March 23, 1993
TO: BOARD OF GOVERNORS NO. 22-93
SEC RULES COMMITTEE NO. 27-93
RE: INSTITUTE TESTIMONY ON S.479, THE "SMALL BUSINESS INCENTIVE
ACT OF 1993"
__________________________________________________________
The Institute recently submitted written testimony to the
Subcommittee on Securities of the Senate Committee on Banking,
Housing, and Urban Affairs on S.479, the "Small Business
Incentive Act of 1993." The bill, sponsored by Senator Dodd, is
very similar to legislation introduced last year at the request
of the SEC on which the Institute also submitted testimony. (See
Memorandum to Board of Governors No. 28-92 and SEC Rules
Committee No. 26-92, dated May 4, 1992.) A copy of the
Institute's statement on S.479 is attached.
The Institute's statement expresses strong support for the
basic objective of S.479, which is to promote capital formation
for small businesses. The testimony notes that registered
investment companies have served as a significant source of
capital for small businesses. In addition, the testimony states,
the SEC's recent actions to increase the amount of illiquid
securities that a mutual fund may hold and its proposal to permit
the creation of "interval funds" should increase further the
ability of investment companies to provide capital to small
businesses. The testimony indicates that the Institute generally
supports these efforts. With respect to the proposed
legislation, however, the testimony expresses the Institute's
concern that certain of its provisions would unnecessarily weaken
investor protections that are provided under the Investment
Company Act of 1940.
In particular, S.479 would add a new section to the
Investment Company Act to exempt pools of securities held
exclusively by "qualified purchasers" from the definition of
investment company under the Act. The bill as currently proposed
would delegate to the SEC the authority to define the term
"qualified purchaser," based on certain factors to be set forth
in the statute. The Institute's testimony states that this
discretionary grant is too broad, and could result in the
offering of unregulated pools of securities, including pools not
investing in small businesses, to a potentially large and
relatively unsophisticated class of purchasers.
The Institute's statement recommends that the "qualified
purchaser" standard be set forth in the statute and,
specifically, that the minimum statutory standard be based on the
definition of "qualified institutional buyer" in Rule 144A under
the Securities Act of 1933.
The Institute's testimony also expresses concerns about the
bill's proposed amendments to the business development company
("BDC") provisions of the Investment Company Act. These
amendments would (1) permit BDCs to purchase securities of
eligible portfolio companies in the secondary market (rather than
from the issuer or its affiliates, as is currently required), and
(2) relieve BDCs of the requirement to make available significant
managerial assistance to eligible portfolio companies. The
Institute's testimony states that these proposed changes would
have the effect of converting BDCs into passive investment
vehicles similar to traditional investment companies, thus
calling into question the special treatment they receive under
the Investment Company Act.
Frances M. Stadler
Assistant Counsel
Attachment