Re: Industry Comments on Reducing Regulatory Burden

SBIA Comment Letter to:

Joseph Shepard
Associate Administrator
Office of Investment and Innovation
Small Business Administration

Re: Industry Comments on Reducing Regulatory Burden

Dear Associate Administrator Shepard:

For 60 years, the Small Business Investor Alliance (SBIA) has been the trade association that serves as the collective voice of the Small Business Investment Company (SBIC) industry. SBIA’s membership includes both GPs and LPs in the SBIC program. This membership ensures that our SBIC policy proposals are solid, balanced, and aligned with promoting a healthy capital market for small businesses.

Debenture and non-levered SBICs are highly-regulated private funds that serve the important public purpose of facilitating private investment into domestic small businesses. Core to the success of the program is that investments are market-driven and not government-chosen. A 2017 Library of Congress study found that SBIC-backed businesses created 3 million net new jobs and supported an additional 6.5 million jobs from 1995-2014 (a period of 20 fiscal years that included the Great Recession and the tech bubble recession). The underlying economics of the SBIC program are sound: for years it has maintained its zero subsidy, and for several years it has been operating at or near the lowest loss rates in the 60-year history of the program.

On August 15, 2017, SBA published in the Federal Register a request for public comment entitled “Reducing Unnecessary Regulatory Burden.” The request was issued in accordance with three executive orders aimed at reducing regulatory burdens. Executive Order 13771 was issued by President Trump on January 30, 2017 and has the goal of reducing regulatory costs by eliminating two regulations for every new regulation that is issued. Executive Order 13777, issued by President Trump on February 24, 2017, aims to—among other things—repeal, replace, or modify regulations that “eliminate jobs, or inhibit job creation; are outdated, unnecessary, or ineffective; impose costs that exceed benefits;” and “create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies.” Executive Order 13563, issued by President Obama on January 11, 2011, requires agencies to propose regulations whose benefits are justified by their costs and to issue the least burdensome regulations possible. In November 2017, SBIA submitted a comment letter in response to the August 2017 request from SBA. SBIA stands by that letter and would like to see those recommendations implemented. We submit the comments below as additional items that would make the SBIC program operate more efficiently.

President Trump deserves credit for his pro-small business efforts to reduce regulations and taxes. Further, SBIA is supportive of the goals laid out in the President’s executive orders and appreciates the opportunity to comment on ways to reduce unnecessary regulatory burdens. SBICs embody SBA’s goal “to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation,” while instituting strong taxpayer protections. SBICs are proof that these goals can coexist, and we welcome the opportunity to offer suggestions to extend and enhance that record.

The recommendations contained below are all in line with the goals of the executive orders issued by Presidents Trump and Obama and applying them would ease burdens on small business investors and help unleash more capital to domestic small businesses in a more efficient manner.

In preparation for the SBA’s regulatory review, SBICs and Limited Partners (LPs) were surveyed about the regulations and, equally important, the SBA’s real-world application of the regulations. Many of our LPs participated in a conference call to help us further flesh out our comments to reflect their views. SBIA staff also spoke to many more SBICs, LPs, lawyers, and accountants to ensure we were capturing and communicating critical issues. The survey produced results based on a very large sample size of all actively investing SBIC license holders. Fund managers who hold over 100 active SBIC licenses completed the survey as did LPs who have investments in a similarly large number of SBIC funds. The survey encompassed the four main regulatory aspects of the SBIC program: licensing, operations, examinations, and forms.

This comment letter includes some of the findings of the survey. For the sake of brevity, we are including only comments which received overwhelming consensus from the SBIC industry and which are appropriate for this specific comment letter. It is important to note that a number of SBICs had serious concerns about responding to the survey out of an explicitly stated fear that SBA would trace back their responses and retaliate against them if SBA was able to identify fund managers who had raised concerns about the regulations or how they were being applied. As such, SBIA will only be describing the results of the survey and not be releasing the survey or any other information that could be tied back to any specific person, group, or SBIC fund.

Overall Regulatory Challenges

The Debenture and non-levered SBICs have been successfully operating for decades under regulations that have barely changed. Most of the regulations are time-tested and reasonable. While the regulations have been adequate to the task, with the passage of time, personnel, and management philosophies, a review and update of the regulations and their applications are appropriate. Our survey documented a significant number of regulations, policies, and practices that are unnecessary, outdated, burdensome, conflicting with other law, and hindering job creation. By an overwhelming margin in our survey, respondents noted that the biggest challenge facing the SBIC program is uncertainty about the management of the program and confusion about the current leadership’s vision for the operation of the program, not the regulations. Not only was this the answer to the specific question about the biggest challenge facing the SBIC program, it also showed up in the “word cloud” of responses to the survey. Words like “confusion,” “delays,” and  “uncertainty” were some of the most common concerns. Words like “clarity,” “timelines,” “consistency,” “standards,” and “communication” were some of the most common in the questions where suggestions for improvement were sought. SBIA applauds SBA’s efforts to clean up and modernize the regulations, but we also strongly encourage SBA to focus on fixing the delays, uncertainties, and other execution problems that may continue long after any written word of regulation is changed. LPs described it this way:

[It is now] about 20 months into the Administration and the leadership of the SBIC program has not articulated what they want to accomplish with the Small Business Investment Company program.
Improved regulations are welcome, but how the leadership of the SBIC program implements the regulations has a far bigger effect on how effective SBICs are allowed to be.

LPs choose between competing investments every day. If the leadership of the SBIC program makes it difficult to invest in SBICs and for SBICs to operate, then we can redirect our investments away from SBICs and small business and into other investments.

SBIC Licensing

SBIC licensing is core to the program because without a license, no investments can be made into small businesses. SBA has an extraordinary group of public servants doing the best they can to fulfill the demands of their jobs. They are at the front lines of both taxpayer protections and small business access to capital. The SBICs and LPs are concerned that licensing is understaffed and that the staff does not have the adequate technological resources needed to perform at their full potential. LPs in particular see the SBIC licensing team as disciplined professionals who complement the private sector’s efforts to vet and approve fund managers. Further, there are a number of regulatory and policy improvements that can make licensing clearer, faster, and better for both applicants and the SBA.

Green Light letters

SBIA’s members believe that the SBA’s Green Light letter process should lay out the specific targets that the applicant must reach to be licensed. SBA should honor their letter and license applicants who meet the standards set therein, provided that no new material adverse information develops during the review of the license application. If SBA’s expectations are clear, quantifiable, and written, then there is greater transparency and less regulatory frustration for both sides. Clear standards must be communicated from the Agency Committee to make this happen. Also, LPs commit to GPs and their business model. SBA forcing changes to the business model that was approved for the Green Light, by significantly reducing leverage late in the process, is not fair to LPs or GPs.

Agency Committee

The survey shows there is overwhelming confusion or doubt about the value that the Agency Committee brings to the licensing process. The Agency Committee was created under the Administration of President Bill Clinton to get more political appointees involved in SBIC licensing. The Agency Committee makes decisions without many of its members having ever met an SBIC fund manager, without any members ever meeting the applicant whose fate they are deciding, without clearly documenting and communicating their expectations and standards to the Office of Investment, and without ever communicating their expectations and standards to the small business investing community. By the time applicants reach the Agency Committee for their consideration, hundreds of thousands of dollars and up to two years may have been spent forming the SBIC, but these expenses and applicants’ work going through the process is not necessarily valued or respected.

It should be noted that, according to SBA’s Standard Operating Procedure (SOP), all issues must have been dealt with satisfactorily before being presented to the Agency Committee. So, if all the legal, financial, and other approvals have already been satisfied, then it is not clear what value this body adds to the process. SBA should either have the Agency Committee communicate their standards and expectations to the SBIC community, or it should reconsider what value this additional step adds to the process beyond more time and expense. Every member of the Agency Committee was invited to meet the SBIC industry at SBIA’s 2018 Washington Fly-In, and none accepted the invitation. SBIA would welcome the chance to have members of the Agency Committee engage the SBICs and understand more about our market.

Licensing Decisions Based on Facts in the Record (13 CFR 107.305)

Licensing decisions by SBA should be based on the facts in the record that are discovered during the process of approving a fund. The licensing team in OII does excellent diligence, a very small amount of which must be kept confidential, but there is no documentation of how decisions are made or what facts were used to make determinations. Applicants should have the right to address or correct any issues, but they cannot do so if they do not have a chance to address and correct the record.

Specific Reason for Non-Approval with Opportunity for SBIC Applicants to Cure

SBIA’s survey respondents believe that SBA should give applicants clear and specific reasons for non-approval with an opportunity to cure any issues that SBA raises. Not every applicant for a license is worthy of licensure, but some issues deemed worthy of non-approval by SBA can often be cured by the applicant. If applicants cure the issues, SBA should promptly reconsider the application and grant approval if all conditions are met. An applicant should not be turned down or prohibited from filing a formal application without a clear, meaningful, written explanation from the SBA and a good faith opportunity to fix any issues. The SBA should also recognize that some of the reasons SBICs are being delayed or prohibited from filing an application are 100% due to SBA’s actions or inactions and are on matters over which the applicant has zero control (timing of exams, for example).

Clear Appellate Mechanism for Adverse Decisions

SBIA members also believe that a clear appellate process should exist for funds who receive an adverse regulatory decision, particularly, but not limited to, licensing.

Meaningful Fast-Track Licensing for Known, Repeat SBIC Applicants

SBIA members surveyed unanimously support a meaningful fast track licensing process for repeat SBICs. The GAO has studied the risks of first-time and repeat licensees and found that repeat SBICs are lower risk.1 Repeat licensees (some of whom have been successfully operating SBICs for decades) are fundamentally less risky and more well-known to SBA than first time applicants. SBA is intimately aware of their investments and is very familiar with their management teams and investment strategies. Beyond a new FBI background check and review of new capital certificates, nothing is not already known to the SBA. If there are no material changes, the process should be significantly expedited.

Existing SBICs have the added burden of not being able to apply for a license until SBA’s (recently broken) examinations process has run its course. Existing SBICs may already have had dozens of clean exams previously, but that is not considered. First-time licensees have never been examined and therefore do not face these unnecessary delays. Existing SBICs should not face delays or have limitations put on the amount of leverage they can access because of an examination process that is completely outside of their control. (Greater explanation of the issues surrounding the problems with examinations are covered later in this letter.)

Recognizing the inefficiencies created by the treatment of existing SBICs and how that removes resources from attracting and vetting new SBICs from across the country, the House and Senate Appropriations Committees’ Financial Services and General Government appropriations bills for FY 2019 recommended a 60- to 90-day window for repeat licenses.

Transparency During the Licensing Process

SBIA members surveyed unanimously agreed that the licensing process should be more transparent, more predictable, and that applicants should know where they stand at all stages during the process. As one LP described it, “The inability to forecast licensing causes cash flow and allocation planning problems for many LPs.” Further, an LP described the following:

SBA wants banks to finalize their commitments to SBICs before licensure, but banks investing in SBICs are being forced to withhold their commitments until after licensure because we don’t have insight into the timing of the licensing process. Banking laws do not allow us to be put in the position of being held hostage to the SBA’s uncertainties.

Other SBIA members described the situation this way:

Institutional Investors need to plan allocations yearly. SBA’s delays have caused us problems with planning our allocations. Further, we have been forced to go back to our investment committee to get renewed approvals or to rebalance our allocations because of SBA’s actions and timing.

For those of us (LPs) that are publicly traded companies, this is a problem because we wan to be transparent with our shareholders who hold us accountable for meeting the investing goals that we set.

Acknowledging Receipt of Materials and Accepting All Forms (Including Licensing Materials) Electronically without a “Wet Signature”

The requirement for a wet signature of licensing or regulatory materials is unnecessary, and the survey showed that removal of this requirement is overwhelmingly supported by SBIA members. With current technology, all required signatures can be collected safely and securely electronically. SBIA’s membership recognizes that this is not a requirement that is peculiar to SBA. Accepting materials electronically will also address the issues/questions about when materials were received. The date SBA received regulatory or licensing requests should not be a question. This could easily be addressed with the use of virtual data rooms and other off-the-shelf technology, like email.

SBICs Should Receive Their Actual License within Two Weeks of Approval

SBICs need their license to operate and for their bank LPs to comply with banking law. Upon approval, SBICs should receive their actual license as soon as possible and definitely within two weeks. SBIC survey respondents overwhelmingly agreed on this point.

Recently, it has taken months to get a written confirmation of licensure. This time frame is arbitrary, expensive and challenging for the licensee, and does not benefit small businesses seeking capital. These delays are an added headache for bank LPs who need the letter to document compliance with banking laws. SBA should have a regulation providing SBICs with a timely confirmation of licensure. SBA should also publicly announce when funds are licensed and when licenses are surrendered.

SBICs Should Be Able to Maintain Their Licenses in Wind Down after Paying Down Their Leverage Below the $5 Million-Dollar Threshold

When SBICs complete their life cycle, their fund size will eventually reduce to zero, but before they get to zero, they generally drop below the $5 million minimal threshold that SBA requires. Surrendering the license can harm bank LPs because of the banks’ allowance to invest in SBICs under the banking laws. Survey respondents feel that SBA should allow SBICs to hold onto their licenses as they wind down and should make regulatory changes to significantly reduce the cost of operating SBIC funds that are in wind down. At the final stages of a fund’s life there is minimal fund income, so it is important that SBA reduce regulatory costs so as not to create an artificial incentive to surrender the license.

SBA’s Model Limited Partnership Agreement (LPA) Should Be More Customizable

SBA has a fairly rigid model LPA. SBIA recognizes that the lawyers reviewing the SBIC LPA are severely under-resourced, which requires some level of standardization. It is very hard for an applicant to make changes to the LPA, even the “non-bold” language that is theoretically flexible. SBIA members surveyed believe that there should be more flexibility for General Partners (GP) and institutional Limited Partners (LP) to negotiate market terms for their LPAs. SBA should require LPA language that is necessary to fulfill its statutory mandate and provide the necessary protections to serve its role as a guarantor of a credit facility and as a regulator. Since SBA is a guarantor of a credit facility and not an LP, it should leave the non-statutory and non-credit related terms to the GPs and LPs to negotiate.


The SBA’s affiliate rules need to be updated to ensure that investments with private equity funds are not inadvertently limited, survey respondents agreed. Some SBA regulations were written before related SEC regulations were written and now the SBA regulations need to be updated to reflect these changes. The lack of an exception from affiliation for portfolio companies that are owned by private equity funds that are exempt from registration under the Investment Company Act of 1940 because of Section 3(c)(7) only restricts or harms SBICs’ investment activities. The exemptions from the Affiliates definition should be changed to expressly include 3(c)(7) funds. Many SBIC funds are affected by this regulation, and a simple fix would be to remove the current exception under 13 CFR 121.103(b)(5)(vi) and replace it with a reference to any “private fund” as defined by SEC Rule 203(m)-1, which includes any 3(c)(1) or 3(c)(7) fund.

Capitalizing an SBIC: Private and Regulatory, Institutional Capital

LP Capital from Bona Fide “Funds of Funds” Should Be Recognized as Institutional Capital

There are a number of well-established, proven “Funds of Funds” whose investments in SBICs are not treated as institutional regulatory capital. This harms capital inflows into domestic small businesses and does not treat all significant LPs similarly. SBIA’s survey revealed that well-known and established Funds of Funds who meet or exceed the qualifications to be an “institutional investor” should be treated as providers of institutional, regulatory capital. We recognize that a new Fund of Funds that might warrant scrutiny and a review, but there are top-tier, long establish, SEC-regulated Funds of Funds that are not treated as institutional capital. Further, fair treatment of the Funds of Funds model will allow new entities to form to provide professional investment opportunities to unique sources of capital that may need to be pooled to gain the benefits of scale, to access unique market expertise, or to find particularly SBIC characteristics (looking for SBICs that focus on rural areas, for example).
Pensions and Endowments from State-Chartered Universities Should Be Recognized as

Private, Regulatory Capital Instead of as “Instrumentalities of the State.” (Instrumentalities of the State May Not Qualify as Regulatory Capital.)

Recently, SBA has started treating endowments and pension funds from some universities as
“instrumentalities of the states.” This is not an accurate description of what they are. Further, this treatment effectively blocks other endowment and pension funds from investing in an SBIC that has these investors. As one large LP described it, “SBIC investments are only a fraction of our multibillion dollar endowment’s overall capital. If SBA continues to make it difficult to invest in SBICs, then we can and will redirect our investments away from domestic small businesses to other investment opportunities.” This new interpretation of the regulations runs directly counter to the President’s goals for fostering domestic investment and small business job growth.

SBA Should Recognize LP Investments from Canada and Other Treaty Countries as Regulatory Capital

Under US law, investments from certain countries may not be discriminated against. Canada, Australia, and Mexico are three examples where this US law applies. Contrary to US law, SBA is not treating investments from these countries as regulatory, institutional capital. Survey respondents agreed that SBA’s regulations should be modified to reflect existing law. Creating barriers for our trading partners to empower domestic small businesses via SBICs appears to run counter to the President’s goals for job creation and more equitable treatment of American small businesses.

Transfer of LP Interests That Represent 10% or Less of an SBIC Fund Should Be Streamlined or Permitted without Prior SBA Approval

SBICs have Limited Partner Advisory Committees (LPACs). Survey respondents feel that if an SBIC has the approval of its LPAC, then it should be allowed to transfer smaller LP interests (10% or less of the committed capital). Existing restrictions are cumbersome and unnecessary.

Side Letters

Side letters are necessary documents for many LPs, particularly banks. Many banks have their own standard side letter to reflect their bank’s (banking) regulatory requirements. Side letters are extremely time consuming to the under-resourced legal staff because they are commonly treated as if each were de novo. SBIA’s survey found that side letters that have already been approved and used numerous times by LPs (commonly from bank LPs) should be presumed by SBA to be acceptable for future commitments. Alternatively, LPs should be able to get a standard side letter pre-approved once for use across multiple and future funds that they plan to invest in for a set period of time. SBIA’s LP Council could work with SBA to provide guidance and standards for these side letters.

SBIC Operations

Common Contact File/Resource to Prevent Multiple Requests for Information

Survey respondents said that SBA should have a common contact file/resource/customer relationship management system in place that will prevent SBA from asking for the same information that has previously been submitted – often many times or in many similar ways. Redundant requests of information are common, burdensome, and could be easily remedied. A system of this type could expedite processes at SBA significantly and reduce burdens for both SBICs and the SBA.

Addressing Regulatory Questions through a “No Action Letter” System

SBIA survey respondents overwhelmingly support the establishment of a no action letter system, modeled off that of the SEC, to help SBIC industry participants address good faith regulatory questions that may arise. SBIA believes this would help facilitate productive communication between industry participants and regulators and would provide an outlet to address questions and potential issues early. As appropriate, no action letters should also be shared with the SBIC community so there is clarity in the regulatory environment.

Conflicts of Interest (13 CFR 107.730)

The conflict of interest rules are being interpreted so narrowly that in some cases they are now harming LPs and GPs by preventing or terminally delaying legitimate small business investments. Similar to transfer of LP interests below a certain threshold, if the LPACs from two affiliated SBICs (often two successive SBIC funds, e.g., SBIC Fund 1 and SBIC Fund 2) both agree that an investment is appropriate, then it should be allowed. With LPAC approval, and when two SBIC entities are financing a small business under the same terms, this should be automatically approved and should not be viewed as a conflict of interest. SBIA survey respondents recommend that the regulations follow 13 CFR 107.730(d)(2) for conflicts of interest. The regulations should also provide automatic approval if all SBIC LPACs have been approved and the SBA has not made a determination within 30 days.

Overline Requests (13 CFR 107.740)

SBIA’s members recommended in the survey the establishment of clear, binding timelines within which SBA must make a determination on overline requests, or else the request should be deemed approved if the LPAC has already been approved of the investment. Such timelines will be helpful in reducing uncertainty and providing structure for industry participants. If SBA does not decide on an overline request within the time allotted (30 days), requests should be granted automatic approval. It should be noted that during the economic stresses of 2008, small businesses failed, and Americans lost their jobs because SBICs were not able to get timely approvals for follow-on SBIC investments from the SBA. The economy is solid now, but the regulations will need to be applied in tougher times, too. No American should lose their job because paperwork was pending for month after month at SBA.
Similarly, SBIA and its members overwhelmingly feel that the SBA should develop clear and binding timelines for processing all regulatory requests, not just overlines, to promote efficiency and certainty in the industry. SBA should create a list of regulations that will be deemed approved if SBA does not make a decision within a pre-determined amount of time.

Personnel Changes and Absences

By regulation, the SBA should provide SBICs with a formal notification when their analyst, examiner, etc. is reassigned or on extended leave. It is not uncommon that an analyst leaves the government, leaves SBA, goes on extended vacation, is out ill, or otherwise becomes unavailable. Often, no notice is given to the SBIC, and no information is given as to whom critical and time sensitive requests should be submitted. In this scenario, SBICs could unknowingly submit time-sensitive regulatory requests to a person who is unable to receive the filing.
SBIA members surveyed believe that SBICs should be aware of whom they are supposed to communicate with at all times. SBIA hopes that informing SBICs of analyst changes will facilitate improved communication between SBA and the industry and contribute to the smooth functioning of regulatory processes. Further, the use of virtual data rooms and other off-the-shelf technologies commonly used in the private sector will make it easier for SBA staff to find information and records when assigned to a new SBIC.

Fund Expenses vs. Management Company Expenses

According to the survey, SBIA members feel that the allocation of an expense as either a fund expense or a management company expense should be negotiated between the private LPs and the GPs in the LPA. The expense allocation should not be decided solely via SBA regulation; rather, a negotiated decision made jointly by LPs and GPs in the LPA will allow for a mutually beneficial solution. It is appropriate that expense allocations should be included in the LPA which is shared with SBA.

Technological Modernization

Similarly, SBIA’s members support the removal of regulations related to outdated technological requirements. Specifically, SBICs should no longer be required to maintain a fax machine at the primary office (13 CFR 107.504), as email and mobile communication systems provide faster, more reliable, and more ubiquitous forms of communication.

Additionally, to prevent fraud and protect market information, the SBIC industry participants responding to SBIA’s regulatory survey agreed unanimously that the SBA should have a secure, encrypted mechanism for communicating sensitive materials and information such as leverage commitments and wiring instructions. Cybercrime is a growing problem across all industries, and SBICs, their LPs, and the SBA all should have more secure communications for the movement of large financial transactions than conventional email provides. It should be noted that the survey received comments about making sure any new communications system or portal not be too cumbersome, expensive, or limiting.


SBIA survey respondents recommend that SBICs be allowed to use a single safe to maintain the records for all affiliated SBICs. SBICs should also be allowed to keep records electronically in secure virtual data rooms or other secure cloud services.

Prepayment of Financing (13 CFR 107.830)

SBIA survey respondents also recommend that SBICs be allowed to put modest pre-payment limitations on the capital they invest in small businesses. Small businesses should be allowed to make prepayments, but reasonable limitations should be permitted. Every prepayment requires time and some expense by the SBIC. Being paid a penny (or a single dollar) is not reasonable. Perhaps prepayments of at least a certain percentage—5%, for example—would be reasonable.

SBIC Industry Data

SBA should return to publishing SBIC industry data on a regular, timely basis, according to the majority of survey respondents. The 7a and 504 programs release their data weekly. The SBIC program used to release the data monthly, and it would be released within a week of the month ending. Now SBA releases the data quarterly and waits an additional 6 weeks to release the data. LPs and GPs would benefit from having fresh, not stale, data. SBIC industry participants rely on up-to-date data to identify industry trends and remain informed as they make key decisions pertaining to their businesses. This data should be released monthly and within 5-10 business days of the end of the month.

Cost of Money

SBIA members believe that cost of money regulations should be made more flexible. Further, the definition of “default interest” should be revised to allow for increased charges without violating the Cost of Money. The definition of default should be expanded to be more consistent with the market and to not leave SBICs and the SBA in a disadvantaged position. SBICs should be allowed to be more proactive in taking necessary steps to address risks to investments.


SBIA members who were surveyed also overwhelmingly believe that an SBIC should be able to get out of “liquidations” and back into regular operations if the issues that caused them to be moved to liquidation are cured, and they otherwise would be able to operate as an SBIC. This is an unusual circumstance, but it should be addressed.

Debenture Pooling

SBIA survey respondents feel that the SBA should pool SBIC debentures four times a year (instead of the current two) and allow repayment four times a year (instead of the current two). Until about 10 years ago, SBA pooled four times a year (twice for Debenture SBICs and twice for the defunct Participating Securities program). SBICs may draw leverage and have to wait up to six months to know the interest rate on that leverage. SBICs also may be paid back from a small business and have millions of dollars sit idle for up to six months. If SBA were to keep the exact terms on the SBIC debentures, but pool/price four times a year instead of two, then SBICs would often have less timing/interest rate risk and would be able to pay back debentures sooner and reduce risk to SBA. This could be achieved without any change to the offerings other than adding summer and winter pooling/pricing dates.

OII Interaction with SBIC Fund Managers and Limited Partners

SBIA members would also like to see more engagement by OII leadership with the SBIC industry via SBIA. If there are regulations that are somehow preventing the OII leadership from attending industry gatherings, then those regulations should be changed. The leadership of OII has attended only one of the many SBIA industry events held since January 2017. These events are an opportunity to learn about what is happening in the market the SBA is regulating. Industry dialogue has been exclusively in closed, invite-only settings where the government chooses the participants; in private, one-on-one meetings with LPs and GPs; or in settings where all questions are
screened/chosen by SBA and all the answers are pre-scripted. This lack of engagement by SBA is not only an inefficient and ineffective way of having two-way communication, but it also raises doubts that market participants are being told the same information. As one LP put it, “The leadership of the SBIC program should be engaging the SBIA to work with SBICs and with LPs. Engagement should be regular and two-way.”


Examination Reports

SBIA survey participants recommend that examination reports be provided to the SBIC within four weeks of a completed examination. Despite recent massive increases in examination fees, the examination process has recently become a choke point for the effective operation of the program. Currently, exams are being completed with the examiner verbally informing the SBIC that there were no findings, but the actual letter informing the SBIC of the results of their exam may not be given for up to six months later – awaiting approvals from higher ups at SBA. There is no justification for these delays in issuing the examination letters. This means that the SBIC may be blocked by SBA from reserving leverage or from submitting a licensing application for another entire year and exam cycle because their exam results are considered out of date and stale. It is also inappropriate for SBA to exclude from the licensing times report the amount of time SBA blocked SBICs from filing for a license due to SBA’s inability to produce an examinations letter.

It should be noted that licensed SBICs have been unable to invest because they have been waiting many months for the results of their examinations and therefore cannot purchase leverage. There is no reason SBICs are not given their results promptly after the examination. Further, the SBIC has begun misusing the existing regulations by applying a “must” standard to regulations that clearly state “should” regarding a fresh examination. Further, SBA’s delays in issuing exam reports prevent SBICs from responding to potential findings and resolving any outstanding concerns – meaning that they may get findings two consecutive years because SBA withheld that there was a finding, adding to SBICs’ expenses under the new higher fee regime. Timely exam results empower the SBICs to make needed changes prior to their next review.

Finally, it is critical to note that SBICs have absolutely zero control over when they receive an exam, but SBA is holding SBICs accountable for the timing of the exams by blocking their ability to file for a license or access leverage. Ultimately, both of these withholding actions hinder the ability of small businesses to access capital.

Examinations for Multiple SBIC Licenses

The overwhelming number of survey respondents thought it best to have all licenses of an SBIC platform examined at the same time. It is not uncommon to have multiple licenses under common control examined at different times by different examiners. This is inefficient for both the SBIC and the SBA. Further, during examinations, many smaller SBICs are unable to continue their normal operations until the exam is complete, so spreading out the exams is particularly disruptive. Finally, having all licenses reviewed simultaneously by the same examiner will prevent getting different results for the same practice inside the same SBIC group. However, simultaneous or sequential examinations should not be a reason for SBA delaying examinations in a way that could delay licensure, leverage, or other actions.

Examination Issues Shared with the Industry

There was overwhelming support in SBIA’s member survey for the SBA to share an annual notice of the most common examination findings. Once a year, the SBA should share with the entire SBIC industry the most common negative findings from examinations. SBIA would be happy distribute this information and help the SBIC industry develop “best practices” to make regulatory violations far more rare. If GPs and LPs are informed of the most common errors, then GPs will have the opportunity to proactively review their practices to make sure they are in full compliance, and LPs will be able to consider these matters when interviewing funds for future investments. All parties will benefit from SBA sharing this information.

Examination of the Management Company

SBIA members also responded in the survey that examinations should be limited to the examination of the SBIC. SBA commonly examines things well outside of the scope of their legal and regulatory authority, specifically the management company contracted with SBICs. SBA should not conduct such examinations unless there is a specific, clear, and compelling reason to review the management company. Management companies regularly manage SBICs and non-SBIC vehicles, and the examiners confuse the two, causing SBIC regulations questions to be raised on entities that are not SBICs. SBA should clarify the regulations and SOP to make sure they are not wasting the time of SBA examiners and the money of SBICs by examining issues outside their legal mandate.

Choice of Accounting Method

SBICs should be given the option of using Generally Accepted Accounting Principles (GAAP) instead of statutory accounting at the time of licensure. Given the unique nature of leveraged SBICs, statutory accounting is needed while leverage is outstanding. Once leverage is paid off, SBICs should be allowed to reduce their operating expenses by going to GAAP.

Updating Forms

The survey received many comments that most SBA forms relating to the SBIC program are outdated, confusing, redundant, or overly cumbersome and require updating. SBIA’s s1Qurvey participants specifically identified Form 468 as confusing and difficult to read, with no opportunity to amend or correct investments that were entered erroneously. SBIC participants also identified Form 1031 as particularly dated, complicated, and in need of reform. SBA and SBIA should conduct a joint review of its SBIC forms to streamline and remove duplicative content.

The SBIC-Web system was always clunky, but recently it has become at times almost unworkable – with delays for each data entry being measured in seconds. With hundreds of entries required, it takes days and nights to enter the data. With the recent changes, SBIC-Web is also regularly unavailable to even access. Recently, SBA’s use of technology has been getting worse, not better. SBA should allow SBICs to submit an Excel spreadsheet if SBIC-Web is not working.

SBIA thanks the Small Business Administration for its attention to SBIC regulatory issues and appreciates the opportunity to share feedback from the SBIC community. We look forward to a thoughtful and continued dialogue throughout the regulatory review process.


About the Small Business Investor Alliance (SBIA)

The Small Business Investor Alliance (SBIA) is the premier organization of lower middle market private equity funds and investors. SBIA works on behalf of its members as a tireless advocate for policies that promote competitive markets and robust domestic investment for growing small businesses. SBIA has been playing a pivotal role in promoting the growth and vitality of the private equity industry for over 50 years. For more information, visit or call (202) 628-5055.

1 U.S. Government Accountability Office, Small Business Investment Companies: Characteristics and Investment Performance of Single and Multiple Licensees, GAO-16-107 (Washington, DC, 2016), 14-18.

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