I believe Mr. Ikard and Mr. Curtis have also agreed on a bill which would, in essence, allow small business concerns to retain more of their income if they reinvested into the business, reducing the primary tax from 30 to 20 percent. Would you be in favor of that?

Mr. RUVELSON. Self-interest would dictate that I would support that.

Mr. ROOSEVELT. Outside of self-interest, how sound do you think it is?

Mr. RUVELSON. I think it is logical, for there you are alluding to the accumulation of surplus. I think you have to give the small business investment companies an opportunity to grow and for investors to be attracted to it. I think that is possibly the cheapest thing that our Government can do, to make them attractive and sound and progressive. I think that is an answer more than subsidization. Mr. ROOSEVELT. Thank you very much.

Mr. EVINS. Mr. Mitchell.

Mr. MITCHELL. Mr. Ruvelson, in one of your proposals you stated the possibility of lowering the minimum maturity period below 5 years. Would that not, sir, put you in competition with other lending institutions which are filling the short- or immediate-term loan field?

Mr. RUVELSON. I must answer it this way: There is a question as to the interpretation as to what constitutes minimum maturity. I have had no opportunity to discuss this. I would like to see the matter clarified through the Investment Division of the Small Business Investments Company as to what is a minimum maturity. In other words, if we are talking about a 10-year debenture, is it permissive under the law to have the maturity payments spread from the first year to the 10th year, or do your maturity payments begin at the 5 years and end with the 10th year? In other words, what do they mean when they say 5 years is the minimum maturity? If it is as I have thought, it meant, I would say it is somewhat restrictive to the operation because there are many situations where you are forced to forgo any use of your principal for a minimum period of 5 years and it makes you give pause.

Mr. MITCHELL. On the direct loans, on the minimum maturity of 5 years there is nothing to prohibit the borrower from paying the loan off prior to the 5-year period.

Mr. RUVELSON. There is nothing to prevent him, although I think in most cases they will take the maximum maturity.

Mr. MITCHELL. Speaking for a moment of section 305 (e) of the act which requires that a loan made by an investment corporation to a business concern shall be of such sound value or so secure as reasonably to assure repayment, it is noted in your proposal No. 2 at the top of page 2, and I believe you refer to it in other places, as secured type loans. Are we to assume, Mr. Ruvelson, that you will not make loans to small-business concerns except those that are fully secured by collateral security?

Mr. RUVELSON. Well, the law states, as I understand it, that we have two alternative methods of advancing financing. One is on the convertible type of debenture and the other is on the basis of a secured type loan. What will constitute security is a matter of individual determination.

In our own group, at the suggestion of the bank, which is one of our stockholders, we felt the business viewpoint should be emphasized rather than the banking viewpoint. So if you will note, in our board of directors of nine persons, only one is a representative of a banking institution. One of our officers is an executive officer of Federal Savings & Loan.

So the question of what is a fully secured loan to some people might be a 5-time security; to a lot of others, it might be a 100 percent, or any place in between.

Mr. MITCHELL. Do you think that under the banking principle that loans could be made on past integrity, past paying habits, and past and future earnings, without collateral?

Mr. RUVELSON. They have not found it possible in the banking field where their maturities are short, so here where we are talking about 5 to 20 years, I do not assume that our type of risk would suddenly become more desirable.

Mr. MITCHELL. Your answer is, in the banking field they were not making that type of loan?

Mr. RUVELSON. No. My answer is not that, sir. The banking field obviously in making commercial loans to a small business relies upon security. They are giving a short term, seasonable, or whatever the accommodation may be, but generally less than 12 months. I do not think that we can be expected where we are giving multiples of that maturity to go on to the general faith and credit and integrity and put out these dollars when the minimum maturity is 5 years. Mr. EVINS. Thank you, Mr. Ruvelson.

We hope you catch your plane.

Mr. RUVELSON. Thank you very much.

Mr. EVINS. Have a successful trip back to Minneapolis.

Mr. EVINS. We will call next Mr. Thomas Graham.

Mr. GRAHAM. May I introduce Mr. Davis, who is a management investment consultant?

TESTIMONY OF THOMAS GRAHAM, LOUISVILLE, KY.; ACCOMPANIED BY TYRUS R. DAVIS, LOUISVILLE, KY.

Mr. EVINS. Mr. Graham is from Louisville, Ky.

We will be pleased to hear from you.

Mr. GRAHAM. Mr. Chairman, if you think it is all right, I would just as soon not read this statement.

Mr. EVINS. You may file it with the reporter, and highlight it as you wish.

(The prepared statement of Mr. Graham follows:)

PREPARED STATEMENT OF THOMAS GRAHAM, LOUISVILLE, KY.

Mr. Chairman and members of the committee, my name is Thomas Graham and my occupation is that of a small businessman. I am president of the Bankers Bond Co., Inc., of Louisville, Ky., a small investment banking concern; president of Bankers Southern, Inc., a registered closed-end nondiversified investment company; a director of some 20 small businesses, and have been for almost 40 years associated with the financial fraternity of this area. In connection with my small business financial activities, I am a member of the Midwest Stock Exchange, past governor of the Investment Bankers Association of America, and a member of its Federal taxation committee for the past 12 years; past president of National Security Traders Association, and a former commit

tee member of district No. 10 of National Association of Securities Dealers. I am sure that most of you gentlemen know that there has been recently formed an organization called the National Association of Small Business Investment Companies, of which I have the honor of being one of the governors.

On August 21, 1958, the 85th Congress passed the Johnson-Patman Act, the so-called Small Business Investment Act of 1958. It was my privilege to appear before several of the legislative committees dealing with the problems of small business and, also, before several of the so-called independent agencies who also are concerned with some of the aspects of small business financing. During the 1958 legislative year and from a period extending back to 1950, such financing has been of primary concern to myself as a fundamental bulwark against the growing trend of monopolistic practices which would conceivably make serious changes in our free enterprise system. Therefore, it was of great personal and professional joy to me when the Congress saw fit to enact this legislation. It was, of course, anticipated that the mere passage of this act would not solve all of the intrinsic and extrinsic problems in this most impor. tant area of our economic life, but it was, in my opinion anyway, a step as basic to our economy as the Federal Reserve Act of 1911.

When the rules and regulations were issued by the Small Business Administration through its newly enacted Small Business Investment Division, I had several questions in mind as to the possible effect of several of these regulations and have been in contact with interested individuals and groups during this time in anticipation of these hearings. I would, with your permission, like to direct myself toward the following aspects of the Small Business Investment Act of 1958 and its supporting rules and regulations:

(1) From a standpoint of hindsight, which, unfortunately, is a great crutch to those of us who are human beings, I feel that we have made an unfortunate error in semantics by attaching the label "investment companies" to the newly formed units. Those of us who have been involved with the Investment Company Act of 1940 should have known that these new companies would find it difficult, if not impossible, to operate under this act because of certain basic restrictions which are part of the statutory requirements of the act and/or the interpretations of the SEC staff. For instance, the Investment Company Act of 1940 states that a registered investment company cannot purchase in excess of 5 percent of the value of the total assets of another registered investment company at the time of any purchase or acquisition of such securities. This, in essence, means that operative investment companies so registered under the 1940 act will find it difficult, if not impossible to participate in the equity financing phases as stated under the Small Business Investment Act of 1958. This is inconsistent, at least in my opinion, with the functions of investment companies, so formed under the 1940 act, who had practically a mandate from the Congress to apply themselves to equity capital financing in the real meaning of the word. That investment companies so formed under the 1940 act have taken a casual attitude toward equity financing is patent from the standpoint of investigation of the record.

I would, therefore, suggest to this committee that some consideration be given to changing the title under which these new companies are to act from "small business investment companies" to "small business equity companies." Though this may entail some difficulties, I feel sure that this particular change will provide great momentum in reaching capital sources not presently available to the new small business companies.

Also, I would like to suggest that some consideration be given to the limitations of investments that are stated in the rules and regulations supporting this act. I refer specifically to those prohibitions dealing with companies which have had a limited public distribution of their securities and companies which may have been traded on any exchange or in the over-the-counter market. This is of particular concern to me since it is my firm belief that it is the strengthening (that is, in providing of adequate market sources and the providing of liquidity) of the securities of regional interest that will put a stop to this growing trend of branch office operations, sellouts, and mergers, and the disappearance of local industries. I fervently hope that this committee will give primary consideration to a closer view of these regulations which prohibit these investments by small business concerns formed under the 1958 act, because companies so prohibited from receiving assistance under the regulations that have been written are the selfsame companies which provide the "stop" to the monopolistic trend. What I am, in essence, suggesting is that no blanket rule be placed on types

of investments that these units can make, but that each investment be treated on its own merits.

(2) A second change which I would put forth before this committee for their interest concerns a matter of professional consideration of portfolio activities rather than a distinct comment on any particular point heretofore brought up; that is, there is great danger of these new companies making their investments in such a way so as to lock their capital up in one or two, or three, situations without consideration for proper portfolio diversification. I feel that the Small Business Investment Division should look with interest at the types of investments that these units make, especially in regard to the diversification principle. It would seem to me that one of the grave problems that faces the small business concerns is going to be how to derive sufficient income from their operations to provide adequate staff facilities for investigatory purposes, investment analyses, economic surveys, etc. I confess that I do not have an answer to this problem, except to once again suggest that if registered investment companies, which are currently operative, could participate more fully in this program, such a staff would be readily available. One might note with interest that of the first several licenses issued by the Small Business Investment Division, 90 percent of them have been to commercial banks, which, I am afraid, are entering into this field primarily from a public relations standpoint and not so much from the standpoint of reflecting the need for equity financing of the type stated in the policy statements of the Johnson-Patman bill. Conveniently, this legislation fits squarely into a gap that has existed in the commercial banking field since the Banking Act of 1933. I am afraid, however, that the background and theoretical concepts found in the commercial banking field will place serious hindrance to the making of equity loans in a real sense.

These, then, are the points I would like to bring to the attention of you, Mr. Chairman, and to this committee:

(1) The Small Business Investment Act of 1958 can play an important role in preserving and enriching the free enterprise system of this country of ours. (2) It was ill-advised to label these new companies "investment companies" when from a theoretical and practical standpoint they are "equity companies." Such a change in title would open up a whole new area of capital participation which is presently not available.

(3) Some manner of counseling these new units in determining proper diversification, practices in their investment policy, and in providing a sufficient staff in order to make these investment decisions within professional prudence would be not only desirable, but, in my opinion, necessary.

I appreciate deeply and humbly this opportunity to present to you at this time certain of my personal and professional views, with those of others who have had long association with this problem.

Thank you for the time you have given me this morning.

Mr. GRAHAM. I have been interested for many years in this particular question of equity financing. When the Banking Act of 1933 was passed and our banks in Kentucky do as they did in the old days, as they probably do in Tennessee, the bank would be a commercial bank. The banker would also do investment banking and he would do equity financing. Those three functions all work together. Then when the Banking Act of 1933 was passed, they separated investment banking from commercial banking, but they left an entire void by doing nothing on the equity banking system. I presume in those days we all felt that the future of the country was such that maybe we would never get into risk capital again. We didn't feel the need of it in Kentucky in the 1930's because it was largely a resuscitation of existing enterprise.

I have had a selfish interest in this. In the first depression we didn't know there was a depression in Louisville and of 35 cities in the United States we had the least unemployment of any of the 35. We had the minimum-sized businesses and that is what I address myself to when I talk about finance.

Then big industry came to Louisville. Of the securities we traded in, from 1946 to 1959 we lost 58 percent of that in that period either

by merger, sellout or just collapse or liquidation, with the result that last week we beat "Soapy" Williams, and we have more unemployment in Louisville than any of those 35 cities in the United States. So you see it is a problem that is of tremendous personal and selfish interest to me.

I want to address myself first to the intent of the Congress. In 1934 they passed the Securities and Exchange Act. That was the jewel in the crown of the New Deal. We were all very proud of it. But over a period of time what has happened in that is that now, as of 1959, we find more monopoly. I am not speaking politically, but in the so-called Eastern or Wall Street areas. Never in the history of finance have we found that a small investor who the Securities Act was supposed to protect and defend-that's what it's for the small investors all they can buy now is junk or buy mutual funds. The good securities now all go to the sophisticated investors and the ones • who are getting the protection from the act are the sophisticated investors, and the small investors are behind the eight ball.

Over a period of time, it has retrogressed to a point where I don't think the act is working in the public interest. It certainly doesn't work in our area.

Of course, as I said when the Banking Act of 1933 was passed, they provided for investment banking and commercial banking and left this equity bank situation out of existence.

Now, in 1936, we formed an equity banking company which was called the Discount Corp. We invested and helped finance and underwrite local securities. We liquidated in 1942 for two reasons: First, the Investment Act of 1940, the Investment Trust Act of 1940, and the war made it undesirable. So it worked out very well. Our customers got about 100 percent profit plus 6 percent interest, so it worked out all right. We ended up with a capital of a quarter of a million dollars.

Now in 1946, realizing this trend, I began to kind of work around to see if we could not form an equity corporation again. I have worked for the last 13 years fooling around one way or the other trying to see by trial and error what could be worked out.

I have worked with Senator John Sparkman on the matter since 1949 and with the Securities and Exchange Commission. Everybody has tried to be very helpful. But the Security and Exchange Acts and the Investment Company Acts got so complicated that I was not able to even get it set up until 1957, when we formed a wholesale investment banking company.

Now, what you have to do in our area, and I think you, Mr. Evins, being in the sister State of Tennessee, I think you can realize that if you are going to go into this type of investment, this type of equity financing, you practically have no market and you are not going to get much in going into this kind of business that is entirely untried until you make existing securities.

Then after about 6 months study, the SEC advised me that if we were going into long-term underwriting we would have to register under the Investment Trust Act of 1940. We spent 15 months trying to work those two laws together and finally on January 15, 1958, we got the release from the Securities and Exchange Commission to