Small Business Investment Companies-Conflicts of Interest and Investment of Idle Funds, 63110-63113 [2010-25729]
Download as PDF
<![CDATA[
jlentini on DSKJ8SOYB1PROD with PROPOSALS
63110
Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules
worthiness that may be used in
regulations in place of credit ratings?
4. In evaluating potential standards of
credit-worthiness, the following criteria
appear to be most relevant; that is, any
alternative to credit ratings should:
a. Provide for a reasonable and
objective assessment of the likelihood of
full repayment of principal and interest
over the life of the security;
b. Foster prudent risk management;
c. Be transparent, replicable, and well
defined;
d. Allow different banking
organizations to assign the same
assessment of credit quality to the same
or similar credit exposures;
e. Allow for supervisory review;
f. Differentiate among investments in
the same asset class with different credit
risk; and
g. Provide for the timely and accurate
measurement of negative and positive
changes in investment quality, to the
extent practicable.
Are these criteria appropriate? Are
there other relevant criteria? Are there
standards of credit-worthiness that can
satisfy these criteria?
5. OTS recognizes that any measure of
credit-worthiness likely will involve
tradeoffs between more refined
differentiation of credit-worthiness and
greater implementation burden. What
factors are most important in
determining the appropriate balance
between precise measurement of credit
risk and implementation burden in
considering alternative measures of
credit-worthiness?
6. Would the development of
alternatives to the use of credit ratings,
in most circumstances, involve cost
considerations greater than those under
the current regulations? Are there
specific cost considerations that OTS
should take into account? What
additional burden, especially at
community and regional savings
associations, might arise from the
implementation of alternative methods
of measuring credit-worthiness?
7. The credit rating alternatives
discussed in this ANPR differ, in certain
respects, to those being proposed by
OTS and other federal banking agencies
for regulatory capital purposes.8 OTS
believes such distinctions are consistent
with current differences in the
application and evaluation of credit
quality for evaluating loans and
investment securities and those used for
risk-based capital standards. Are such
distinctions warranted? What are the
benefits and costs of using different
standards for different regulations?
8 75
FR 52283, August 25, 2010.
VerDate Mar<15>2010
16:04 Oct 13, 2010
Jkt 223001
Alternatives for Replacing References to
Credit Ratings in Part 560
8. What are the advantages and
disadvantages of the alternative
standards described in the
SUPPLEMENTARY INFORMATION?
9. Should the credit-worthiness
standard include only high quality and
highly liquid securities? Should the
standard include specific standards on
probability of default? Should the
standard vary by asset class? Are there
other alternative credit-worthiness
standards that should be considered?
Should a combination of creditworthiness standards be used, and if so,
in what instances would this be
preferred? Would different creditworthiness standards be appropriate for
different asset classes, probabilities of
default, varying levels of liquidity,
different types securities or money
market instruments, etc?
10. If OTS relied upon internal rating
systems, should the credit-worthiness
standard include any pass grade or
should it only be mapped to higher
grades of pass?
11. Alternatively, should the banking
regulators revise the current regulatory
risk rating system to include more
granularity in the pass grade and
develop a credit-worthiness standard
based upon the regulatory risk rating
system?
12. Should OTS adopt standards for
marketability and liquidity separate
from the credit-worthiness standard? If
so, how should this differ from the
credit-worthiness standard?
13. Should an alternative approach
take into account the ability of a
security issuer to repay under stressed
economic or market environments? If so,
how should stress scenarios be applied?
14. Should an assessment of creditworthiness link directly to a savings
association’s loan rating system (for
example, consistent with the higher
quality credit ratings)?
15. Should a savings association be
permitted to consider credit assessments
and other analytical data gathered from
third parties that are independent of the
seller or counterparty? What, if any,
criteria or standards should the OTS
impose on the use of such assessments
and data?
16. Should a savings association be
permitted to rely on an investment
quality or credit quality determination
made by another financial institution or
another third party that is independent
of the seller or counterparty? What, if
any, criteria or standards should OTS
impose on the use of such opinions?
17. Which alternative(s) would be
most appropriate for smaller,
PO 00000
Frm 00005
Fmt 4702
Sfmt 4702
community-oriented savings
associations and why?
18. Are there other alternatives that
ought to be considered?
19. What level of due diligence of a
savings association should be required
when considering the purchase of an
investment security? How should OTS
set minimum standards for monitoring
the performance of an investment
security over time so that savings
associations effectively ensure that their
investment securities remain
‘‘investment quality’’ as long as they are
held?
Dated: October 6, 2010.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. 2010–25845 Filed 10–13–10; 8:45 am]
BILLING CODE P
SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
RIN 3245–AF56
Small Business Investment
Companies—Conflicts of Interest and
Investment of Idle Funds
U.S. Small Business
Administration.
ACTION: Proposed rule.
AGENCY:
The U.S. Small Business
Administration proposes to revise a rule
which prohibits a small business
investment company (SBIC) from
providing financing to an Associate, as
defined in the rules, unless it first
obtains a conflict of interest exemption
from SBA. The revision would eliminate
the requirement for an exemption in the
case of a follow-on investment in a
small business concern by an SBIC and
an Associate investment fund, where
both parties invested previously on the
same terms and conditions and where
the follow-on investment would also be
on the same terms and conditions as
well as in the same proportions. In
addition, this rule would implement
two provisions of the Small Business
Investment Act. First, it would bring the
public notice requirement for conflict of
interest transactions into conformity
with statutory requirements. Second, it
would expand the types of investments
an SBIC is permitted to make with its
‘‘idle funds’’ (cash that is not
immediately needed for fund operations
or investments in small business
concerns). Finally, the rule would
remove an outdated cross-reference and
eliminate a section that exactly
SUMMARY:
E:\FR\FM\14OCP1.SGM
14OCP1
jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules
duplicates a provision found elsewhere
in part 107.
DATES: Comments on the proposed rule
must be received on or before November
15, 2010.
ADDRESSES: You may submit comments,
identified by RIN 3245–AF56, by any of
the following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail, Hand Delivery/Courier: Harry
E. Haskins, Deputy Associate
Administrator for Investment, U.S.
Small Business Administration, 409
Third Street, SW., Washington, DC
20416.
SBA will post comments on https://
www.regulations.gov. If you wish to
submit confidential business
information (CBI) as defined in the User
Notice at https://www.regulations.gov,
please submit the information to Carol
Fendler, Investment Division, 409 Third
Street, SW., Washington, DC 20416.
Highlight the information that you
consider to be CBI and explain why you
believe this information should be held
confidential. SBA will review the
information and make the final
determination of whether it will publish
the information or not.
FOR FURTHER INFORMATION CONTACT:
Carol Fendler, Investment Division,
Office of Capital Access, (202) 205–7559
or sbic@sba.gov.
SUPPLEMENTARY INFORMATION:
Section 107.730—Financings which
constitute conflicts of interest. The
Small Business Investment Act of 1958,
as amended (SBI Act), authorizes SBA
to adopt regulations to govern
transactions that may constitute a
conflict of interest and which may be
detrimental to small business concerns,
small business investment companies,
their investors, or SBA. Accordingly,
SBA promulgated 13 CFR 107.730,
which generally prohibits financing
transactions that involve a conflict of
interest, unless the SBIC obtains a prior
written exemption from SBA. The most
common type of transaction requiring
an exemption is ‘‘financing an
Associate.’’ Associates of an SBIC, as
defined in § 107.50, encompass a broad
range of related parties based on
business, economic and family ties, both
direct and indirect.
In addition to identifying transactions
requiring a conflict of interest
exemption, § 107.730 sets forth the
circumstances under which an SBIC is
permitted to co-invest with its
Associates. The primary purpose of
these provisions is to ensure that the
terms of such co-investments are ‘‘fair
and equitable’’ to the SBIC, i.e. that the
VerDate Mar<15>2010
16:04 Oct 13, 2010
Jkt 223001
SBIC is not being disadvantaged relative
to an Associate. The co-investment rules
include a number of ‘‘safe harbor’’
provisions under which the transaction
is presumed to be fair and equitable to
the SBIC; one of these safe harbors
covers financings where the SBIC and
its Associate invest at the same time and
on the same terms and conditions. SBIC
managers frequently seek to rely on this
provision because they are involved in
the management of more than one fund
and would like to have the funds coinvest in a small business. SBA
generally considers such co-investments
to be beneficial because risk is spread
across more than one entity. The small
business may also benefit from having
access to multiple investors.
It became apparent after adoption of
the current § 107.730 that certain types
of transactions could be characterized as
both ‘‘co-investment with an Associate’’
and ‘‘financing an Associate.’’ As with
all other transactions that involve the
financing of an Associate, SBA has
required the SBIC to obtain a prior
written exemption even if the financing
would fall under the safe harbor for coinvestments with Associates.
However, SBA believes the exemption
requirement is unnecessarily
burdensome for one particular type of
transaction: The SBIC and an Associate
investment fund (most typically a fund
under common management) make an
initial investment in a small business
under the same terms and conditions,
which include the acquisition by each
fund of at least a 10% equity interest in
the small business. This initial round of
financing is a ‘‘co-investment with an
Associate’’ and does not require a
conflict of interest exemption. However,
when the same two parties want to
make a follow-on investment in the
same small business, again under the
same terms and conditions, the second
and subsequent round(s) of financing
are considered to be ‘‘financing an
Associate’’ and do require a prior
written exemption. This is because the
Associate fund’s 10% or greater equity
interest causes the small business itself
to be defined as an Associate of the
SBIC under paragraph (8)(ii) of the
definition in § 107.50. While SBA
would approve a conflict of interest
exemption for a follow-on financing
transaction on the same terms and
conditions by an SBIC and its Associate
fund, the Agency is concerned that the
exemption requirement may cause
unnecessary delays in making financing
available to the small business, and
imposes a significant administrative
burden on both the SBIC and SBA.
To address this concern, this
proposed rule adds an exception to 13
PO 00000
Frm 00006
Fmt 4702
Sfmt 4702
63111
CFR 107.730(a)(1). Currently, this
paragraph prohibits the financing of an
Associate without a prior written
conflict of interest exemption. Under
the new exception, a prior written
exemption would not be required for an
Associate financing that satisfies all of
the following conditions:
1. The small business that will receive
the financing is an Associate of the
SBIC, pursuant to paragraph (8)(ii) of
the Associate definition, only because
an Associate investment fund already
holds a 10% or greater equity interest in
the small business.
2. The SBIC and the Associate fund
previously invested in the small
business at the same time and on the
same terms and conditions.
3. The SBIC and the Associate fund
will provide follow-on financing to the
small business at the same time and on
the same terms and conditions.
4. The SBIC and the Associate fund
will provide follow-on financing to the
small business in the same
proportionate dollar amounts as their
respective investments in the previous
round of financing (e.g., if the SBIC
invested $2 million and the Associate
invested $1 million in the previous
round, their follow-on investments
would be in the same 2:1 ratio).
The revision will allow transactions
meeting these specific conditions to be
governed only by the co-investment
provisions of § 107.730(d) rather than by
the ‘‘Associate financing’’ provisions of
the current § 107.730(a), thereby
returning to SBA’s original intent when
it promulgated the co-investment rules.
SBA expects that this change will help
to eliminate delays in making follow-on
financing available to small businesses
while providing appropriate protection
for small business concerns, investors in
SBICs and the Federal government.
SBA is also proposing a change to
§ 107.730(g), which requires public
notice of all requests by SBICs for
conflict of interest exemptions. The
current language requires public notice
by both SBA (via publication in the
Federal Register) and the requesting
SBIC (via publication in a newspaper in
the locality most directly affected by the
transaction). These disclosure
requirements are more extensive than
those required by section 312 of the SBI
Act, from which the local publication
requirement was removed by section 3
of Public Law 107–100 (December 21,
2001). This rule would bring the
regulation into conformity with the
statute by eliminating the requirement
for public notice in the affected locality;
the requirement for public notice in the
Federal Register would not be affected.
E:\FR\FM\14OCP1.SGM
14OCP1
63112
Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules
Section 107.530—Restrictions on
investments of idle funds by leveraged
Licensees. An SBIC holding idle funds
may invest those funds only as
permitted by § 107.530(b). The
permitted investments are all relatively
short term and bear minimal or no risk
of loss, such as direct obligations of the
United States that mature within 15
months of the date of investment. The
current regulation largely follows
section 308(b) of the SBI Act (15 U.S.C.
687(b)), but does not reflect an
amendment made by Public Law 108–
447, Division K, section 202 (December
8, 2004) that allows an SBIC to invest
‘‘in mutual funds, securities, or other
instruments that consist of, or represent
pooled assets of’’ the various direct
investment vehicles permitted by
section 308(b). 15 U.S.C. 687(b)(3). For
example, this provision allows an SBIC
to invest idle funds in a money market
account, as long as the money market
fund invests exclusively in permitted
instruments. This proposed rule would
bring the regulation into conformity
with the statute.
Section 107.855—Interest rate ceiling
and limitations on fees charged to Small
Businesses (‘‘Cost of Money’’). The
proposed rule would correct an error by
removing § 107.855(g)(10). This
paragraph provides an exclusion from
the Cost of Money calculation in the
form of a cross-reference to the nonexistent § 107.855(i).
Section 107.505—Facsimile
requirement. The proposed rule would
eliminate duplication by removing
§ 107.505, which requires an SBIC to
have the capability to receive fax
messages. This section repeats language
already found in § 107.504(b).
Compliance with Executive Orders
12866, 12988 and 13132, the Paperwork
Reduction Act (44 U.S.C. Ch. 35) and
the Regulatory Flexibility Act (5 U.S.C.
601–612)
Executive Order 12866
The Office of Management and Budget
has determined that this rule is not a
‘‘significant’’ regulatory action under
Executive Order 12866.
jlentini on DSKJ8SOYB1PROD with PROPOSALS
Executive Order 12988
This action meets applicable
standards set forth in section 3(a) and
3(b)(2) of Executive Order 12988, Civil
Justice Reform, to minimize litigation,
eliminate ambiguity, and reduce
burden. The action does not have
retroactive or presumptive effect.
Executive Order 13132
The proposed rule would not have
substantial direct effects on the States,
VerDate Mar<15>2010
16:04 Oct 13, 2010
Jkt 223001
or the distribution of power and
responsibilities among the various
levels of government. Therefore, for the
purposes of Executive Order 13132,
Federalism, SBA determines that this
proposed rule has no federalism
implications warranting the preparation
of a federalism assessment.
Paperwork Reduction Act, 44 U.S.C. Ch.
35
For purposes of the Paperwork
Reduction Act, (PRA) 44 U.S.C. Ch. 35,
SBA has determined that this rule
would not impose any new reporting or
recordkeeping requirements. The
requirement for SBICs to submit
requests for conflict of interest
exemptions is not an information
collection as that term is defined by the
PRA because the requests do not involve
any standardized or identical reporting,
recordkeeping or disclosure
requirements. Rather, each request for
exemption is unique to the
circumstances of the particular SBIC. In
any event, to the extent that SBICs are
currently required to submit conflict of
interest exemptions under the
circumstances described in this
proposed rule, that requirement would
no longer exist.
Compliance With the Regulatory
Flexibility Act, 5 U.S.C. 601–612
The Regulatory Flexibility Act (RFA),
5 U.S.C. 601, requires administrative
agencies to consider the effect of their
actions on small entities, small nonprofit businesses, and small local
governments. Pursuant to the RFA,
when an agency issues a rule, the
agency must prepare an Initial
Regulatory Flexibility Act (IRFA)
analysis which describes whether the
impact of the rule will have a significant
economic impact on a substantial
number of small entities. However,
§ 605 of the RFA allows an agency to
certify a rule, in lieu of preparing an
IRFA, if the rulemaking is not expected
to have a significant economic impact
on a substantial number of small
entities. This proposed rule would affect
all SBICs, of which there are currently
309. SBA estimates that approximately
75% of these SBICs are small entities.
Therefore, SBA has determined that this
proposed rule would have an impact on
a substantial number of small entities.
However, SBA has determined that the
impact on entities affected by the rule
would not be significant. The conflict of
interest provision would eliminate the
current requirement for SBICs to obtain
a conflict of interest exemption for a
particular type of transaction. This
change is expected to reduce the
regulatory burden on SBICs and allow
PO 00000
Frm 00007
Fmt 4702
Sfmt 4702
them to close such financing
transactions with less delay.
SBA asserts that the economic impact
of the rule, if any, would be minimal
and entirely beneficial to small SBICs.
Accordingly, the Administrator of the
SBA hereby certifies that this rule
would not have a significant impact on
a substantial number of small entities.
List of Subjects in 13 CFR Part 107
Investment companies, Loan
programs—business, Reporting and
recordkeeping requirements, Small
businesses.
For the reasons stated in the
preamble, the Small Business
Administration proposes to amend part
107 of title 13 of the Code of Federal
Regulations as follows:
PART 107—SMALL BUSINESS
INVESTMENT COMPANIES
1. The authority citation for part 107
continues to read as follows:
Authority: 15 U.S.C. 681 et seq., 683,
687(c), 687b, 687d, 687g, 687m, Pub. L. 106–
554, 114 Stat. 2763; and Pub. L. 111–5, 123
Stat. 115.
§ 107.505
[Removed]
2. Remove § 107.505.
3. Amend § 107.530 by redesignating
paragraphs (b)(3) through (b)(6) as (b)(4)
through (b)(7) and adding a new
paragraph (b)(3) to read as follows:
§ 107.530 Restrictions on investments of
idle funds by leveraged Licensees.
*
*
*
*
*
(b) Permitted investments of idle
funds. * * *
(3) Mutual funds, securities, or other
instruments that exclusively consist of,
or represent pooled assets of,
investments described in paragraphs
(b)(1) or (b)(2) of this section; or
*
*
*
*
*
4. Amend § 107.730 by revising
paragraphs (a)(1) and (g) to read as
follows:
§ 107.730 Financings which constitute
conflicts of interest.
(a) * * *
(1) Provide Financing to any of your
Associates, except for a Financing to an
Associate that meets all of the following
conditions:
(i) The Small Business that receives
the Financing is your Associate,
pursuant to paragraph (8)(ii) of the
Associate definition in § 107.50, only
because an investment fund that is your
Associate holds a 10% or greater equity
interest in the Small Business.
(ii) You and the Associate investment
fund previously invested in the Small
E:\FR\FM\14OCP1.SGM
14OCP1
Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules
Business at the same time and on the
same terms and conditions.
(iii) You and the Associate investment
fund are providing follow-on financing
to the Small Business at the same time,
on the same terms and conditions, and
in the same proportionate dollar
amounts as your respective investments
in the previous round(s) of financing
(for example, if you invested $2 million
and your Associate invested $1 million
in the previous round, your respective
follow-on investments would be in the
same 2:1 ratio).
*
*
*
*
*
(g) Public notice. Before granting an
exemption under this § 107.730, SBA
will publish notice of the transaction in
the Federal Register.
§ 107.855
[Amended]
5. Amend § 107.855 by removing
paragraph (g)(10) and redesignating
current paragraphs (g)(11) through
(g)(13) as (g)(10) through (g)(12).
Dated: October 6, 2010.
Karen G. Mills,
Administrator.
[FR Doc. 2010–25729 Filed 10–13–10; 8:45 am]
BILLING CODE 8025–01–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 39 and 140
RIN 3038–AC98, 3038–AD02
Financial Resources Requirements for
Derivatives Clearing Organizations
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (Commission or
CFTC) is proposing rules to implement
new statutory provisions enacted by
Title VII and Title VIII of the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). The
proposed regulations establish financial
resources requirements for derivatives
clearing organizations (DCOs) for the
purpose of ensuring that they maintain
sufficient financial resources to enable
them to perform their functions in
compliance with the Commodity
Exchange Act and the Dodd-Frank Act.
DATES: Submit comments on or before
December 13, 2010.
ADDRESSES: You may submit comments,
identified by RIN number, by any of the
following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
jlentini on DSKJ8SOYB1PROD with PROPOSALS
SUMMARY:
VerDate Mar<15>2010
16:04 Oct 13, 2010
Jkt 223001
• Agency Web Site: https://
www.cftc.gov. Follow the instructions
for submitting comments on the Web
site.
• E-mail: DCOSIDCOfinres@cftc.gov.
Include the RIN number in the subject
line of the message.
• Fax: 202–418–5521.
• Mail: David A. Stawick, Secretary of
the Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW.,
Washington, DC 20581.
• Hand Delivery/Courier: Same as
mail above.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
www.cftc.gov. You should submit only
information that you wish to make
available publicly. If you wish the
Commission to consider information
that may be exempt from disclosure
under the Freedom of Information Act,
a petition for confidential treatment of
the exempt information may be
submitted according to the established
procedures in CFTC Regulation 145.9.1
FOR FURTHER INFORMATION CONTACT: John
C. Lawton, Deputy Director and Chief
Counsel, 202–418–5480,
jlawton@cftc.gov, Phyllis P. Dietz,
Associate Director, 202–418–5449,
pdietz@cftc.gov, or Eileen A. Donovan,
Special Counsel, 202–418–5096,
edonovan@cftc.gov, Division of Clearing
and Intermediary Oversight, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21 Street, NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Title VII
On July 21, 2010, President Obama
signed the Dodd-Frank Act.2 Title VII of
the Dodd-Frank Act 3 amended the
Commodity Exchange Act (CEA) 4 to
establish a comprehensive regulatory
framework to reduce risk, increase
transparency, and promote market
integrity within the financial system by,
among other things: (1) Providing for the
registration and comprehensive
regulation of swap dealers and major
swap participants; (2) imposing clearing
and trade execution requirements on
1 Commission regulations referred to herein are
found at 17 CFR Ch. 1.
2 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
may be accessed at https://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
3 Pursuant to Section 701 of the Dodd-Frank Act,
Title VII may be cited as the ‘‘Wall Street
Transparency and Accountability Act of 2010.’’
4 7 U.S.C. 1 et seq.
PO 00000
Frm 00008
Fmt 4702
Sfmt 4702
63113
standardized derivative products;
(3) creating rigorous recordkeeping and
real-time reporting regimes; and
(4) enhancing the Commission’s
rulemaking and enforcement authorities
with respect to all registered entities
and intermediaries subject to the
Commission’s oversight.
Section 725(c) of the Dodd-Frank Act
amends Section 5b(c)(2) of the CEA,
which sets forth core principles with
which a DCO must comply to be
registered and to maintain registration
as a DCO.
The core principles were added to the
CEA by the Commodity Futures
Modernization Act of 2000 (CFMA).5
Consistent with the CFMA’s principlesbased approach to regulation, the
Commission did not adopt
implementing rules and regulations, but
instead promulgated guidance for DCOs
on compliance with the core
principles.6 However under Section
5b(c)(2), as amended by the Dodd-Frank
Act, Congress expressly confirmed that
the Commission may adopt
implementing rules and regulations
pursuant to its rulemaking authority
under Section 8a(5) of the CEA.7
The Commission continues to believe
that, where possible, each DCO should
be afforded an appropriate level of
discretion in determining how to
operate its business within the statutory
framework. At the same time, the
Commission recognizes that specific
bright-line regulations may be necessary
in order to facilitate DCO compliance
with a given core principle, and
ultimately, to protect the integrity of the
U.S. clearing system. Accordingly, in
developing the proposed regulation, the
Commission has endeavored to strike an
appropriate balance between
establishing general prudential
standards and prescriptive
requirements.
Core Principle B, as amended by the
Dodd-Frank Act, requires a DCO to
possess financial resources that, at a
minimum, exceed the total amount that
would enable the DCO to meet its
financial obligations to its clearing
members 8 notwithstanding a default by
5 See Commodity Futures Modernization Act of
2000, Public Law 106–554, 114 Stat. 2763 (2000).
6 See Appendix A to Part 39, 17 CFR Part 39. The
Commission notes that it intends to propose
removal of Appendix A, in its entirety, as part of
a future proposed rulemaking.
7 Section 8a(5) of the CEA authorizes the
Commission to promulgate such regulations as, in
the judgment of the Commission, are reasonably
necessary to effectuate any of the provisions or to
accomplish any of the purposes of the CEA.
8 The term ‘‘clearing members’’ refers to entities
that have a direct financial relationship to a DCO,
regardless of the DCO’s organizational structure,
E:\FR\FM\14OCP1.SGM
Continued
14OCP1
]]>Agencies
[Federal Register Volume 75, Number 198 (Thursday, October 14, 2010)]
[Proposed Rules]
[Pages 63110-63113]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-25729]
=======================================================================
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
RIN 3245-AF56
Small Business Investment Companies--Conflicts of Interest and
Investment of Idle Funds
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The U.S. Small Business Administration proposes to revise a
rule which prohibits a small business investment company (SBIC) from
providing financing to an Associate, as defined in the rules, unless it
first obtains a conflict of interest exemption from SBA. The revision
would eliminate the requirement for an exemption in the case of a
follow-on investment in a small business concern by an SBIC and an
Associate investment fund, where both parties invested previously on
the same terms and conditions and where the follow-on investment would
also be on the same terms and conditions as well as in the same
proportions. In addition, this rule would implement two provisions of
the Small Business Investment Act. First, it would bring the public
notice requirement for conflict of interest transactions into
conformity with statutory requirements. Second, it would expand the
types of investments an SBIC is permitted to make with its ``idle
funds'' (cash that is not immediately needed for fund operations or
investments in small business concerns). Finally, the rule would remove
an outdated cross-reference and eliminate a section that exactly
[[Page 63111]]
duplicates a provision found elsewhere in part 107.
DATES: Comments on the proposed rule must be received on or before
November 15, 2010.
ADDRESSES: You may submit comments, identified by RIN 3245-AF56, by any
of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Mail, Hand Delivery/Courier: Harry E. Haskins, Deputy
Associate Administrator for Investment, U.S. Small Business
Administration, 409 Third Street, SW., Washington, DC 20416.
SBA will post comments on https://www.regulations.gov. If you wish to
submit confidential business information (CBI) as defined in the User
Notice at https://www.regulations.gov, please submit the information to
Carol Fendler, Investment Division, 409 Third Street, SW., Washington,
DC 20416. Highlight the information that you consider to be CBI and
explain why you believe this information should be held confidential.
SBA will review the information and make the final determination of
whether it will publish the information or not.
FOR FURTHER INFORMATION CONTACT: Carol Fendler, Investment Division,
Office of Capital Access, (202) 205-7559 or sbic@sba.gov.
SUPPLEMENTARY INFORMATION:
Section 107.730--Financings which constitute conflicts of interest.
The Small Business Investment Act of 1958, as amended (SBI Act),
authorizes SBA to adopt regulations to govern transactions that may
constitute a conflict of interest and which may be detrimental to small
business concerns, small business investment companies, their
investors, or SBA. Accordingly, SBA promulgated 13 CFR 107.730, which
generally prohibits financing transactions that involve a conflict of
interest, unless the SBIC obtains a prior written exemption from SBA.
The most common type of transaction requiring an exemption is
``financing an Associate.'' Associates of an SBIC, as defined in Sec.
107.50, encompass a broad range of related parties based on business,
economic and family ties, both direct and indirect.
In addition to identifying transactions requiring a conflict of
interest exemption, Sec. 107.730 sets forth the circumstances under
which an SBIC is permitted to co-invest with its Associates. The
primary purpose of these provisions is to ensure that the terms of such
co-investments are ``fair and equitable'' to the SBIC, i.e. that the
SBIC is not being disadvantaged relative to an Associate. The co-
investment rules include a number of ``safe harbor'' provisions under
which the transaction is presumed to be fair and equitable to the SBIC;
one of these safe harbors covers financings where the SBIC and its
Associate invest at the same time and on the same terms and conditions.
SBIC managers frequently seek to rely on this provision because they
are involved in the management of more than one fund and would like to
have the funds co-invest in a small business. SBA generally considers
such co-investments to be beneficial because risk is spread across more
than one entity. The small business may also benefit from having access
to multiple investors.
It became apparent after adoption of the current Sec. 107.730 that
certain types of transactions could be characterized as both ``co-
investment with an Associate'' and ``financing an Associate.'' As with
all other transactions that involve the financing of an Associate, SBA
has required the SBIC to obtain a prior written exemption even if the
financing would fall under the safe harbor for co-investments with
Associates.
However, SBA believes the exemption requirement is unnecessarily
burdensome for one particular type of transaction: The SBIC and an
Associate investment fund (most typically a fund under common
management) make an initial investment in a small business under the
same terms and conditions, which include the acquisition by each fund
of at least a 10% equity interest in the small business. This initial
round of financing is a ``co-investment with an Associate'' and does
not require a conflict of interest exemption. However, when the same
two parties want to make a follow-on investment in the same small
business, again under the same terms and conditions, the second and
subsequent round(s) of financing are considered to be ``financing an
Associate'' and do require a prior written exemption. This is because
the Associate fund's 10% or greater equity interest causes the small
business itself to be defined as an Associate of the SBIC under
paragraph (8)(ii) of the definition in Sec. 107.50. While SBA would
approve a conflict of interest exemption for a follow-on financing
transaction on the same terms and conditions by an SBIC and its
Associate fund, the Agency is concerned that the exemption requirement
may cause unnecessary delays in making financing available to the small
business, and imposes a significant administrative burden on both the
SBIC and SBA.
To address this concern, this proposed rule adds an exception to 13
CFR 107.730(a)(1). Currently, this paragraph prohibits the financing of
an Associate without a prior written conflict of interest exemption.
Under the new exception, a prior written exemption would not be
required for an Associate financing that satisfies all of the following
conditions:
1. The small business that will receive the financing is an
Associate of the SBIC, pursuant to paragraph (8)(ii) of the Associate
definition, only because an Associate investment fund already holds a
10% or greater equity interest in the small business.
2. The SBIC and the Associate fund previously invested in the small
business at the same time and on the same terms and conditions.
3. The SBIC and the Associate fund will provide follow-on financing
to the small business at the same time and on the same terms and
conditions.
4. The SBIC and the Associate fund will provide follow-on financing
to the small business in the same proportionate dollar amounts as their
respective investments in the previous round of financing (e.g., if the
SBIC invested $2 million and the Associate invested $1 million in the
previous round, their follow-on investments would be in the same 2:1
ratio).
The revision will allow transactions meeting these specific
conditions to be governed only by the co-investment provisions of Sec.
107.730(d) rather than by the ``Associate financing'' provisions of the
current Sec. 107.730(a), thereby returning to SBA's original intent
when it promulgated the co-investment rules. SBA expects that this
change will help to eliminate delays in making follow-on financing
available to small businesses while providing appropriate protection
for small business concerns, investors in SBICs and the Federal
government.
SBA is also proposing a change to Sec. 107.730(g), which requires
public notice of all requests by SBICs for conflict of interest
exemptions. The current language requires public notice by both SBA
(via publication in the Federal Register) and the requesting SBIC (via
publication in a newspaper in the locality most directly affected by
the transaction). These disclosure requirements are more extensive than
those required by section 312 of the SBI Act, from which the local
publication requirement was removed by section 3 of Public Law 107-100
(December 21, 2001). This rule would bring the regulation into
conformity with the statute by eliminating the requirement for public
notice in the affected locality; the requirement for public notice in
the Federal Register would not be affected.
[[Page 63112]]
Section 107.530--Restrictions on investments of idle funds by
leveraged Licensees. An SBIC holding idle funds may invest those funds
only as permitted by Sec. 107.530(b). The permitted investments are
all relatively short term and bear minimal or no risk of loss, such as
direct obligations of the United States that mature within 15 months of
the date of investment. The current regulation largely follows section
308(b) of the SBI Act (15 U.S.C. 687(b)), but does not reflect an
amendment made by Public Law 108-447, Division K, section 202 (December
8, 2004) that allows an SBIC to invest ``in mutual funds, securities,
or other instruments that consist of, or represent pooled assets of''
the various direct investment vehicles permitted by section 308(b). 15
U.S.C. 687(b)(3). For example, this provision allows an SBIC to invest
idle funds in a money market account, as long as the money market fund
invests exclusively in permitted instruments. This proposed rule would
bring the regulation into conformity with the statute.
Section 107.855--Interest rate ceiling and limitations on fees
charged to Small Businesses (``Cost of Money''). The proposed rule
would correct an error by removing Sec. 107.855(g)(10). This paragraph
provides an exclusion from the Cost of Money calculation in the form of
a cross-reference to the non-existent Sec. 107.855(i).
Section 107.505--Facsimile requirement. The proposed rule would
eliminate duplication by removing Sec. 107.505, which requires an SBIC
to have the capability to receive fax messages. This section repeats
language already found in Sec. 107.504(b).
Compliance with Executive Orders 12866, 12988 and 13132, the Paperwork
Reduction Act (44 U.S.C. Ch. 35) and the Regulatory Flexibility Act (5
U.S.C. 601-612)
Executive Order 12866
The Office of Management and Budget has determined that this rule
is not a ``significant'' regulatory action under Executive Order 12866.
Executive Order 12988
This action meets applicable standards set forth in section 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have retroactive or presumptive effect.
Executive Order 13132
The proposed rule would not have substantial direct effects on the
States, or the distribution of power and responsibilities among the
various levels of government. Therefore, for the purposes of Executive
Order 13132, Federalism, SBA determines that this proposed rule has no
federalism implications warranting the preparation of a federalism
assessment.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
For purposes of the Paperwork Reduction Act, (PRA) 44 U.S.C. Ch.
35, SBA has determined that this rule would not impose any new
reporting or recordkeeping requirements. The requirement for SBICs to
submit requests for conflict of interest exemptions is not an
information collection as that term is defined by the PRA because the
requests do not involve any standardized or identical reporting,
recordkeeping or disclosure requirements. Rather, each request for
exemption is unique to the circumstances of the particular SBIC. In any
event, to the extent that SBICs are currently required to submit
conflict of interest exemptions under the circumstances described in
this proposed rule, that requirement would no longer exist.
Compliance With the Regulatory Flexibility Act, 5 U.S.C. 601-612
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires
administrative agencies to consider the effect of their actions on
small entities, small non-profit businesses, and small local
governments. Pursuant to the RFA, when an agency issues a rule, the
agency must prepare an Initial Regulatory Flexibility Act (IRFA)
analysis which describes whether the impact of the rule will have a
significant economic impact on a substantial number of small entities.
However, Sec. 605 of the RFA allows an agency to certify a rule, in
lieu of preparing an IRFA, if the rulemaking is not expected to have a
significant economic impact on a substantial number of small entities.
This proposed rule would affect all SBICs, of which there are currently
309. SBA estimates that approximately 75% of these SBICs are small
entities. Therefore, SBA has determined that this proposed rule would
have an impact on a substantial number of small entities. However, SBA
has determined that the impact on entities affected by the rule would
not be significant. The conflict of interest provision would eliminate
the current requirement for SBICs to obtain a conflict of interest
exemption for a particular type of transaction. This change is expected
to reduce the regulatory burden on SBICs and allow them to close such
financing transactions with less delay.
SBA asserts that the economic impact of the rule, if any, would be
minimal and entirely beneficial to small SBICs. Accordingly, the
Administrator of the SBA hereby certifies that this rule would not have
a significant impact on a substantial number of small entities.
List of Subjects in 13 CFR Part 107
Investment companies, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
For the reasons stated in the preamble, the Small Business
Administration proposes to amend part 107 of title 13 of the Code of
Federal Regulations as follows:
PART 107--SMALL BUSINESS INVESTMENT COMPANIES
1. The authority citation for part 107 continues to read as
follows:
Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g,
687m, Pub. L. 106-554, 114 Stat. 2763; and Pub. L. 111-5, 123 Stat.
115.
Sec. 107.505 [Removed]
2. Remove Sec. 107.505.
3. Amend Sec. 107.530 by redesignating paragraphs (b)(3) through
(b)(6) as (b)(4) through (b)(7) and adding a new paragraph (b)(3) to
read as follows:
Sec. 107.530 Restrictions on investments of idle funds by leveraged
Licensees.
* * * * *
(b) Permitted investments of idle funds. * * *
(3) Mutual funds, securities, or other instruments that exclusively
consist of, or represent pooled assets of, investments described in
paragraphs (b)(1) or (b)(2) of this section; or
* * * * *
4. Amend Sec. 107.730 by revising paragraphs (a)(1) and (g) to
read as follows:
Sec. 107.730 Financings which constitute conflicts of interest.
(a) * * *
(1) Provide Financing to any of your Associates, except for a
Financing to an Associate that meets all of the following conditions:
(i) The Small Business that receives the Financing is your
Associate, pursuant to paragraph (8)(ii) of the Associate definition in
Sec. 107.50, only because an investment fund that is your Associate
holds a 10% or greater equity interest in the Small Business.
(ii) You and the Associate investment fund previously invested in
the Small
[[Page 63113]]
Business at the same time and on the same terms and conditions.
(iii) You and the Associate investment fund are providing follow-on
financing to the Small Business at the same time, on the same terms and
conditions, and in the same proportionate dollar amounts as your
respective investments in the previous round(s) of financing (for
example, if you invested $2 million and your Associate invested $1
million in the previous round, your respective follow-on investments
would be in the same 2:1 ratio).
* * * * *
(g) Public notice. Before granting an exemption under this Sec.
107.730, SBA will publish notice of the transaction in the Federal
Register.
Sec. 107.855 [Amended]
5. Amend Sec. 107.855 by removing paragraph (g)(10) and
redesignating current paragraphs (g)(11) through (g)(13) as (g)(10)
through (g)(12).
Dated: October 6, 2010.
Karen G. Mills,
Administrator.
[FR Doc. 2010-25729 Filed 10-13-10; 8:45 am]
BILLING CODE 8025-01-P
