Bass, Berry & Sims attorneys Bryan Bylica and Philip Kassel outlined the permitted uses of idle funds under the Small Business Investment Company (SBIC) Program in the wake of several large bank failures and the overall disruption in the banking industry. As the authors note, “These failures have brought to the national attention the significance of insurance limits on deposit accounts at financial institutions, as the Federal Deposit Insurance Corp. only insures balances up to $250,000. But as these failed banks have demonstrated, financial institutions often have a significant percentage of their depositors exceeding such insured limits.”

Bryan and Philip point out that leveraged SBIC funds must maintain idle funds in at least one of the following:

  • Direct obligations of, or obligations guaranteed as to principal and interest by, the United States, which mature within 15 months from the date of the investment.
  • Repurchase agreements with federally insured institutions, with a maturity of seven days or less. The securities underlying the repurchase agreements must be direct obligations of, or obligations guaranteed as to principal and interest by, the United States. The securities must be maintained in a custodial account at a federally insured institution.
  • Mutual funds, securities or other instruments that exclusively consist of, or represent pooled assets of, investments described above.
  • Certificates of deposit with a maturity of one year or less, issued by a federally insured institution.
  • A deposit account in a federally insured institution, subject to a withdrawal restriction of one year or less.
  • A checking account in a federally insured institution.
  • A reasonable petty cash fund.

The attorneys caution that “Due to the complex legal and financial requirements in the SBA regulations regarding the permitted uses of idle funds by SBIC funds, it is important for fund managers, their attorneys and advisers to not only know and comply with the permitted uses of such idle funds, but also conduct due diligence on the financial institutions in which it maintains its idle funds in order to ensure it is well capitalized within the meaning of the FDIC rules.”

The full article, “Understanding the Uses of Idle Funds Under SBIC Program,” was published by Law360 on May 18 and is available online (subscription required) or in the PDF provided.