[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

[[Page 20741]]

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