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SBIC Examination FAQs

  1. Why does SBA examine SBICs?
  2. Does SBA’s examination take the place of an annual audit?
  3. Who performs SBIC examinations?
  4. How often does SBA examine SBICs?
  5. Why does SBA collect examination fees and how are those fees calculated?
  6. What records can the examiner obtain and review?
  7. What is the process for an SBIC examination?
  8. What types of findings do examiners look for?
  9. What are the most common problems found by examiners?



  1.   Why does SBA examine SBICs?

Answer:

By statute, SBA must perform SBIC examinations in accordance with Section 310 of the Small Business Investment Act of 1958, as amended, and Title 13, Code of Federal Regulations Section 107.690

SBA conducts SBIC examinations in order to:

(1) Determine whether licensees are complying with the Small Business Investment Act of 1958 and implementing regulations;

(2) Help SBA assess the financial condition of licensees and SBA’s financial vulnerability; and

(3) Ensure the accuracy of information that licensees submit to SBA.

SBA examiners independently gather and report objective, information to the Office of SBIC Operations (Operations), so that Operations can effectively monitor and regulate the SBIC program.  Examiners work individually, and in teams, to determine whether licensees are complying with the SBIC Act and implementing regulations.

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  1.   Does SBA’s examination take the place of an annual audit?

Answer:

SBA’s examination does not take the place of an annual audit.   The SBA examiner’s primary objective is to determine whether licensees are complying with the SBIC Act and implementing regulations.  As part of that examination, the examiners will review the audited financial statements requirement by 13 CFR 107.630.

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  1.   Who performs SBIC examinations?

Answer:

The Office of SBIC Examinations in SBA’s Investment Division conducts all SBIC examinations.  The employees of the Office of SBIC Examinations are located throughout the country as follows:  Washington, D.C. Headquarters (where the Director resides) and field offices in New York, Atlanta, and San Francisco.

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  1.   How often does SBA examine SBICs?

Answer:

Although the Small Business Investment Act of 1958, as amended, requires SBA to examine licensees at least every two years, SBA’s goal is to examine

  • Leveraged licensees (SBICs with outstanding leverage, commitments, or earmarked assets) on a 12-month cycle and
  • Non-leveraged licensees on a 18-month cycle. 

For newly licensed SBICs, we schedule the initial examination to take place within six months of licensing.

SBA will notify SBICs 1 to 2 months prior to each examination in order to coordinate times and request information.

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  1.   Why does SBA collect examination fees and how are those fees calculated? 

Answer:

The Small Business Investment Act of 1958, as amended, Section 310, paragraph b, authorizes the SBA to collect fees to cover the costs of examinations and other program oversight activities.

SBIC regulations 13 CFR §107.692 identifies how these fees are calculated.  In general, SBIC regulations calculate licensing fees by assessing a Base Fee and applying adjustments based on SBIC compliance and complexity as follows:

  • The Base Fee is determined by the licensee’s total assets (at cost) as of the date of the latest certified financial statement and ranges from a minimum of $3,500 to a maximum of $14,000.

  • After the Base Fee is determined, adjustments are made as follows:

  • Examination Fee Discounts:
    • The SBIC has no prior regulatory violations:  15%
    • The SBIC is fully responsive to Examiner’s requests:  10%

  • Examination Fee Additions:
    • If the SBIC is organized as a partnership or limited liability company:  5%
    • If the SBIC is a Participating Security Licensee or Early Stage SBIC:  10%
    • If SBIC files are kept at multiple locations:  10%

  • Other Penalties:  Finally, if the time needed to complete the examination is delayed due to the licensee’s lack of cooperation, SBA may assess an additional fee of up to $500 per day.  Such a fee has not been assessed since prior to 1992.

Examiners will assess examination fees and inform SBICs by the end of the On-Site Visit. 

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  1.   What Records Can the Examiner Obtain and Review?

Answer:

Examiners will obtain and review the following:

  • Agency Records:  Examiners have access to all Agency records that relate to the SBIC program, including reports, audits, documents, correspondence, and other material.  SBA employees must provide any     available information examiners request that relates to the SBIC examination function.

  • Licensee Records:  Under 13 CFR §107.691, examiners have access to a licensee’s books, records, and other pertinent documents.  They also have access to the working papers of the licensee’s independent public accountant.  Examiners may confirm SBIC ownership using SBA Form 1405 for Corporate SBICs or SBA Form 1405a for Partnership SBICs.

  • Records of the Portfolio Concern:  13 CFR §107.692 (c), gives examiners access to the books and records of portfolio concerns receiving financing from licensees. This regulation requires licensees to:

(1) Obtain any information that examiners request to verify certifications made by portfolio concerns, including those concerning the use of proceeds using SBA Form 857; and

(2) Ensure that financing documents contain provisions giving examiners access to the portfolio concern’s books and records.

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  1.   What is the process for an SBIC examination?

Answer:

Standard Operating Procedures 1008 describes the procedures for the Office of SBIC Examinations.  An overview of the SBIC examination process is shown below.  (Click on each link for more information.)

Process

 

Timing*

 

 

Notification

 

2-3 months prior to on-site visit

 

On-site Visit

 

4-5 work days for Leveraged SBICs

3 work days or less for Non-leveraged

SBIC Operations Analyst Sends Official Report

Typically 1 to 2 months after On-site Visit

Examinations will overlap, since examiners must address issues from the last examination, as well as initiate preliminary steps for the next examination.

*Notes on Timing:

The times listed above are approximated.  In general, examiners typically spend about a week preparing for an examination, a week onsite conducting the examination, and a third week writing their reports and organizing their working papers.

However, the length of an examination will vary widely based on many factors, such as: (1) the type and size of the licensee; (2) whether the licensee has received SBA leverage funding; (3) the level of the licensee’s investment activity; (4) the period of time covered in the scope of the examination, (5) the licensee’s prior regulatory history; and (6) whether there are particular concerns that Investment Division analysts want reviewed during the examination.

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Notification

The examiner will notify the licensee 2 to 3 months prior to the on-site examination to coordinate times, request information, and prepare the SBIC for the examination.  In the notification letter, the licensee is requested to send to the examiner, within ten working days:

(1) A trial balance of the general ledger showing account numbers, titles, and balances.

(2) Schedule of financings made since the last examination cut-off date, together with a list of officers, directors, shareholders or partners of these portfolio companies

(3) Schedule of the licensee’s portfolio, showing outstanding balances;

(4) Schedule of delinquencies;

(5) An executed Disclosure Statement: (SBA Form 856 for Leveraged SBICs or SBA Form 856a for Non-leveraged)

(6) Schedule of financings paid-off, written off, and sold since the last examination; and

(7) A recent copy of the licensee’s capital certificate.


In the notification letter the licensee’s management is instructed to prepare and have available specific information for the examination period, including:

(1) Books of account;

(2) Bank account reconciliations;

(3) Bank statements, canceled checks, wire transfer authorizations;

(4) List of all cash and idle funds accounts, including account numbers and the names and addresses of financial institutions;

(5) Minutes of all board of directors meetings;

(6) Documentation on the valuations of all portfolio concerns;

(7) Current financial statements on all portfolio concerns;

(8) All legal documents and correspondence relating to the portfolio concerns;

(9) For each financing made for the examination period, verification copy of SBA Form 1031, Portfolio Financing Report

(10) Stock certificate book, or partnership agreement and amendments;

(11) Correspondence files; and

(12) Any amendments to the original license application submitted to SBA.

The examiner may request other information as applicable.

(Return to Process chart)

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On-Site Visit

The On-Site Visit typically lasts 4-5 days for Leveraged SBICs and no more than 3 days for Non-leveraged.  During this phase, the examiner will visit the licensee’s office to review the licensee’s financial records and to conduct a regulatory review of the licensee’s practices.

The review includes investments made since the last examination, and focuses on significant regulatory issues, such as: financings to big business, conflicts of interest, overline investments, capital impairment, and the adequacy of the licensee’s portfolio valuations.

Time permitting, the examiner will review all financings made since the last examination.   Otherwise the Examiner will review a sample of at least five financing that represent 50 percent or more of the dollar value of the total financings for the period, with a mixture of loan, debt security and equity financings.  In selecting this sample, the examiner may consider other factors including:

  1. Dollar amount and type of financings;
  2. Type of business financed;
  3. Whether financings are new to the portfolio or are follow-ons;
  4. Financings that by amount or nature may have a significant impact on the portfolio valuation; 
  5. Past examination findings; and
  6. Input from Office of SBIC Operations financial analysts.

The examiner may increase the sample size to include additional financings as a result of information obtained during the examination.  

The examiner may perform field visits to portfolio concerns at done at their discretion. Field visits are more likely if the SBIC has SBA-guaranteed leverage or intends to apply for leverage.   SBA may consider scheduling a portfolio concern visit where the visit would meaningfully enhance the examination process (e.g. provide documentation or clarification regarding a significant regulatory issue), and where budgetary and time constraints permit.  Typically SBA uses field visits to confirm the existence of portfolio concerns and verify the use of financing proceeds.  SBA typically does not visit portfolio concerns if the SBIC does not have leverage, unless the examiner suspects major regulatory problems or the SBIC intends to apply for leverage

At the end of the on-site visit, the examiner will meet with the SBIC managers and discuss preliminary findings.  The examiner will also assess the examination fees and communicate them to the SBIC managers. 

(Return to Process chart)

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SBIC Operations Analyst Sends Official Report

The examiner will prepare the report and send to the Office of SBIC Operations.  The SBIC Operations Analyst typically sends the report to the SBIC within 30 days.  The SBIC will work with the Operations Analyst to resolve findings.

(Return to Process chart)

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  1.  What types of findings do examiners look for?

To more efficiently use examination resources, as well as focus attention on serious regulatory issues, the Investment Division identified nine “major findings” that are of special concern.  These findings are noted below with its associated SBIC regulation (Title 13 Code of Federal Regulations) paragraph(s).    

(1) Unlawful Activities Not Contemplated by the Act (§107.500; §107.700; §107.110)

(2) Prohibited Conflicts of Interest (§107.730; §107.885)

(3) Prohibited Control of a Small Business (§107.865)

(4) Short-Term Financings (§107.830; §107.835; §107.845)

(5) Overline Investments (§107.740)

(6) Relending, Foreign, Passive or Other Prohibited Investments, Including Prohibited Real Estate Financings (§107.720)

(7) Excessive Cost of Money (§107.885; See also §§107.860 and 107.830(d)(3))

(8) Inappropriate Distributions, Including Improper Dividends and Excessive Expenditures (§107.520; §107.585; §§107.1520-107.1580; §107.50

(9) Impairment and Valuation Issues (§§107.1830-107.1850; §107.650)

Other Matters:  Regulatory issues other than the nine listed above are reported in examination reports as Other Matters rather than as Findings.  These matters become findings, however, if they were reported in the previous examination and remain unresolved by the Licensee, or if they are new instances of the same regulatory issues previously reported as Other Matters. 

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  1. What are the most common problems found by examiners?

The tables below show exam findings for Leveraged and Non-Leveraged SBICs between FY 2010 and 2012 ordered by number of findings. As shown, the most frequent violation by Leveraged SBICs was 107.503 Valuations, which Non-leveraged SBICs most frequent violation was 107.590 maintaining active operations. 

Exam Findings for FY 2010-2012 by Number of Findings

Asterisks (*) indicate a “major finding”

Leveraged SBICs

SBIC Regulation

Number

% of Findings

107.503:  Valuations*

34

31%

107.830:  Minimum Duration/Term of Financing*

12

11%

107.530:  Restrictions on Investments of Idle Funds

10

9%

107.720:  Ineligible Financings*

8

7%

107.630:  File financial statements with SBA (Form 468)

6

6%

107.1830:  Capital Impairment*

5

5%

Other Major*

13

12%

Other Findings (Not Major)

21

19%

Total

109

100%


Non-leveraged SBICs

SBIC Regulation

Number

% of Findings

107.590:  Maintain active operations

15

16%

107.720:  Ineligible Financings*

12

13%

107.680:  Changes in Licensee Prior to SBA Approval

8

9%

107.640:  File Portfolio Financing Reports

8

9%

107.630:  File financial statements with SBA (Form 468)

8

9%

107.503:  Valuations*

7

7%

107.1000 (b):  Decrease of capital not reported to SBA

5

5%

Other Major*

10

11%

Other Findings (Not Major)

21

22%

Total

94

100%

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