S. 1645 — American Ownership and Resilience Act

This section defines terms used in the Act, including (1) 1940 Act company (i.e., investment company registered under the Investment Company Act of 1940), (2) 1980 Act company (i.e., investment company registered under the Small Business Investment Incentive Act of 1980), (3) covered business concern (i.e., independently owned and operated enterprise where investments by venture capital firms, investment companies, employee welfare benefit plans, pension plans, or certain tax-exempt entities do not affect independent status), (4) covered investment (i.e., financing for employee stock ownership plan or eligible worker-owned cooperative acquisitions or expansions that maintain majority employee ownership), (5) eligible worker-owned cooperative (as defined in IRC §1042(c)), (6) employee stock ownership plan (as defined in IRC §4975(e)), (7) employee welfare benefit plan and pension plan (adopting definitions from ERISA §3 and including public/private plans subject to ERISA plus similar federal, state, or local government plans), (8) independent financial advisor, and (9) independent trustee.

This section establishes an ownership investment facility under which the Secretary provides leverage of up to $5 billion per fiscal year to licensed ownership investment companies to encourage covered investments, with no more than 20% of such total to Protégé OIC companies. For covered investments involving sales to employee stock ownership plans (ESOPs), the section requires (1) appointment of an independent trustee before execution to obtain a fairness opinion from an independent financial advisor evaluating whether the price, terms, and financing costs are financially fair to the ESOP; (2) prohibition on employee personal financing, including wage concessions or retirement rollovers (except for sales of employee-held ownership interests or reasonable customary contributions to worker-owned cooperatives); (3) no exercise of control by the ownership investment company over the covered business concern; (4) on third-party sale of the concern, distribution of ESOP proceeds as if all shares were fully allocated based on participant compensation under IRC §415(c)(3); (5) maintenance of ESOP share count at no less than initial levels during the investment company's interest (waivable by independent trustee); (6) retention of an independent trustee during the investment company's interest; (7) for subsidiary LLCs, ESOP majority interest, exclusive S corporation board governance, compliance of profits interests with IRC §409(p), and application of sale proceeds rules; and (8) prior to any stock sale or specified corporate matters under IRC §409(e)(3), independent trustee appointment, fairness opinion, and participant or beneficiary direction rights.

This section establishes organizational requirements for ownership investment companies (OICs), including Protégé OICs, requiring them to be state-chartered corporations (with at least 30-year succession unless dissolved earlier), limited liability companies, or limited partnerships (with at least 10-year succession) formed solely to perform functions under the Act, with operational areas and branches subject to Department approval. It requires OIC articles—which must specify the company's objects, name, operational areas, principal office location, and capital stock amount and classes—to be approved by the Secretary, along with any amendments. It directs the Secretary to accept OIC license applications on a rolling basis (including electronic submissions), provide a status report within 90 days of receipt, and approve or disapprove completed applications within 90 days based on whether the applicant meets section 6(a) and (b) requirements; management qualifications; financing needs in the proposed area; owners' and management's reputation; and operational viability (disregarding leverage availability). For OICs, the Secretary must consider managers' track record managing investments (realized or unrealized) in employee stock ownership plans or eligible worker-owned cooperatives (or retention of advisors with at least five years of relevant experience) and may issue provisional licenses for up to one year to applicants lacking minimum private capital under section 6(a) but intending to raise private capital commitments.

This section establishes the Protégé ownership investment company (OIC) Program, under which a manager of a non-Protégé OIC may enter a Secretary-approved written agreement to assist a Protégé OIC in applying for an OIC license under section 4(c) and managing the licensed OIC. The Secretary may grant a license to the Protégé OIC based on the mentor manager's investment track record. For participating managers, this section (1) authorizes a minority financial interest in the OIC-managed company; (2) increases the maximum outstanding leverage available to any one licensed company of the manager to the otherwise applicable amount plus $17,500,000 under section 7(b)(6)(B)(i)(I); and (3) increases the maximum outstanding leverage available to any two or more commonly controlled licensed companies of the manager to the otherwise applicable amount plus $35,000,000 under section 7(b)(6)(B)(i)(II).

This section requires each licensee to maintain private capital of not less than $10 million and directs the Secretary to determine whether such capital is adequate to ensure sound and prudent operations and the ability to make periodic interest payments on debt, considering anticipated investment income, owner and manager experience, licensee history, and financial resources. The section further requires the Secretary to ensure that licensee management—including for Protégé OICs—is sufficiently diversified from and unaffiliated with ownership to promote independence and objectivity in financial management and oversight.

This section authorizes ownership investment companies to borrow money and issue securities, promissory notes, or other obligations under regulations prescribed by the Secretary and establishes a debenture guarantee program (when authorized by appropriations) under which the full faith and credit of the United States backs timely principal and interest payments on such debentures (subordinate to other company debts unless the Secretary determines otherwise). Debentures may have terms up to 15 years and bear interest at the Treasury rate for comparable maturities plus up to 1.38% annually (to achieve zero subsidy cost under the Federal Credit Reform Act of 1990). It limits outstanding leverage as follows: (1) for a single non-Protégé ownership investment company, the lesser of 100% of private capital or $500 million; (2) for commonly controlled non-Protégé companies, $1 billion; (3) for a Protégé ownership investment company, the lesser of 100% of private capital or $100 million (with no multiple licenses under common control). Leverage calculations exclude (up to $75 million or 25% of private capital, whichever is less) the cost basis of investments in U.S.-headquartered businesses conducting research, development, engineering, or production for critical industries or technologies vital to national or economic security (not applicable to Protégé companies). It further (1) restricts third-party debt to mitigate default risk to the federal government; (2) requires private capital impairment reviews prior to leverage approval; (3) permits coordination with leverage for small business investment companies under the Small Business Investment Act of 1958; and (4) mandates a nonrefundable leverage fee.

This section revises the financing authority previously available to small business investment companies (SBICs) under 15 U.S.C. 685, authorizing ownership investment companies to provide covered business concerns with debt, synthetic equity, preferred stock, or equity capital (expanding from loans only), subject to Department regulations. It requires that, before providing such capital, the ownership investment company may require the covered business concern to refinance all outstanding indebtedness to become its sole holder and agree not to incur new indebtedness without the company's prior approval and first opportunity to provide the financing (new requirements). The section further (1) authorizes provision of capital directly or in participation with third-party investors; (2) sets maximum interest rates for the company's share of any loan to be determined by the Secretary, permitting debenture issuers to base rates on outstanding debenture coupon rates plus approved expenses and requiring initial determinations to consult SBA regulations under 15 U.S.C. 685 (shifting authority from SBA Administrator); (3) retains loan maturities of up to 20 years, with extensions or renewals up to 10 years to aid orderly liquidation; and (4) requires loans to be of sound value or secured to reasonably assure repayment.

This section limits an ownership investment company's aggregate securities acquisitions and commitments for any single covered business concern to 10% of the sum of the company's private capital and total projected leverage in its Secretary-approved business plan, if the company has outstanding financing from the Secretary (absent the Secretary's approval).

This section authorizes the Securities and Exchange Commission (SEC), by rule and subject to specified terms, to exempt classes of securities issued by ownership investment companies under this Act from registration requirements under title I of the Securities Act of 1933 by adding them to the list of exempted securities in section 3 of that Act, if the SEC determines enforcement is not necessary in the public interest and for investor protection; similarly authorizes the SEC to exempt such securities from requirements under title III of the Trust Indenture Act of 1939 by adding them to exemptions in section 304 of that Act; and exempts such companies from asset coverage requirements for senior securities under section 18(a)(1)(A) and (B) of the Investment Company Act of 1940, provided the senior security is guaranteed by the Department. (As background, section 18 generally limits registered investment companies to issuing senior securities—i.e., debt or preferred stock—only if covered by specified percentages of assets, such as 300% for debt.)

This section prohibits the Department from committing leverage under this Act to any licensee unless the licensee's managers (1) certify the names and fees paid or to be paid to any attorneys, agents, or other persons engaged to expedite applications for Department assistance; and (2) execute an agreement binding the licensee, for two years after assistance is rendered, to refrain from employing, tendering employment or office to, or retaining for professional services any Department officer, attorney, agent, or employee (on the date assistance was rendered or within one year prior) who occupied a position involving discretion over granting such assistance.

This section directs the Secretary to submit to Congress, not later than one year after enactment and annually thereafter, a detailed report on the operations of the Department under this Act—including government losses for the preceding fiscal year and estimated losses for the current fiscal year. The report must address (1) plans to provide ownership investment company financing and licensing nationwide to all covered business concerns; (2) plans to support states increasing the number of licensees; (3) steps to maximize recoupment of government funds and ensure compliance; (4) recommendations to the Department of the Treasury for tax incentives; (5) a Securities and Exchange Commission (SEC) report on simplifying regulatory requirements under federal securities laws and eliminating overlapping jurisdiction; (6) SEC actions to simplify Investment Company Act of 1940 compliance and regulated investment company tax elections; (7) numbers of ownership investment companies (including Protégé OICs) licensed, liquidated, or having surrendered licenses, with leverage amounts; (8) leverage received by ownership investment companies (including Protégé OICs); (9) sizes, locations, characteristics, and investment types (debt, synthetic equity, preferred equity, or equity) of licensed ownership investment companies (including Protégé OICs); (10) geographic dispersion of licensees relative to state populations; (11) summaries of employee stock ownership plans created by ownership investment companies (including Protégé OICs), with metrics on participants, employees, securities value, assets, contributions, distributions, median balances, and demographics (by race, gender, state); and (12) summaries of eligible worker-owned cooperatives created by ownership investment companies (including Protégé OICs), with metrics on member-owners, employees, securities value, membership account assets and median balances, and demographics (by race, gender, state).

This section establishes procedures authorizing the Secretary to revoke or suspend licenses for false or misleading statements, willful or repeated violations of the Act or regulations, or violations of cease and desist orders. It further authorizes the Secretary to issue cease and desist orders requiring compliance or license suspension, preceded by an order to show cause with a hearing; subpoena witnesses and documents nationwide, with court enforcement; and provides for appeals of such orders to the U.S. court of appeals for the circuit of the licensee's principal place of business, to be filed within 30 days, with the court's discretion to stay the order pending review.

This section authorizes the Secretary to investigate potential violations of the Act by licensees or other persons, including by administering oaths, issuing subpoenas, compelling witness attendance and document production, and seeking court enforcement for noncompliance. This section requires the Department to examine each licensee at least once every two years (with waivers possible for up to one year or during suspension for litigation or receivership) to verify compliance with Act requirements such as lawful activities, conflicts of interest, control of covered businesses, investment holding periods, diversification limits, prohibitions on relending or passive/foreign investments, interest rate limits, and covered investment mandates; permits use of qualified private sector examiners with costs assessed to the licensee; and requires licensees to submit reports as specified (with exemptions for certain Investment Company Act registrants to avoid duplication). This section requires each licensee to submit written valuations of loans and investments semiannually (annually if no leverage outstanding or as otherwise directed), notify the Secretary within 30 days of any material adverse change at fiscal quarter-end, and provide Secretary-approved independent certified public accountant-audited annual financial statements that review valuation procedures and confirm conformity with valuation criteria.

This section authorizes the Secretary to apply to a U.S. district court for a permanent or temporary injunction, without bond, or an enforcement order against any licensee or person violating or about to violate the Act, its rules or regulations, or related orders. It grants such courts exclusive equity jurisdiction over the licensee and its assets, wherever located, and authority to appoint a trustee or receiver—including the Secretary upon request, unless the court deems it inequitable—to hold or administer those assets.

This section requires the Secretary to adopt regulations governing conflicts of interest involving transactions with officers, directors, shareholders, partners, or members of licensees (or persons or concerns with interests therein) that may be detrimental to covered business concerns, licensees, or their shareholders, partners, or members—including public disclosure requirements—and modeled on existing Small Business Administration regulations under section 312 of the Small Business Investment Act of 1958 (15 U.S.C. 687d). The Secretary must consult those SBA regulations for any initial determination and promulgate the new regulations according to the implementation milestones in section 3(l) of this Act.

This section defines a "management official" of a licensee to include any officer, director, general partner, manager, employee, agent, or other participant in the management or conduct of the licensee's affairs. It authorizes the Secretary to remove a management official who willfully and knowingly commits a substantial violation of the act, related regulations, or a final cease-and-desist order, or a substantial breach of fiduciary duty involving personal dishonesty. Such removal requires written notice stating the grounds and a hearing 30 to 60 days after notice (unless adjusted for good cause or at the Attorney General's request); the order becomes effective 30 days after service (immediately if consented to) and remains enforceable unless stayed, modified, terminated, or set aside. It further authorizes the Secretary to immediately suspend from office or prohibit further participation in licensee affairs any such management official if necessary to protect the licensee or Department interests, with the action remaining in effect pending removal proceedings unless stayed by the U.S. district court for the licensee's home district (or D.C.) upon application within 10 days. Separately, it authorizes immediate suspension upon an information, indictment, or complaint charging the management official with a felony involving dishonesty or breach of trust, remaining in effect until final disposition or Secretary termination; upon final conviction, the Secretary may issue a removal order effective upon service on the licensee.

This section deems a licensee's violation of the Act or its regulations to also be a violation by any officer, director, employee, agent, or other person who authorizes, participates in, aids, or abets such violation. It further prohibits such persons from breaching their fiduciary duty if it causes or endangers financial loss or damage to the licensee and bars, absent the Secretary's written consent, persons convicted of a felony or dishonesty offense, or civilly liable or enjoined for fraud or breach of trust, from serving or continuing to serve in those roles.

This section establishes civil penalties of not more than $100 per day against licensees that violate regulations or directives under this Act by failing to file required reports pursuant to section 12, unless the failure is due to reasonable cause and not willful neglect. It further authorizes the Secretary to exempt licensees from these penalties or impose alternative requirements, upon terms and conditions deemed necessary and appropriate and not inconsistent with the public interest or protection of the Department.

This section establishes venue for enforcement suits or actions brought by the Department under sections 13, 15, 17, 19, or 23 of the Act in the federal district where the licensee maintains its principal office and authorizes service of process in any district where the defendant maintains its principal office or transacts business, or wherever the defendant may be found.

This section authorizes the Secretary of the Small Business Administration to issue trust certificates representing ownership in pools of debentures issued by small business investment company licensees and guaranteed under the Small Business Investment Act, and to guarantee the timely payment of principal and interest on such trust certificates using the full faith and credit of the United States. (As background, the debentures enable licensees to raise capital for equity investments and loans to small businesses, with the Small Business Administration providing guarantees.) The guarantee is limited to the principal and interest on the underlying debentures (with proportional reductions for prepayments or defaults and interest accruing only through the payment date), requires central registration and agent contracts for pooling and issuance (including fidelity bonds), mandates purchaser disclosures on terms and yield, authorizes regulation of brokers and dealers, and prohibits a fee for the guarantee itself (though agents may collect approved fees).

This section directs the Secretary to issue guarantees under section 7 and trust certificates under section 21 at periodic intervals of not less than every 12 months and at such shorter intervals as the Secretary deems appropriate, taking into consideration the amount and number of such guarantees or trust certificates.

This section establishes miscellaneous provisions governing ownership investment companies, as follows: (1) authorizes their operations, including business generation, loan servicing, and securities investigations, to be conducted in cooperation with banks, investors, or lenders on a fee basis, with companies eligible to receive such fees; (2) directs the Secretary to prescribe regulations to implement the Act; (3) provides for judicial determination and potential forfeiture of rights, privileges, and franchises for violations, via suit by the United States in the district of the company's principal office at the instance of the Secretary or Attorney General; and (4) exempts the United States from liability for any obligations, stocks issued, or commitments made by such companies.