OVERSIGHT OF SMALL BUSINESS THURSDAY, DECEMBER 16, 1982 U.S. SENATE, SMALL BUSINESS COMMITTEE, Washington, D.C. The committee met, pursuant to notice, at 9:45 a.m., in room 424, Russell Senate Office Building, Hon. Lowell Weicker, Jr. (chairman of the committee), presiding. Present: Senator Weicker. Also present: Robert J. Dotchin, staff director; R. Michael Haynes, chief counsel; and Dorothy C. Olson, hearing clerk. STATEMENT OF HON. LOWELL WEICKER, JR., A U.S. SENATOR FROM THE STATE OF CONNECTICUT, AND CHAIRMAN, SMALL BUSINESS COMMITTEE The CHAIRMAN. The committee will come to order. First of all, I want to apologize for starting the hearing late. It was due to certain administrative details. We are going to move right along. This is the sixth in a series of oversight hearings the committee has held to examine the major programs run by the Small Business Administration, and today we will be looking at the small business investment company and minority enterprise small business investment company programs. In recent months, these programs have been the subject of much controversy by the press and the public. Allegations of widespread abuse and fraud have been raised, and two reports issued by the Inspector General's Office have been critical of aspects of the SBIC and MESBIC programs. Our purpose in meeting today is to take a good, long look at these two programs to get a better understanding of the abuses that have existed and the outlook for the future. As chairman of the Small Business Committee, I am troubled by accounts in the press and from the Inspector General's Office that indicate that the program is laced with participants who have not operated their SBIC's or MESBIC's properly and have abused the program. If this program is to continue to serve the very vital function that it has served over the past several decades, it is important that it operate effectively, without a taint of doubt of impropriety. I do not intend to allow this program, which has done so much in the past, to be victimized by an unscrupulous few. (1) We have with us today the Acting Inspector Ge SBA, who will discuss with us his findings as a resul sive study of the SBIC and MESBIC programs, SBA A James Sanders, and representatives of the SBIC and dustry. Because of the fact that there are going to be vot shortly, which means that we are going to go a littl times that I have indicated to the Administrator, ar has other engagements, I wonder, Jim, whether you go ahead and give your testimony now. That way you to the Small Business Administration without having around noontime, which is what I figure it would be until the end of the proceedings. Mr. SANDERS. Thank you very much, Mr. Chairman. The CHAIRMAN. Would you identify those who are then just proceed in offering your statement any way propriate. STATEMENT OF HON. JAMES C. SANDERS, ADM SMALL BUSINESS ADMINISTRATION, ACCOMPANIE T. HOLLOWAY, ASSOCIATE ADMINISTRATOR FOR F INVESTMENT, AND ROBERT G. LINEBERRY, DE CIATE ADMINISTRATOR FOR INVESTMENT Mr. SANDERS. Mr. Chairman, thank you for this co am accompanied this morning by Mr. Holloway on my sociate Administrator for Finance and Investment, a berry on my right, the Deputy Associate Administrat ment who is in charge of the SBIC programs. I would like to submit my statement for the recor man, and just make some comments from that statem terest of time. The CHAIRMAN. Your statement in its entirety will b the record. Mr. SANDERS. Thank you, sir. I think it should be said that this innovative prog are discussing today has succeeded in providing uniqu needed assistance to small business. Since its inception billion of financial assistance has been provided to 66,000 small concerns which in turn have produced jo gains, and tax revenues far exceeding the Governmen erating the program. In the calendar year of 1981, 2,32 nesses received $387 million of disbursements from SB The benefits of this program are truly impressive such as Cray Research, Intel, Federal Express, Four-Ph are some of the examples of success. I think an impo of this particular program, also, that sometimes goes u unmentioned, is the human capital that has been de the last 25 years in the SBIC program. That is to say, of the financial entrepreneurs that operate the SBIC even more important to the Nation than the other res program. This program has developed venture capitalists in way. The economy will reap a harvest because of t that we d muchrly $4.5 re than conomic st of op all busimpanies Systems, t feature ciced and ped over expertise s perhaps ces of the successful xnow-how that has been provided to many entrepreneurs, and that know-how has attracted many private capital dollars today that continue to flow to the small business venture capital market. Now I think another comment that is important for us to consider in these deliberations is that most of the problems that have surfaced in violations, in flagrant violations, examples that we all should be concerned about, were surfaced by the SBA's Inspector General's department. That is part of the SBA's management system. They were not uncovered by the Secret Service or the FBI or anyone else. They were uncovered by the Inspector General of the SBA. I think that the agency in this particular program has tried to act and continues and will make redoubled efforts to act-in a manner which balances the need for adequate protection of the public interest against the need to not overly constrain an innovative, high-risk program-and it is a high-risk program, by its nature. Accordingly, there is some understandable tension among the SBA, its Inspector General, and other oversight bodies who feel that measures taken are not tough enough. On the other hand, these steps clearly amount to a sharpening of some policy and regulatory items that had been poorly defined and inconsistently administered, and have caused some necessary tension with the SBIC industry, which believes we have been too restrictive. I think nothing positive, Mr. Chairman, comes from raising the heat of our rhetoric to a point where the facts are forfeited in the interest of individual gain, Government intransigence, or unnecessary public outcry. To its credit, the SBIC industry has fulfilled much of what all believe that the Congress intended by passing the Small Business Investment Act of 1958. The impressive record of investment and success stories is a tribute to those licensees who have worked with the SBA to achieve the goals for which the program was designed. This program requires active management and constant attention to the balance of which I spoke. I do know that you will continue to hear from industry representatives and from others on all sides of the myriad issues involved in the complex business financing program. This dialog is important. It is important to us. There will always exist this kind of dynamic tension between the industry and our responsibilities for regulating the industry to see that those who are taking advantage of the public and the taxpayer are eliminated from it, while not penalizing those that truly perform under the guidance and for the purposes of this act as passed. We know that if it gets too quiet, then we all have to worry. That concludes my remarks, Mr. Chairman. I might suggest that if Mr. Holloway has something to add, we can give him a few minutes. [The prepared statement of Mr. Sanders follows:] I welcome this opportunity to come before your comm discuss the status and future of the Small Business Company Program. Accompanying me are Edwin T. Holl Associate Administrator for Finance and Investment Lineberry, Deputy Associate Administrator for Inves The SBIC Program, created by the Small Business Inv of 1958, is SBA's Pioneer Program combining private profit motive, expertise and resources with governr incentives to provide long-term, high-risk debt and financing and management assistance to the Small Bu |