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Introduced Appears

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49C. Letter, dated March 29, 1965, addressed to Mildred A.

Finneran, secretary, Putnam Investors, Inc., from
James T. Phelan, Director, Eastern Division, Office
of Investment Companies Operations, Small Business
Administration, re Matters disclosed in SBA exami-

nation of Putnam Investors, Inc., as of June 39, 1964. 231

49D. Certificate of assurance of compliance, dated February

22, 1965, by Putnam Investors, Inc., with provisions

of certain laws..

231

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49E. Reapplication for $100,000 loan and transmittal letter

from Putnam Investors, Inc., to Small Business

Administration, dated August 20, 1965.--

231 (*)

49F. Letter dated September 14, 1965, addressed to Putnam

Investors, Inc., from Small Business Administration,

denying the loan..

231

50. Small Business Administration report of investigation of

Putnam Investors, Inc., dated January 5, 1966---- 231

51. Certified public accountant report on examination of

financial records of Bloomington Small Business In-

vestment Co., as of March 31, 1963.--

233 (*)

52A. Letter dated April 3, 1964, addressed to Mr. Chris A.

Huette, president, Bloomington Small Business In-

vestment Co, from Francis P. McKenna, Chief,

Financing Division, Office of Investment Assistance,

concerning sale of additional stock of Bloomington

Small Business Investment Co...

235

52B. Letter dated December 23, 1963, addressed to Frank

McKenna, from Chris A. Huette, president, Blooming-

ton Small Business Investment Co., concerning sale

of additional stock of Bloomington Small Business

Investment Co.-

235

53. Letter dated July 2, 1964, addressed to Bloomington

Small Business Investment Co., attention of Chris
A. Huette, president, from Richard E. Kelley,
Deputy Administrator for Investment, Small Busi-
ness Administration, concerning transfer of "ear-
marked portfolio securities'.

236 (*)

54. Chart showing estimated loss on problem companies as

of April 30, 1966..

242

292

55. Chart showing reporting SBICs-Government funds-
With deficits as of September 30, 1965..

244 292
56. Summary of disbursements to SBÍC's with 10 percent

or more deficit during the period October 1, 1965,

through May 31, 1966..

246

57. Chronology of changes in Small Business Administra-

tion regulations, February 10, 1964, through March
31, 1966 ---

260

58. Prepared statement of Grogan Lord, president of the

National Association of Small Business Investment

Companies, submitted to the subcommittee and
subsequent comments..

279 292

Proceedings of

August 2, 1966.

1

August 3, 1966.

111

August 4, 1966

195

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•May be found in the files of the subcommittee.

INVESTIGATION INTO SMALL BUSINESS INVESTMENT

COMPANIES

TUESDAY, AUGUST 2, 1966

U.S. SENATE,
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
OF THE COMMITTEE ON GOVERNMENT OPERATIONS,

Washington, D.C. The subcommittee met at 10:10 a.m., in room 3302, New Senate Office Building, pursuant to Senate Resolution 183, agreed to February 14, 1966, Senator Fred R. Harris (acting chairman of the subcommittee) presiding:

Members of the subcommittee present: Senator Fred R. Harris, Democrat, Oklahoma; Senator John L. McClellan, Democrat, Arkansas; Senator Edmund S. Muskie, Democrat, Maine; Senator Karl E. Mundt, Republican, South Dakota; Senator Carl T. Curtis, Republican, Nebraska. Also

present: Jerome S. Adlerman, general counsel; Philip W. Morgan, chief counsel to the minority; John J. Walsh, investigator; Ralph Dunavant, GAO staff; Ruth Y. Watt, chief clerk.

Senator HARRIS. This morning the subcommittee begins a series of hearings relating to the organization and operation of small business investment companies. The Small Business Investment Act of 1958 authorizes the Small Business Administration to license these private investment companies and to provide them with Federal funds for the purpose of lending to and investing in small business concerns which normally do not have free access to traditional bank loans.

There are about 700 of these investment corporations in the country, Each company is authorized to borrow from $BA funds totaling twice the amount of the company's private capital.

I believe, and I am sure that the members of the subcommittee agree, that the majority of the persons who own and operate most of the small business investment companies are honest and reputable men of good character. We have no desire nor intention to discredit them or the small business program. But it is our duty and our responsibility to inform the Congress about weaknesses, inefficiencies, and abuses which may be present in the SBIC program.

Many of the Small Business Investment Companies are in serious financial trouble. A former administrator of the program has stated publicly that 232 of the 700 firms were on the agency's "problem list” on April 30, 1966. He referred to certain "dubious practices” in the operation of some of the companies, and he estimated that, because of “the wrong people who operate SBIC's," the Small Business Administration was likely to lose about $18 million of the $275 million it has in

1

vested in the program. One purpose of these hearings will be to determine whether his estimates of problems and losses may be too low.

During these hearings, the subcommittee will hear testimony by officials of the Small Business Administration about the history and scope of the program, and about the total investment of Federal funds. SBA witnesses will also be asked to testify about the procedures and policies employed in licensing, examining, investigating, and supervising the SBIC's. Representatives of the General Accounting Office will discuss the problems of administration of the program in terms of results, deficiencies, and needed changes.

Staff members of the subcommittee will testify about facts disclosed by our investigation relating to the overall SBIC program and to the particular corporations investigated. Individuals involved with specific firms will be asked to tell us about details of their operations and transactions.

Some of the testimony, like that of our banking hearings last year, will relate to allegations of improprieties, misconduct, self-serving transactions, and misapplications of funds by the officials and owners of certain small business investment companies. We will also examine some apparent inadequacies of supervision and administration of the program by the Small Business Administration.

The subcommittee is concerned about the adequacy of existing laws to provide controls and regulations sufficiently effective to protect the Government's investment in these companies. We must examine the procedures for licensing and supervision to determine whether they furnish strong deterrents and strict prohibitions against dishonest and corrupt persons. We will try to discover whether civil remedies are available and can be utilized by the Government for prompt and effective action to safeguard and, when necessary, to recover Federal funds.

The Small Business Administration now has a new Administrator who will be our first witness in these hearings. He is faced with some serious problems which arose before he assumed office. He is widely regarded as an able and conscientious Government official. I am sure members of the subcommittee share my belief that he will take all necessary steps to eliminate shortcomings in the SBIC program and to deter the kinds of abuses that will be examined in these hearings.

We hope that the testimony and evidence at these hearings will provide a comprehensive record which the subcommittee may use as a foundation for submitting firm recommendations to the Congress for corrective legislation that may be needed and for administrative safeguards and improvements that may be required of the Federal agencies concerned.

Upon the request of the subcommittee chairman, Senator McClellan, I will be acting as acting chairman during these hearings, and before we go to the ranking minority member of the subcommittee, Senator Mundt, I would like to ask if you, Mr. Chairman, have any beginning statement you care to make at this time.

Senator MCCLELLAN. Thank you, Mr. Chairman. I simply want to join in the sentiments expressed in your opening statement, and especially do I wish to emphasize that there is nothing so far in our investigations to in any way reflect upon the present Administrator.

The purpose of this hearing is to find out what has been wrong, and find out ways to correct it, in order that we may have more efficient government.

I know you are going to cooperate with this committee fully, and we appreciate that and working together we ought to find some solutions here that will be of benefit to the Congress and also to you, if you seek to faithfully perform your duties in the future.

I wish to thank you for the cooperation I know you have given already.

Senator HARRIS. Senator Mundt, do you have any comments ? ?

Senator MUNDT. I would like to associate myself, first of all, with the remarks of the chairman of our full committee, and the chairman of this subcommittee in explaining the purpose of this hearing.

The need for some type of Federal assistance to the small business community of our Nation has been known for some time. To that end, Public Law 163 of the 83d Congress, 1st session, was enacted and approved on July 30, 1953, to dissolve the Reconstruction Finance Corporation and to establish a Small Business Administration. The policy of Congress was expressed in section 202 of that act as emphasizing the essence of the American economic system of private enterprise and free competition, so necessary for our economic well-being and security, which could not be realized unless the actual and potential capacity of small business was encouraged and developed.

To paraphrase further, Congress declared as policy that the Government should aid, counsel, and assist the interests of small business concerns to preserve free, competitive enterprise and to insure a fair proportion of total purchases and contracts for supplies and services for the Government be placed with such small business enterprises. Essentially the same policy of Congress was enunciated in Public Law 85-536, approved July 18, 1958, when the Small Business Administration was given a permanent status.

I supported the foregoing legislation, which amongst other things, provided for direct loans to defined small businesses, on a short- and intermediate-term basis, when the business concerns could not otherwise obtain funds from their normal commercial sources. Of course, the disaster loan program was subsequently added to the responsibilities of the Small Business Administration, which I also supported enthusiastically. I certainly speak from experience in my capacity as a Senator from South Dakota in saying that both of these programs have been of vital assistance, directly and indirectly, to my constituents.

Now, in taking a look at the matters at hand I was impressed by the legislative history of Public Law 85-699, approved August 21, 1958, which is known as the Small Business Investment Act of 1958.

The floor remarks from various Members of both Houses of the Congress indicate that testimony before the respective Small Business Committees and the Banking and Currency Committees had placed such organizations as the American Bankers Association, the Committee for Economic Development, the U.S. Chamber of Commerce, the Federal Reserve Board, and the Small Business Administration squarely behind this measure. This, indeed, is a formidable combination to be in support of any particular piece of legislation.

67–788—66

Additionally, the floor discussion reflects a high degree of unanimity in both legislative bodies of Congress on the subject. In fact, the lack of any real semblance of pro and con discussion prompted one Congressman, on July 23, 1958, to take exception to the fact that there was no minority report of any kind upon which any Member of the House of Representatives could reflect or permanently record his views.

The measure was passed in the Senate on a voice vote on June 9, 1958, and similarly in the House of Representatives on July 23, 1958. Minor variances were subsequently resolved and the act was signed by the President on August 21, 1958. Four amendments which have attempted to improve this legislation have subsequently and similarly been passed by both the Senate and the House of Representatives in succeeding Congresses without opposition.

Now, granted that hindsight is a wonderful thing, I am still prompted to inquire, after some 8 years of experience with this particular legislation, was the Small Business Investment Company Act, in reality, a necessary program and, if so, has it been and is it now being carried out along the lines and for the purposes indicated by the 85th and subsequent Congresses?

I say this because in reading an excerpt from the House Banking and Currency Committee's report which can be found, amongst other places, on page 10362 of the Congressional Record of May 16, 1960, I note that of the 95 small business investment companies licensed by the Small Business Administration at that time, only 11 of them are located in cities or towns in the United States with a population of 100,000 or less, using the 1960 Bureau of Census figures as my measuring stick. By contrast, practically every metropolitan city that you or I can think of in this country has one or more of these SBIC's within its environs. I dare say that this pattern would not be changed too greatly if one were to make a similar comparison with the 700 or so SBIC's which are licensed by the SBA to do business at present. Is this the intent of this legislation ?

Certainly there are no SBIC's in South Dakota, although I recognize that there is a development company there which comes within the provisions of the Small Business Investment Company Act but with which we are not concerned at the moment. In fact, I would venture a guess that the really small, main street businessmen of our North Central States, for the most part, have never heard of the SBIC program.

This, coupled with the chairman's referenced statement that some 200 of the 100-odd licensed SBIC's are “problem companies,” gives further rise to my concern and thus further reason for my posing this question.

At the same time, however, I hasten to add that I, for one, do not want to prejudge this matter. As the various witnesses come before us and explain this act, and their administering and utilizing of same, in fuller detail—and as the “bad apple types” who always seem to learn of these programs almost before the printing press has finished running them off, are explained in greater detail-then and as the transcript of the hearings is subsequently reviewed, will I form an opinion as to what best can be done for small business as it represents

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