[Federal Register Volume 77, Number 47 (Friday, March 9, 2012)]
[Notices]
[Pages 14447-14450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-5732]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29975; File No. 812-13882]


Kohlberg Capital Corporation; Notice of Application

March 5, 2012.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 12(d)(3) of the Act.

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Applicant: Kohlberg Capital Corporation (the ``Company'').

Summary of Application: Applicant requests an order (``Order'') of the 
Commission pursuant to section 6(c) of the Act granting an exemption 
from the provisions of section 12(d)(3) of the Act, to the extent 
necessary, in order to permit the Company and its wholly-owned holding 
companies Katonah Management Holdings LLC (``Katonah Management'') and 
Commodore Holdings, L.L.C. (``Commodore Holdings'' and together with 
Katonah Management, the ``Holding Companies'') to continue to hold a 
greater than 50% equity interest in Katonah Debt Advisors, LLC 
(``KDA''), Trimaran Advisors, L.L.C. (``Trimaran'' and together with 
KDA, the ``Advisers''), and the Special Purpose Subsidiaries (as 
defined below), each of which is a direct or indirect wholly-owned 
portfolio company of the Company, when the Advisers and the Special 
Purpose Subsidiaries are required to register as investment advisers 
under the Investment Advisers Act of 1940, as amended (``Advisers 
Act'').

Filing Dates: The application was filed on March 18, 2011, and amended 
on September 12, 2011, and March 1, 2012. Applicant has agreed to file 
an amendment during the notice period, the substance of which is 
reflected in this notice.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicant with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on March 26, 2012, and should be accompanied by proof of 
service on applicant, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC, 20549-1090; Applicant, 
295 Madison Avenue, 6th Floor, New York, NY 10017.

FOR FURTHER INFORMATION CONTACT:  Barbara T. Heussler, Senior Counsel, 
at (202) 551-6990, or Jennifer Sawin, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file

[[Page 14448]]

number, or applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.

Applicant's Representations

    1. The Company, a Delaware corporation, is a non-diversified, 
closed-end management investment company that has elected to be 
regulated as a business development company (``BDC'') under section 
54(a) the Act.\1\ The Company's investment objective is to generate 
current income and capital appreciation from investments made in senior 
secured term loans, mezzanine debt and selected equity investments in 
privately-held middle market companies. The Company originates and 
invests in senior secured term loans, mezzanine debt and selected 
equity securities primarily in middle market companies. The Company was 
formed in 2006 for the purpose of acquiring 100% of the equity 
interests in KDA, and raising capital in an initial public offering 
(``Formation Transactions''). On February 29, 2012, the Company 
acquired 100% of the equity interests in Trimaran, an unregistered 
investment adviser (the ``Trimaran Transaction'').\2\ Trimaran was 
acquired as a wholly-owned subsidiary of Commodore Holdings, which is a 
newly formed wholly-owned subsidiary of the Company. The Company is and 
will continue to be an internally managed BDC. In connection with the 
Formation Transactions, KDA became a wholly-owned portfolio company of 
the Company. In connection with the Trimaran Transaction, Trimaran 
became an indirect wholly-owned portfolio company of the Company. The 
Company, the Advisers and the Special Purpose Subsidiaries are directly 
or indirectly overseen by the Company's eight member board of directors 
(``Board''), of whom five are not considered ``interested persons'' of 
the Company within the meaning of section 2(a)(19) of the Act.
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    \1\ Section 2(a)(48) of the Act defines a BDC to be any closed-
end investment company that operates for the purpose of making 
investments in securities described in sections 55(a)(1) through 
55(a)(3) of the Act, makes available significant managerial 
assistance with respect to the issuers of such securities, and has 
elected to be subject to sections 55 through 65 of the Act.
    \2\ The Advisers and the Special Purpose Subsidiaries currently 
rely on the exemption set forth in section 203(b)(3) of the Advisers 
Act, which provides generally that an investment adviser with fewer 
than 15 clients is not required to register under the Advisers Act. 
As discussed below, this exemption has been eliminated.
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    2. The Advisers manage certain unregistered collateralized loan 
obligation funds that invest in broadly syndicated loans, high yield 
bonds and other credit instruments (``CLO Funds'').\3\ The Advisers and 
the Special Purpose Subsidiaries do not currently offer any other 
investment advisory services or provide services to any other entities 
other than the CLO Funds. The Advisers receive contractual and 
recurring management fees and may also receive incentive fees from the 
CLO Funds for management and advisory services. The Company expects to 
receive dividends of earnings from the Advisers that are derived from 
recurring fee income and to generate capital appreciation from its 
investment in the asset management business of the Advisers. 
Alternatively, for internal structuring purposes, these fees may be 
paid to certain special purpose vehicles that are direct or indirect 
wholly-owned subsidiaries of the Company (each a ``Special Purpose 
Subsidiary'').\4\ The revenue that the Advisers and the Special Purpose 
Subsidiaries generate through the fees they receive for managing the 
CLO Funds and after paying the expenses associated with its operations, 
including compensation of employees, may be distributed to the Company 
as dividends.\5\
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    \3\ The CLO Funds are not registered as ``investment companies'' 
under the Act in reliance on section 3(c)(1) or 3(c)(7) of the Act, 
which excepts certain funds from the definition of investment 
company.
    \4\ The Special Purpose Subsidiaries are currently wholly owned 
subsidiaries of Katonah Management Company. In the future, Special 
Purpose Subsidiaries may be wholly owned directly or indirectly by 
the Advisers, Katonah Management, Commodore Holdings, or another 
holding company wholly owned by the Company. Currently, the 
Company's only subsidiaries are KDA, Trimaran, the Holding 
Companies, the Special Purpose Subsidiaries, and Kohlberg Capital 
Funding LLC I and KCAP Funding, two wholly owned, special purpose 
financing subsidiaries.
    \5\ The Company has invested in the CLO Funds managed by the 
Advisers and the Special Purpose Subsidiaries and expects to invest 
in future CLO Funds to be managed by the Advisers and the Special 
Purpose Subsidiaries for which the Company expects to receive a 
current cash return.
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    3. The Company has made an election to be treated for tax purposes 
as a regulated investment company (``RIC''). The fee income received by 
the Advisers and the Special Purpose Subsidiaries in connection with 
the provision of services to the CLO Funds could impair the Company's 
RIC status if the Company earned such income directly. Therefore, in 
order for the Company to maintain its RIC status while continuing to 
receive this income, the Company believes that it is in the best 
interests of the Company and its shareholders for the Advisers and the 
Special Purpose Subsidiaries to continue to receive fees from the CLO 
Funds instead of the Company receiving such fees directly.
    4. The Private Fund Investment Advisers Registration Act of 2010 
(the ``2010 Act'') \6\ eliminated the exemption from investment advisor 
registration on which the Advisers and the Special Purpose Subsidiaries 
have relied, and they will be required to register with the Commission 
as investment advisers under the Advisers Act.\7\ The Company states 
that if relief is not granted, the Company will likely be forced to 
decide between losing its RIC status, terminating its relationship with 
the Advisers and the Special Purpose Subsidiaries, or limiting the 
dollar amount of assets that the Adviser and the Special Purpose 
Subsidiaries manage in order to avoid them having to register as 
investment advisers with the Commission.
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    \6\ Title IV of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \7\ None of the Advisers or Special Purpose Subsidiaries is 
expected to qualify for an exemption from registration under the 
rules the Commission recently adopted. See Exemptions for Advisers 
to Venture Capital Funds, Private Fund Advisers With Less Than $150 
Million in Assets Under Management, and Foreign Private Advisers, 
Investment Advisers Act Release No. IA-3222 (Jun. 22, 2011). The 
Company intends to register KDA and the Special Purpose Subsidiaries 
on a single application for registration. See Commission staff 
letter issued January 18, 2012, to the American Bar Association 
Business Law Section, Subcommittee on Hedge Funds (``2012 ABA 
Letter''). Trimaran intends to register separately as an investment 
adviser. The Company will not own any security or other interest in 
any investment adviser that will not be registered under the 
Advisers Act.
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Applicant's Legal Analysis

    1. Section 12(d)(3) of the Act makes it unlawful for any registered 
investment company and any company controlled by such registered 
investment company,\8\ to purchase or otherwise acquire any security 
issued by or any other interest in certain securities-related 
businesses, including the business of any person who is an investment 
adviser registered under the Advisers Act, unless (a) such person is a 
corporation all the outstanding securities of which are owned by one or 
more registered investment companies; and (b) such person is primarily 
engaged in the business of underwriting and distributing securities 
issued by other persons, selling securities to customers, or any one or 
more of such or related activities, and the gross income of such person 
normally is derived principally from such business or related 
activities. Section 60 of the Act provides that section 12 shall apply 
to a BDC to the same extent as if it were

[[Page 14449]]

a registered closed-end investment company.
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    \8\ The Holding Companies are wholly owned by the Company, and 
therefore are subject to section 12(d)(3).
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    2. Section 6(c) of the Act provides that the Commission may 
conditionally or unconditionally exempt any person, security, or 
transaction from any provision of the Act or any rule thereunder, if 
and to the extent that such exemption is necessary or appropriate in 
the public interest and consistent with the protection of investors and 
the purposes fairly intended by the policy and provisions of the Act.
    3. It is not expected that the Advisers or the Special Purpose 
Subsidiaries would also be broker-dealers that are primarily engaged in 
the business of underwriting and distributing securities issued by 
other persons. The ownership of the Advisers and the Special Purpose 
Subsidiaries, at such point as it becomes necessary for them to 
register as investment advisers, could thus cause the Company (and the 
Holding Companies) to be in violation of section 12(d)(3) of the 
Act.\9\
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    \9\ Rule 12d3-1 under the Act provides certain limited relief 
from the restrictions of section 12(d)(3). Since the Company expects 
that a significant portion of the Advisers and the Special Purpose 
Subsidiaries' gross revenues will be derived from ``securities 
related activities'' as defined in rule 12d3-1, and since the 
Company owns all of the outstanding securities of the Advisers and 
the Special Purpose Subsidiaries, rule 12d3-1 does not appear to be 
available.
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    4. The Company requests an order pursuant to section 6(c) of the 
Act granting an exemption from the provisions of section 12(d)(3) of 
the Act, to the extent necessary to permit the Company (and the Holding 
Companies) to continue to hold a greater than 50% equity interest in 
the Advisers and the Special Purpose Subsidiaries, when the Advisers 
and the Special Purpose Subsidiaries are required to register as 
investment advisers under the Advisers Act.
    5. The Company states that section 12(d)(3) was intended to 
safeguard investment companies from (a) entrepreneurial risks of 
securities related businesses, and (b) conflicts of interest and 
reciprocal practices between investment companies and securities 
related businesses.
    6. The Company does not believe a greater than 50% ownership of the 
Advisers or the ownership of the Special Purpose Subsidiaries presents 
the potential for the type of abuse intended to be eliminated by 
section 12(d)(3) of the Act. The Company's and Holding Companies' 
ownership and control of the Advisers and the Special Purpose 
Subsidiaries does not raise the concerns regarding entrepreneurial 
risks and conflicts of interests and reciprocal practices. The Company 
notes that the form of organization of most securities related 
businesses has changed since the time section 12(d)(3) was enacted, 
from privately held general partnerships to corporate forms that are 
characterized by limited liability. The Company's ownership of the 
Advisers and the Special Purpose Subsidiaries does not expose its 
shareholders to unlimited liability because the Advisers and the 
Special Purpose Subsidiaries are each organized as a separate entity 
and are structured as limited liability companies, not partnerships.
    7. Applicant also asserts that the Company's and Holding Companies' 
ownership and control of the Advisers and the Special Purpose 
Subsidiaries do not present potential conflicts of interest and 
reciprocal practices. The Company owns 100% of the equity interests in 
the Advisers and the Special Purpose Subsidiaries and, as a result, 
exercises total control over the strategic direction of the Advisers 
and the Special Purpose Subsidiaries, including the power to control 
the policies that affect the Company and to protect the Company from 
potential conflicts of interest and reciprocal practices. The 
investment focus of the CLO Funds and the Company are distinct and 
generally do not overlap.\10\ Furthermore, the CLO Funds do not hold 
securities of the Advisers or Special Purpose Subsidiaries or the 
Company, and the Advisers and the Special Purpose Subsidiaries do not 
serve as investment adviser, underwriter or promoter to the Company.
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    \10\ In the unusual circumstance where the Company and the CLO 
Funds invest in the same security, the policies and procedures of 
the Company and the Advisers and the Special Purpose Subsidiaries 
govern the allocation of investment opportunities. These policies 
provide that investment opportunities are allocated according to 
``optimum investment amounts'' for the Company and the CLO Funds 
based on criteria such as investment objectives, diversification 
cash flow, liquidity requirements and asset allocation targets 
specific to each CLO Fund. If the total investment is unavailable, 
the allocation available is generally allocated among investing 
entities pro rata based on the optimum investment amount. The 
Company, the Advisers and Special Purpose Subsidiaries have also 
adopted other policies and procedures to address potential 
conflicts, including but not limited to, allocation of expenses, 
personal securities trading, insider trading and confidentiality of 
proprietary information.
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    8. No advisory personnel employed by the Company or any of its 
investment adviser subsidiaries are involved in any advisory businesses 
or activities outside of the Company's ownership and control, except 
for certain principals of Trimaran (the ``Trimaran Principals''). These 
principals serve as employees of Trimaran, serve as directors of the 
Company, and are also the principals and sole owners of a registered 
investment adviser that is not an affiliated person (as defined in 
section 2(a)(3) of the Act) of the Company (together with any adviser 
that is a ``relying adviser'' (as that term is used in the 2012 ABA 
Letter) of such registered investment adviser, the ``Unaffiliated 
Adviser''). No new investments are currently being recommended to the 
Unaffiliated Adviser's clients. Furthermore, the investment strategies 
of the CLO Funds and the Unaffiliated Adviser's clients (the 
``Unaffiliated Adviser Clients'') \11\ do not overlap. The Company, the 
Advisers, the Special Purpose Subsidiaries, and the CLO Funds shall not 
invest in the same securities or investments as the Unaffiliated 
Adviser or the Unaffiliated Adviser Clients.
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    \11\ The term ``Unaffiliated Adviser Clients'' includes the 
current clients of the Unaffiliated Adviser and any future advisory 
clients of the Unaffiliated Adviser so long as any Trimaran 
Principal is employed by, or on the Board of, the Company or any 
investment adviser owned by the Company.
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    9. The Company asserts that allowing the Company and Holding 
Companies to own the Advisers and the Special Purpose Subsidiaries 
after they have registered as advisers under the Advisers Act is not 
only consistent with the protection of investors, but it benefits the 
Company and its shareholders by ultimately increasing its gross 
revenues and net income. The Company's Board found that the continued 
investment by the Company in the Advisers and Special Purpose 
Subsidiaries is in the best interests of the Company and its 
shareholders. Moreover, if the requested relief is not granted, the 
Company, and, thus, the Company's shareholders, will likely suffer the 
harm of either losing some or all of the benefit of the income from 
owning the Advisers and Special Purpose Subsidiary business or 
potentially losing the benefit of the Company's RIC status.
    10. For the foregoing reasons, the Company believes that permitting 
the Company and the Holding Companies to continue to hold a greater 
than 50% equity interest of each Adviser and to hold each Special 
Purpose Subsidiary after their registration as an investment adviser 
under the Advisers Act is in the best interests of the Company and its 
shareholders, appropriate in the public interest, and consistent with 
the protection of investors and the purposes fairly intended by the 
policies and provisions of the Act.

[[Page 14450]]

Applicant's Conditions

    The Company agrees that the order granting the requested relief 
will be subject to the following conditions:
    1. The Company will not dispose of its interests in an Adviser if, 
as a result, the Company would own, directly or indirectly, 50% or less 
of the outstanding voting interests or economic interests in that 
Adviser unless the Company disposes of 100% of its interests in such 
Adviser.
    2. The Board will review at least annually the investment 
management business of the Company, the Advisers and the Special 
Purpose Subsidiaries in order to determine whether the benefits derived 
by the Company warrant the continuation of the ownership by the Company 
of the Advisers and the Special Purpose Subsidiaries and, if 
appropriate, will approve (by at least a majority of the directors of 
the Company who are not ``interested persons'' of the Company as 
defined by the Act) at least annually, such continuation.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5732 Filed 3-8-12; 8:45 am]
BILLING CODE 8011-01-P