On December 16, 2016, the Small Business Administration (SBA) published for comment proposed rule changes to Small Business Investment Company (SBIC) licensing and examination fees. The proposed rule is the first increase to the licensing and examination fees since 1996. Comments on the proposed rule will be accepted until February 14, 2017.
The full text of the proposed rule is available in the Federal Register, Volume 81, Number 242, page 91049.
The proposed rule would revise existing regulations to increase, over a five year period, SBIC licensing and examination fees. After the five year period, the rule proposes annual increases of licensing and examination fees based on inflation. The proposed rule would also establish certain examination fee discounts for SBICs that make significant low and moderate income investments. Finally, the proposed rule better defines SBA’s licensing phases and what forms and fees are required at each phase.
To adjust licensing and examination fees to remain current with inflation after the initial five year increase period, the proposed rule adds the defined term “Inflation Adjustment” to existing regulations. Inflation Adjustment would be defined as the methodology used to increase SBIC administrative fees using the consumer price index for all urban consumers (CPIU), as calculated by the US Bureau of Labor and Statics based on the US city average for all items, not seasonally adjusted, with the base period 198284 = 100. Beginning October 1, 2021, examination and licensing fees would be recalculated annually to reflect increases in the CPIU at the beginning of each government fiscal year (October 1) rounded to the nearest $100. No change will be made to the fees in the event that CPIU decreases. Changes to CPIU would be calculated from the previous year’s June CPIU to the most recent June CPIU to allow sufficient time to publish the revised fee before the October fiscal year.
Currently, SBIC applicants are required to pay a base fee of $10,000 plus an additional $5,000 if the applicant intends to operate as a limited partnership. Applicants seeking to be licensed as Early Stage SBICs are required to pay an additional $10,000, resulting in a total application fee of $25,000.
The proposed rule would remove the additional fee currently charged to an applicant intending to operate as a limited partnership, as well as removing from the regulations fees associated with applications to issue Participating Securities leverage—a type of leverage no longer available under the SBIC program.
The proposed rule increases the licensing fee to $25,000 in Fiscal Year (FY) 2017, with further increases of $5,000 each October for the next four years, culminating in a licensing fee of $45,000 by October 1, 2020. Beginning on October 1, 2021, the licensing fee will be increased using the Inflation Adjustment described above.
Changes in Control of Licensees Fee
Currently, SBICs seeking a change in control are required to pay a $10,000 fee. The proposed rule changes the current fee to be equal to the licensing fee for the applicable fiscal year, as detailed above.
Currently, base examination fees are calculated as a percentage of an SBIC’s total assets at cost, with the maximum base examination fee set at $14,000 for SBICs with total assets greater than $60 million. The base examination fee is then adjusted based on the status of the SBIC, including discounts for no prior violations ( 15%) and full responsiveness (10%), and increases in the event an SBIC is a limited liability company or limited partnership (+5%), is a Participating Securities licensee (+10%), if records or files are stored at multiple locations (+10%), or if the SBIC is an Early Stage SBIC (+10%). An additional fee of $500 per day will be assessed if SBA determines an examination is being delayed due to the SBIC’s lack of cooperation or the poor condition of its records.
The proposed rule would replace the base fee calculation with the following formula: Base Fee = “Minimum Base Fee” + 0.024% of assets at cost, not to exceed the “Maximum Base Fee.” Both the Minimum Base Fee and Maximum Base Fee would change each year from 2017-2020. Over such period, the Minimum Base Fee will increase from $5,000 to $9,000, the Maximum Base Fee for nonleveraged SBICs will increase from $20,000 to $30,000 and the Maximum Base Fee for leveraged SBICs will increase from $20,000 to $44,000. The proposed rule defines nonleveraged SBICs as SBICs that have no outstanding SBAguaranteed leverage or leverage commitments. Such an SBIC must also certify to SBA that it will not seek new SBA leverage in the future. Beginning October 1, 2021, the Base Fee would be adjusted annually using the Inflation Adjustment.
Additionally, the proposed rule changes the current fee adjustments in the following ways:
- Low and Moderate Income (LMI) Investing Discount – a discount of 1% of the Base Fee for every $10 million in LMI Investments, up to a maximum of 10% of the Base Fee.
- Non-Responsive Addition – removal of the 15% discount for full responsiveness and addition of 15% of the Base Fee for nonresponsiveness or not fully responsive to the letter of notification of examination.
- Remove Additions for Participating Securities and Early Stage licensees.
- Unresolved Finding Addition – addition of fee of 5% of the Base Fee for every 30 calendar days or portion thereof for each examination finding that remains unresolved after a 90 calendar day grace period from notification to the SBIC that corrective action must be taken, unless SBA ultimately resolves the finding in favor of the SBIC.
The proposed rule retains the 15% discount for SBICs with no outstanding regulatory violations and no violations as a result of the most recent examination as well as the additional 10% charge for SBICs that maintain records in multiple locations.
Finally, the proposed rule increased the delay fee from $500 to $700 per day, which will be further adjusted from October 1, 2021, using the Inflation Adjustment.
By October 2020, the proposed rule would increase licensing costs by $30,000 for all applicants that complete a license application. Further, the SBA estimates that examination fees for the average nonleveraged SBIC would increase by $5,100, with the examination fees for the average leveraged SBIC increasing by $12,100 based on FY 2015 examination data.