[Federal Register Volume 85, Number 72 (Tuesday, April 14, 2020)]
[Notices]
[Pages 20739-20741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07788]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33837]
Order Under Sections 6(c), 17(d), 38(a), and 57(i) of the
Investment Company Act of 1940 and Rule 17d-1 Thereunder Granting
Exemptions From Specified Provisions of the Investment Company Act and
Certain Rules Thereunder
April 8, 2020.
The outbreak of coronavirus disease 2019 (COVID-19) has had far-
reaching and unanticipated effects, including in our financial markets,
and, in particular, our credit markets. In light of the current
situation, we are issuing this Order providing exemptions from certain
requirements of the Investment Company Act. The exemptions provide
additional temporary flexibility for closed-end investment companies
that have elected to be regulated as business development companies
(``BDCs'') to issue and sell senior securities and participate in
certain joint enterprises or other joint arrangements that would
otherwise be prohibited by section 57(a)(4) of the Investment Company
Act and Rule 17d-1 thereunder. BDCs were created to provide capital to
smaller domestic operating companies that otherwise may not be able to
readily access the capital markets (we refer to such companies as
``portfolio companies''). The Commission recognizes that, in the
current environment, many BDCs may face challenges absent these
exemptions in providing capital to their affected portfolio companies,
and therefore, in fulfilling their statutory mandate. A BDC may face
such challenges if (i) it is unable to satisfy the asset coverage
requirements under the Investment Company Act due to temporary mark-
downs in the value of the loans to such portfolio companies, or (ii)
certain of its affiliates are prohibited from participating in
additional investments in the BDC's portfolio companies due to
restrictions in its current exemptive order permitting co-investments.
In recognition of the current facts and circumstances, and for the
reasons identified above, the Commission has determined that certain
BDCs may be unable to meet their statutory mandate. Therefore, the
temporary exemptions herein are necessary and appropriate in order for
BDCs to continue providing credit support to portfolio companies
impacted by COVID-19.
In light of the current and potential effects of COVID-19, the
Commission
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finds that the exemptions set forth below, as applicable:
Are necessary and appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Investment Company Act;
Permit transactions under the terms of which the participation
of each registered investment company is consistent with the
provisions, policies, and purposes of the Investment Company Act,
and not on a basis different from or less advantageous than that of
other participants; and
Are necessary and appropriate to the exercise of the powers
conferred on it by the Investment Company Act.
The necessity for prompt action of the Commission does not permit
prior notice of the Commission's action.
I. Time Period for the Exemptive Relief
The relief provided in each of the following Sections of this Order
is limited to the period from (and including) the date of this Order to
the earlier of (i) December 31, 2020 (including such date), or (ii) the
date by which the BDC ceases to rely on this Order (the ``Exemption
Period'').
The Commission intends to continue to monitor the situation as it
develops. The time period for any or all of the relief may, if
necessary, be extended with any additional conditions that are deemed
appropriate, and the Commission may issue other relief as necessary or
appropriate.
II. Issuance and Sale of Senior Securities by BDCs
It is Ordered, pursuant to sections 6(c) and 38(a) of the
Investment Company Act that:
During the Exemption Period, notwithstanding the asset coverage
requirements of sections 18(a)(1)(A) and 18(a)(2)(A) of the Investment
Company Act, as modified for BDCs by sections 61(a)(1) and 61(a)(2),
and the requirement of section 18(b) of the Investment Company Act to
determine asset coverage on the basis of values calculated as of a time
within forty-eight hours (not including Sundays or holidays) next
preceding the time of such determination, a BDC may issue or sell a
senior security that represents an indebtedness or that is a stock
(together, the ``covered senior securities''), provided that:
(a) Adjusted Portfolio Value. At the time of any issuance or sale
of a covered senior security, the BDC shall calculate asset coverage
ratios in accordance with section 18(b) of the Investment Company Act,
except that, in reliance on this Order, with respect to portfolio
company holdings (i) that the BDC held at December 31, 2019; (ii) that
the BDC continues to hold at the time of such issuance or sale; and
(iii) for which the BDC is not recognizing a realized loss,\1\ the BDC
may use values calculated as of December 31, 2019, to calculate
portfolio value (the ``Adjusted Portfolio Value'') to meet an Adjusted
Asset Coverage Ratio.\2\ To calculate the Adjusted Asset Coverage
Ratio, a BDC must reduce its asset coverage ratio using the Adjusted
Portfolio Value by an amount equal to 25% of the difference between the
asset coverage ratio calculated using the Adjusted Portfolio Value and
the asset coverage ratio calculated in accordance with section 18(b) of
the Investment Company Act.\3\ For example a BDC has a 220% asset
coverage ratio on December 31, 2019.\4\ Its asset coverage ratio
declines to 160% on March 31, 2020, not using the Adjusted Portfolio
Value, and 200% if it calculated the ratio (without the 25% decrease)
using the Adjusted Portfolio Value. This BDC would have an Adjusted
Asset Coverage Ratio of 190% (200% minus 10% (25% of the difference
between 200% and 160%)).
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\1\ BDCs may not include a December 31, 2019, fair value
measurement in their Adjusted Asset Coverage Ratio if the portfolio
company holding is permanently impaired. For purposes of this Order,
a permanently impaired holding is a holding where a BDC recognized a
realized loss subsequent to December 31, 2019, and the loss is not
recoverable. For example, a BDC's portfolio company may have been
impacted by events occurring in 2020, such as a natural disaster,
the permanent loss of an operating license, or an enacted temporary
shelter-in-place policy, and such BDC may have determined that a
permanent valuation write down or a portion thereof was necessary as
the loss will not be recoverable.
\2\ As described, the adjustment permitted by this Order applies
only to portfolio company holdings that are not permanently
impaired, and that are held both at December 31, 2019, and at the
date of issuance of the covered senior security subject to this
Order. The adjustment does not apply to portfolio company holdings
acquired after December 31, 2019. For purposes of this Order, all
assets acquired and all senior securities issued after December 31,
2019, that are held or outstanding at the date of the calculation of
the Adjusted Asset Coverage Ratio shall be included in the
calculation without adjustment.
\3\ Further, the Adjusted Portfolio Value is solely for purposes
of calculating the BDC's asset coverage ratio. BDCs must adhere to
generally accepted accounting principles in the United States for
purposes of financial reporting, which requires application of fair
value measurement for portfolio holdings under the Financial
Accounting Standards Board Accounting Standards Codification Topic
820: Fair Value Measurements.
\4\ For BDCs, sections 61(a)(1) and 61(a)(2) of the Investment
Company Act modify the asset coverage requirements of section 18(a)
to be either 200 percent or 150 percent (provided certain conditions
have been met).
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(b) Election. Prior to relying on section II of this Order, a BDC
must make an election by filing on Form 8-K. Similarly, a BDC may
withdraw its election through filing on Form 8-K.
(c) Limitation on New Investments. A BDC that has elected to rely
on section II of this Order shall not, for 90 days from the date of
such election, make an initial investment in any portfolio company in
which the BDC was not already invested as of the date of this Order,
provided that a BDC may make an initial investment in such a portfolio
company if at the time of investment its asset coverage ratio complies
with the asset coverage ratio applicable to it under section 18 of the
Investment Company Act, as modified by section 61.
(d) Board Approval of Reliance on this Order. Prior to the BDC's
election to rely on section II of this Order, the BDC's board of
directors or trustees (``Board''), including a required majority of the
Board, as defined in section 57(o) of the Investment Company Act (a
``Required Majority''), shall have determined that the issuance or sale
of covered senior securities is permitted by this Order and is in the
best interests of the BDC and its shareholders.
(e) Board Approval of Each Issuance of Senior Securities. Prior to
a BDC issuing or selling covered senior securities, the Board,
including a Required Majority, shall determine that each such issuance
is in the best interests of the BDC and its shareholders. Prior to
making such determination, the Board must obtain and consider (i) a
certification from the BDC's investment adviser that the issuance of
covered senior securities is in the best interests of the BDC and its
shareholders; such certification shall include not only the investment
adviser's recommendation, but also the reasons therefore, including
whether the adviser has considered other reasonable alternatives that
would not result in the issuance or sale of a covered senior security;
and (ii) advice from an Independent Evaluator \5\ regarding whether the
terms and conditions of the proposed issuance or sale of a covered
senior security are fair and reasonable compared to similar issuances,
if any, by unaffiliated third parties in light of current market
conditions.
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\5\ The term ``Independent Evaluator'' shall mean a person who
has expertise in the valuation of securities and other financial
assets and who is not an interested person, as defined in section
2(a)(19) of the Investment Company Act, of the BDC, or any affiliate
thereof.
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(f) No Sunset Period. The Board of any BDC that has elected to rely
on section II of this Order shall receive and review, no less
frequently than monthly, reports prepared by the BDC's investment
adviser regarding and assessing the efforts that the investment adviser
has undertaken, and progress
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that the BDC has made, towards achieving compliance with the asset
coverage requirements under section 18 of the Investment Company Act,
as modified by section 61, by the expiration of the Exemption Period.
Upon expiration of the Exemption Period, any BDC not in compliance with
the asset coverage requirements applicable to such BDC at that time as
described in sections 18(a)(1)(A) and 18(a)(2)(A), as modified by
sections 61(a)(1) and 61(a)(2), shall immediately make a filing on Form
8-K that includes the following information: (i) The BDC's current
asset coverage ratio; (ii) the reasons why the BDC was unable to comply
with the asset coverage requirements; (iii) the time frame within which
the BDC expects to come into compliance with the asset coverage
requirements; and (iv) the specific steps that the BDC will be
undertaking to bring itself into compliance with the asset coverage
requirements.\6\
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\6\ Sections 18 and 61 of the Investment Company Act generally
prohibit a BDC that is not in compliance with its asset coverage
requirements from paying a cash dividend or issuing additional
senior securities.
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(g) Recordkeeping. Each BDC shall make and preserve, for a period
of not less than six years, the first two years in an easily accessible
place, minutes describing (i) the Board's deliberations in connection
with paragraph (e) above, including the factors considered by the board
in connection with such determinations, as well as all information,
documents and reports provided to the Board in connection therewith;
and (ii) the reports made to the Board pursuant to paragraph (f) above,
including copies of all other information provided to or relied upon by
the Board.
(h) No Compensation or Remuneration of Any Kind. Except (i) to the
extent permitted by section 57(k) of the Investment Company Act; or
(ii) for payments or distributions made by an issuer to all holders of
a security in accordance with the security's terms, no affiliated
person of the BDC nor any affiliated person of such a person, shall
receive any transaction fees (including break-up, structuring,
monitoring or commitment fees) or other remuneration from an issuer in
which the BDC invests during the Exemption Period. For the avoidance of
doubt, this condition does not apply to the receipt of investment
advisory fees by an investment adviser to the BDC under an investment
management agreement entered into in accordance with section 15 of the
Investment Company Act.
(i) This Order provides relief only to issue or sell senior
securities representing an indebtedness or that is a stock. This Order
does not provide relief in connection with the declaration or payment
of any dividend or any other distribution.
III. Expansion of Relief for BDCs With Existing Co-Investment Orders
It is Ordered, pursuant to sections 17(d) and 57(i) of the
Investment Company Act and rule 17d-1 thereunder that:
During the Exemption Period, notwithstanding sections 17(d) and
57(a)(4) of the Investment Company Act and rule 17d-1 thereunder, any
BDC to which a Commission order permitting co-investment transactions
in portfolio companies with certain affiliated persons is currently
applicable (``existing co-investment order'') may:
Participate in a Follow-On Investment (which may include a Non-
Negotiated Follow-On Investment) with one or more Regulated Funds and/
or Affiliated Funds, provided that (i) if such participant is a
Regulated Fund, it has previously participated in a Co-Investment
Transaction with the BDC with respect to the issuer, and (ii) if such
participant is an Affiliated Fund, it either (X) has previously
participated in a Co-Investment Transaction with the BDC with respect
to the issuer, or (Y) is not invested in the issuer; \7\ provided that:
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\7\ The terms Follow-On Investment, Regulated Fund, Affiliated
Fund and Co-Investment Transaction shall have the same meanings
ascribed to them in the BDC's existing co-investment order, or, if
the BDC's existing co-investment order uses a substantially similar
term, the substantially similar term. For purposes of this Order,
the term Affiliated Fund does not include any open or closed-end
investment company registered under the Investment Company Act or a
BDC.
The term ``Non-Negotiated Follow-On Investment'' shall be given
the meaning ascribed to it in existing co-investment orders. For
purposes of this Order, a BDC may participate in a Non-Negotiated
Follow-On Investment in reliance on this Order whether or not such
term is used in its existing co-investment order.
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(a) Any such transaction is otherwise effected in accordance with
the terms and conditions of the existing co-investment order; and
(b) Board Oversight.
(1) Non-Negotiated Follow-On Investments. Non-Negotiated Follow-On
Investments do not require prior approval by the Board; however they
are subject to the periodic reporting requirements set forth in the
BDC's existing co-investment order.
(2) Follow-On Investments other than Non-Negotiated Follow-On
Investments. In connection with making the findings required by the
BDC's existing co-investment order with respect to Follow-On
Investments that are not Non-Negotiated Follow-On Investments, the
Board, and a Required Majority, shall review the proposed Follow-On
Investment both on a stand-alone basis and in relation to the total
economic exposure of the BDC to the issuer.\8\
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\8\ For purposes of complying with this condition of this Order,
the Board, and a Required Majority, need not make the findings
required with respect to Enhanced Review Follow-On Investments, as
such term is defined in existing co-investment orders.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07788 Filed 4-13-20; 8:45 am]
BILLING CODE 8011-01-P