May 4, 1992
TO: BOARD OF GOVERNORS NO. 28-92
SEC RULES COMMITTEE NO. 26-92
RE: INSTITUTE STATEMENT ON THE "SMALL BUSINESS INCENTIVE ACT OF
OF 1992"
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As we previously reported, the Securities and Exchange
Commission had submitted to Congress a legislative proposal
entitled the "Small Business Incentive Act of 1992." (See
Memorandum to Board of Governors No. 20-92 and SEC Rules
Committee No. 15-92, dated March 25, 1992.) At the request of
the SEC, this legislation was introduced in the Senate and the
House and was the subject of a Senate Banking Securities
Subcommittee hearing on March 26. The Institute submitted
written testimony on the bill. A copy of the Institute's
statement is attached.
In its testimony, the Institute expressed support for the
underlying objectives of the bill, which is designed to promote
capital formation of small business. However, the Institute
expressed concern about certain provisions which could
unnecessarily weaken investor protection and recommended that the
bill be modified so that it could still achieve its goal without
adverse impact on investor protection. Set forth below is a
summary of the changes recommended by the Institute.
The "Qualified Purchaser" Exception - The Institute
recommended that the proposed exception under the Investment
Company Act for investment pools whose shares are owned
exclusively by "qualified purchasers" be amended to include a
statutory minimum threshold amount with respect to who
constitutes a "qualified purchaser." Specifically, the Institute
recommended that a "qualified purchaser" be required to meet at
least the dollar threshold in the definition of "qualified
institutional buyer" contained in Rule 144A under the Securities
Act, which is defined generally as an institutional investor that
owns or invests on a discretionary basis at least $100 million in
securities. This would ensure that shares in these investment
pools were being offered to those most capable of assessing and
bearing the investment risk.
Section 3(c)(1) - The bill would amend Section 3(c)(1) of
the Investment Company Act to exempt all non-investment companies
from the "look through" provisions for purposes of applying the
100 investor limit thereunder. The Institute recommended that
the bill be modified so that all functionally equivalent
securities pools will, like investment companies, remain subject
to the "look through" provisions of Section 3(c)(1).
Business Development Companies - The Institute opposed the
proposed changes to the provisions governing "business
development companies (BDCs)" that would (1) relax the
requirement of a BDC to make available significant managerial
assistance in certain instances and (2) allow a BDC to purchase
shares in the secondary market. The Institute expressed concern
that these changes would have the effect of transforming these
entities into the functional equivalent of traditional investment
companies, yet exempt from many of the important investor
protection provisions of the Investment Company Act.
Interval Funds - In its statement, the Institute suggested
that an additional way of promoting small business capital
formation would be to allow investment companies to offer shares
that are redeemable on a periodic basis less frequent than daily
(e.g., monthly, semi-annually, etc.), since the securities of
small businesses are often less liquid than those purchased by
funds that are required to redeem their shares on a daily basis.
* * *
We will keep you informed of developments on this
legislation.
Amy B.R. Lancellotta
Associate General Counsel
Attachment