the future, there can be no SBIC's created without private individuals in truth and in fact putting their money into the venture; isn't that correct?

Mr. BOUTIN. That is correct, Senator.

Senator CURTIS. And if they do, they will be the first ones to share the loss.

Mr. BOUTIN. Their money would be the first to go to pay the loss. Senator CURTIS. And if the loss equaled their money, and no more, they would lose all of their money and the Government would come out whole; is that right?

Mr. BOUTIN. That is correct.

Senator CURTIS. Now, by equity capital, I am sure that I understand what you mean by it, but for the record, would you describe it? Mr. BOUTIN. Equity capital, Senator, is money that is put into a small business concern to provide capital for that concern to operate, but not become part of its debt structure. The money could be in stock, or stock options, or it could be made available for the purchase of debentures, convertible to stock. There are a number of vehicles here that could be used. But it is completely different from straight loan money.

Senator CURTIS. Now, at the present time, and in the foreseeable future, individuals borrow money to start an SBIC and all of their assets including those unrelated to the venture are liable for the repayment of that money; is that right?

Mr. BOUTIN. No, that is not correct. If I understand you correctly, if I were to start an SBIC and I were to borrow all or part of my $300,000, I would have to have net assets of twice the amount I borrowed, securing the amount that I do borrow, so that in fact it does. come from me in case of loss or default.

Senator CURTIS. Is there any restriction as to where you borrow it? Can you borrow it from another SBIC, the SBA, or any other Government lending institution?

Mr. BOUTIN. No, you cannot. We would take a very hard look at every single case where borrowing is involved to make sure that reasonable interest rates were being paid, that there were no gimmicks at all in the borrowing.

Senator CURTIS. In the past there have been, or at least there appears to have been, instances where the money was actually borrowed from the money advanced by the Government; is that not right?

Mr. BOUTIN. Yes, sir.

Senator CURTIS. And that has been brought about by having more than one SBIC corporation; is that right?

Mr. BOUTIN. That is correct.

Senator CURTIS. This act was passed in 1958. When was the first license granted?

Mr. BOUTIN. I don't have the date on that. The first licenses that I show granted were in fiscal year 1959, when 16 were given in that first year of operation. There were 16 granted in that year, the first year of the program.

Senator CURTIS. How many were granted the next year?

Mr. BOUTIN. The next year 93 were granted.

Senator CURTIS. And how many have been granted in the aggregate?

Mr. BOUTIN. A total of 791, Senator. Of those, 23 have dropped out by merger, and 82 for other reasons, many of which were plain surrender, so that we have as of the 30th of June 686, which is current to this time.

Senator CURTIS. Can you tell me-I don't know the name for thiswhat happened to the original 16? Are they still going?

Mr. BOUTIN. I will have to provide that for the record. I don't know. That is an interesting question.

Senator CURTIS. I would appreciate it if, for the record, you would supply the number of licenses granted in each fiscal year from the beginning up to the last one, and in a corresponding column show the number that are still operating.

(Information requested follows:)

1 Baltimore Business Investment Co., license suspended because of capital impairment; Bloomington Small Business Investment Co., referred to Department of Justice; First Southern Investment Co., Inc., capital impairment followed principal owner's death. Investigation to be requested.

Senator CURTIS. Are you prepared at this time to classify them as to whether or not they are in trouble?

Mr. BOUTIN. Yes.

Senator CURTIS. Are you able to do that at this time, or would you prefer to do that after some months go by for your further checks? Mr. BOUTIN. By that, does the Senator mean what we see right now, as the number of companies in trouble?

Senator CURTIS. Yes. Are you able to make an answer that is fair to the people involved and fair to the Congress, as to the number that are in trouble?

Mr. BOUTIN. The best answer I can give on that, Senator, is the figure that I referred to before, as of the 30th of June, the best information that I have, and some of that information I must say that I don't trust, is 237 companies. When I say "problem companies," of that number, it varies all the way from 24 that are classified as problem companies simply because they are inactive, and they are sitting on their money and they are doing nothing, to 37 of them that are working out surrender procedures with us.

Right now there are 44 that are capitally impaired to 50 percent or more. There are 48 that are in litigation; 28 are under investigation. We don't know what those investigations are going to show. There are 56 where violations of regulations are involved, and some are serious violations and some are not serious violations.

Some of the companies that are in this category, we think, are viable. We think that they are savable. We think that they can do a good job. They are going to need some help and some attention. I think it would be well if I pointed out to the committee at this time, too, that in spite of the estimate made by the former deputy, and I don't quarrel with that figure because I can't prove it or disprove it, of $18 million possible loss from these problem companies, that the fact of the matter is that right to this moment the Government has suffered no loss from this program.

Senator CURTIS. Now, you have some sort of an agreement or working arrangement with the Department of Justice, don't you? Mr. BOUTIN. Yes, we do.

Senator CURTIS. In a nutshell, what is it?

Mr. BOUTIN. Our relationship with the Department of Justice has been, very simply, Senator, that they handle or have been handling all of our matters before the courts for the agency. We have found fault with that. The previous Administrator, Mr. Foley, and Mr. Katzenbach, at the time that he was Deputy Attorney General, worked out an agreement which we thought made good sense, whereby as a normal practice, SBA would handle its own litigation in cases of SBIC's, but supported by and under the general supervision of the Department of Justice.

That agreement, in fact, has not worked. We testified before other committees on this.

I recently have had a number of conversations with Nick Katzenbach, who happens to be a very good friend of mine, and I have directed Phil Zeidman, our General Counsel, to work with Ramsey Clark and to try to perfect an agreement here whereby we can meet a reasonable time schedule on handling our cases without any detri