WASHINGTON - By the end of January, the government is expected to pare the regulations faced by banks that own small-business investment companies.
These companies, known as SBICs, are privately organized venture capital firms that are licensed and regulated by the Small Business Administration.
Generally, bank-owned investment companies may acquire, without Federal Reserve approval, up to 49% of the voting stock of small businesses.
"SBICs will certainly become much more attractive to banks under this proposal," said small-business consultant Charles R. Hertzberg, a former SBA official. "The regulations that banks are required to follow now are burdensome, and many are really not applicable."
There are two general types of small-business investment companies: those that leverage SBA-guaranteed funds, and those that rely on private capital. Banks generally own the latter.
However, banks are subject to the same requirements as those companies that put SBA funds at risk through their investment company subsidiaries.
But the SBA is proposing to exempt banks "from those regulations that relate to financial risk since the SBA is not providing any capital guarantees for them, and is, therefore, not at risk," said Patricia R. Forbes, the agency's acting associate deputy administrator for economic development. Final action on the rule is expected by Jan. 31.
Sixty-six banks, including Citibank and Chase Manhattan, own these companies, and hardly any rely on SBA funds, Ms. Forbes said. Bank-owned small-business investment companies invest about $2 billion in private capital, but only $35 million of SBA-backed funds. Banks own 28% of all small-business investment companies, but account for 65% of the $3.7 billion private capital in the program.
The start-up capital for some giant successes - such as Federal Express and Apple Computers - came from this program.
Under the SBA proposal, published in the Nov. 28 Federal Register, these bank-owned investment companies would face fewer restrictions regarding what they do with their funds while waiting to invest them in a small business.
Additionally, if a bank-owned investment company liquidates one of its small businesses, it would be exempt from restrictions on expenses incurred selling off the assets of the firm.
Bank-owned investment companies also would no longer have to get prior approval from the SBA for a number of changes, such as decreases in regulatory capital or hiring of an investment manager.
While such companies amount to an end run of sorts around the Bank Holding Company Act - which bars banks from owning nonbank businesses - the situation certainly won't lead to NationsBank buying General Motors, Mr. Hertzberg said.
That's because ownership by an investment company is limited to businesses with a net worth of less than $18 million and net income averaging under $6 million over the preceding three years.