[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Notices]
[Pages 85784-85787]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28749]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 34147; 812-15096-01]


KKR Registered Advisor LLC and KKR Real Estate Select Trust Inc.

December 22, 2020.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

-----------------------------------------------------------------------

    Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from section 
23(a)(1) of the Act.

Summary of Application:  Applicants request an order to permit certain 
registered closed-end management investment companies (``closed-end 
funds'') and business development companies (``BDCs'',\1\ and together 
with the closed-end funds, ``Funds'') to pay Advisory Fees (defined 
below) in shares of their common stock (``Shares'').
---------------------------------------------------------------------------

    \1\ The term ``BDC'' means business development company as 
defined under Section 2(a)(48) of the Act.

Applicants:  KKR Registered Advisor LLC (the ``Existing Adviser'') and 
KKR Real Estate Select Trust Inc. (the ``KREST Fund'' and together with 
---------------------------------------------------------------------------
the Existing Adviser, the ``Applicants'').

Filing Dates:  The application was filed on February 19, 2020, and 
amended on May 28, 2020, September 14, 2020, November 5, 2020, and 
December 18, 2020.

Hearing or Notification of Hearing:  An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by emailing the Commission's Secretary at 
[email protected] and serving Applicants with a copy of the 
request by email. Hearing requests should be received by the Commission 
by 5:30 p.m. on January 18, 2021, and should be accompanied by proof of 
service on the Applicants, in the form of an affidavit or, for lawyers, 
a certificate of service. Pursuant to rule 0-5 under the Act, hearing 
requests should state the nature of the writer's interest, any facts 
bearing upon the desirability of a hearing on the matter, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by emailing the 
Commission's Secretary at [email protected].

ADDRESSES: Secretary, U.S. Securities and Exchange Commission: 
[email protected]. Applicants: Lori Hoffman, Esq., 
[email protected].

FOR FURTHER INFORMATION CONTACT: Hae-Sung Lee, Senior Counsel, at (202) 
551-7345, or Trace W. Rakestraw, Branch Chief, at (202) 551-6825 
(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's website by searching for the file number or an Applicant 
using the ``Company'' name box, at http://www.sec.gov/search/search.htm 
or by calling (202) 551-8090.

Applicants' Representations

    1. Applicants seek an order of the Commission under section 6(c) of 
the Act, granting an exemption from section 23(a)(1) of the Act to the 
extent necessary to allow a Fund \2\ to pay its

[[Page 85785]]

Adviser \3\ all or part of the Advisory Fees \4\ earned by the Adviser 
in Shares in lieu of paying an equivalent amount in cash.
---------------------------------------------------------------------------

    \2\ The term ``Fund'' means (i) the KREST Fund and (ii) any 
existing or future closed-end management investment company (A) that 
is registered under the Act or has elected to be regulated as a BDC, 
(B) whose investment adviser is an Adviser (as defined below) and 
(C) that intends to rely the requested order. Each person that 
currently intends to rely on the requested order is named as an 
Applicant. Any person that relies on the requested order in the 
future would do so only in accordance with the terms and conditions 
contained in the Application.
    \3\ The term ``Adviser'' means (i) the Existing Adviser, (ii) 
any investment adviser that controls, is controlled by or is under 
common control with the Existing Adviser and is registered as an 
investment adviser under the Investment Advisers Act of 1940, as 
amended (the ``Advisers Act'') or (iii) any successor in interest to 
any entity described under (i) and (ii) of this definition. For 
purposes of the requested order, the term ``successor'' is limited 
to an entity that results from a reorganization into another 
jurisdiction or a change in the type of business organization.
    \4\ The term ``Advisory Fees'' means the compensation a Fund 
agrees to pay its Adviser pursuant to an investment advisory 
agreement with its Adviser subject to section 15 of the Act (each, 
an ``Advisory Agreement''). Such compensation may include base 
management fees, income-based incentive fees, and/or capital gains-
based incentive fees, as applicable and permissible under the 
Advisers Act. With respect to the requested relief, the Applicants 
do not differentiate among these types of Advisory Fees because, in 
each case, an Adviser would receive shares in lieu of a dollar 
amount of Advisory Fees.
---------------------------------------------------------------------------

    2. The Existing Adviser, a Delaware limited liability company 
registered as an investment adviser under the Advisers Act, currently 
serves as the investment adviser to the KREST Fund pursuant to its 
Advisory Agreement. The Existing Adviser, or another Adviser registered 
under the Advisers Act, would serve as investment adviser to each Fund.
    3. The KREST Fund, a Maryland corporation that would register under 
the Act as a closed-end management investment company, would 
continuously offer its Shares and expects to offer periodic liquidity 
with respect to its Shares through tender offers conducted in 
compliance with rule 13e-4 under the Securities Exchange Act of 1934 
(as amended, the ``Exchange Act'').\5\ The KREST Fund would be non-
listed, and the Shares would not trade on an exchange.\6\ The KREST 
Fund expects to invest primarily in illiquid assets.
---------------------------------------------------------------------------

    \5\ Other Funds that rely on the requested order in the future 
may offer periodic liquidity in compliance with rule 23c-3 under the 
Act (``Interval Funds'').
    \6\ If the KREST Fund, or any other Fund, lists its Shares, it 
would no longer rely on the requested order.
---------------------------------------------------------------------------

    4. As required by section 15 of the Act, the Adviser would manage 
the Fund pursuant to an Advisory Agreement that precisely describes the 
nature and method of calculation of the Advisory Fees. The Advisory 
Agreement would specify that the Adviser may elect to receive payment 
of the Advisory Fees it has earned, in whole or in part, in an amount 
of Shares equal in value to the dollar figure of the Advisory Fees 
owed. Each fund would disclose this mechanism in its registration 
statements and proxy statements.
    5. Applicants represent that each fund's advisory agreement would 
specify the fee calculation period for Advisory Fees (e.g., annually, 
quarterly, monthly, etc.) (such period, the ``Fee Calculation 
Period''). At the beginning of each Fee Calculation Period, each Fund's 
Adviser would elect to receive its Advisory Fees for such period in 
cash, Shares or some combination of both.\7\ In making such an 
election, the Adviser must consider the best interests of the Fund and 
its shareholders.
---------------------------------------------------------------------------

    \7\ If an Adviser elects to receive its Advisory Fees in a 
combination of cash and shares of common stock, it would also choose 
at the beginning of the Fee Calculation Period what portion of 
Advisory Fees it would receive in Shares.
---------------------------------------------------------------------------

    6. The number of Shares the Adviser would receive would be 
calculated by dividing the earned Advisory Fees elected by the Adviser 
for payment in Shares by the greater of (i) the current net asset value 
(``NAV'') per share of the class of Shares the Adviser would receive, 
as determined by or under the supervision of the Fund's board of 
directors in accordance with the Act and (ii) the current offering 
price of the class of Shares the Adviser would receive. For example, if 
an Adviser earned Advisory Fees amounting to $200,000 for a given Fee 
Calculation Period and the Fund's NAV per share and offering price per 
share was $25 at the time of issuance to the Adviser, the Fund would 
issue 8,000 Shares to the Adviser if the Adviser had elected to receive 
its entire Advisory Fee in Shares for that Fee Calculation Period.
    7. A Fund would only rely on the requested relief to issue Shares 
of a class that is otherwise available for purchase, and reasonably 
expected to be purchased, by other similarly eligible investors. 
Furthermore, the Adviser would receive Shares at the same price as such 
other investors acquiring the same class of Shares. Such class of 
Shares would not exist solely for investment by the Adviser and/or its 
affiliates. The Fund's Advisory Agreement would detail the specific 
class of Shares that the Fund may issue to the Adviser as compensation 
in lieu of a cash payment.
    8. For any Fee Calculation Period during which the Adviser has 
elected to receive all or a portion of its Advisory Fees in Shares, the 
Fund would post a notice to that effect on the Fund's website. The Fund 
would also maintain and make publicly available on its website a 
historical record of how the Adviser was compensated for each Fee 
Calculation Period during the Fund's last three fiscal years. The Fund 
would include, in response to any item on the applicable form for 
registration of securities requiring a description of the Adviser's 
compensation (currently Item 9 of Form N-2), a cross-reference noting 
the availability of such historical information on the Fund's website.
    9. Any Shares received by the Adviser in lieu of cash would be 
subject to the same fees and expenses applicable to the Fund's other 
shareholders in the relevant class, would not receive preferential 
voting, dividend or liquidity rights with respect to its Shares, and 
would otherwise have the same rights and obligations as Shares of the 
same class issued to other investors in the Fund, except that an 
Adviser would ``mirror vote'' any Shares received in lieu of a cash 
payment for Advisory Fees.
    10. Each Adviser would have the same opportunity and rights to 
liquidate Shares of a fund it received in lieu of cash payment of 
Advisory Fees as other shareholders of that fund. As required by 
section 30(h) of the Act, each Adviser and its affiliated persons would 
make public filings with the Commission disclosing any transactions in 
a Fund's Shares as required by Section 16 of the Exchange Act.
    11. An Adviser that elects to receive payment in Shares, however, 
would commit to not selling those Shares for at least 12 months from 
the date of issuance, except in exceptional circumstances such as if it 
no longer serves as the investment adviser of the Fund. In such a case, 
the Adviser would keep a record of the reason for selling the Shares 
within 12 months and the records would be maintained and preserved in 
accordance with rule 204-2(e)(1) under the Advisers Act. Applicants 
state that this commitment would provide further assurances that an 
Adviser bears the long-term benefits and risks of an investment in a 
Fund's Shares and decreases the likelihood of any potential over-
reaching by the Adviser. Each fund would publicly disclose the 
Adviser's commitment in the Fund's registration statement.
    12. Consistent with fiduciary obligations under the Act, on an 
annual basis, the Independent Directors (defined below) of each Fund 
will review such Fund's Advisory Agreement in accordance with section 
15(c) and subject to section 36 of the Act, including those provisions 
allowing for payment of Advisory Fees

[[Page 85786]]

in Shares. To the extent an Adviser receives any fallout benefits from 
receiving compensation in Shares rather than in cash, the Adviser would 
disclose such benefits to the Independent Directors.
    13. The Adviser would have the ability to assign its right to 
receive payment of any Advisory Fees to an entity it controls, is 
controlled by or with which it is under common control (a ``control 
affiliate''); provided that such an assignment may not disadvantage the 
fund. Any Shares issued to a control affiliate of an Adviser would be 
subject to the same conditions of the requested relief as if the Shares 
were issued to and held by the Adviser directly and an Adviser's 
obligations to a Fund under the Advisory Agreement would remain 
unchanged. To the extent an Adviser receives any fallout benefits from 
an assignment to a control affiliate, the Adviser would disclose such 
benefits to the Independent Directors \8\ of the applicable Fund in 
connection with their annual review of such Fund's Advisory Agreement 
in accordance with section 15(c) of the Act.
---------------------------------------------------------------------------

    \8\ The term ``Independent Directors'' means members of the 
Fund's board of directors who are not ``interested persons'' of the 
Fund within the meaning of section 2(a)(19) of the Act.
---------------------------------------------------------------------------

Applicants' Legal Analysis

    14. Section 23(a)(1) of the Act prohibits a registered closed-end 
investment company from issuing any of its securities in exchange for 
services. Section 63 of the Act makes the prohibition in section 
23(a)(1) applicable to BDCs.
    15. Section 6(c) of the Act provides that an exemptive order may be 
granted if and to the extent that such an 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.
    16. Applicants assert that the concerns underlying section 23(a)(1) 
of the Act do not exist under the requested relief. These concerns 
include: (i) Preferential treatment of investment company insiders and 
the use of options and other rights by insiders to obtain control of 
the investment company; (ii) complication of the investment company's 
structure that made it difficult to determine the value of the 
company's shares; and (iii) dilution of stockholders' equity in the 
investment company.\9\
---------------------------------------------------------------------------

    \9\ See H.R. Rep. No. 76-2639, at 8 (1940) and S. Rep. No. 76-
1775, at 7 (1940).
---------------------------------------------------------------------------

    17. In particular, section 23(a)(1) of the Act was enacted in 
response to a then-common practice of funds paying insiders a definite 
number of shares of the fund at a future date for their services 
(rather than assigning a fixed dollar value to the services).\10\ If 
the value of the fund's shares appreciated by the time the shares were 
payable by the fund, the compensation paid to the insiders exceeded the 
original cash value of the services provided. As a result, the fund 
treated insiders on a basis more favorable than other shareholders by 
allowing them to acquire fund shares at less than the net asset value 
of the shares. The insiders received a ``windfall'' that diluted the 
value of the shares held by other shareholders. Applicants maintain 
that the proposed arrangement addresses this concern because the value 
of the Shares an investment adviser would receive would be equal to a 
fixed-dollar amount as calculated under the fund's investment advisory 
agreement.
---------------------------------------------------------------------------

    \10\ Investment Trusts and Investment Companies: Hearings on 
H.R. 10065 Before the House Subcomm, on Interstate and Foreign 
Commerce, 76th Cong., 3d Sess. 109 (1940) (statement of David 
Schenker, Chief Counsel, Investment Trust Study, SEC).
---------------------------------------------------------------------------

    18. Applicants assert that the requested relief does not raise 
otherwise concerns about preferential treatment of Applicant's insiders 
because an Adviser would receive a class of Shares that is available 
for purchase by similarly qualified investors and that would be issued 
at the same price per share available to other investors in the Fund at 
the time of issuance to the Adviser. No Adviser would receive any 
preferential voting, dividend or liquidity rights with respect to 
Shares. The Shares would be subject to the same fees and expenses 
applicable to other shareholders in the relevant class. Furthermore, 
the Adviser and any control affiliate would mirror vote any Shares 
received in lieu of cash for Advisory Fees. Thus, Applicants state that 
the requested relief would not become a means for insiders to obtain 
control of any Fund.
    19. The Funds would not modify their capital structure as a result 
of the requested relief. The Fund's registration statements and proxy 
statements would include ``plain English'' disclosure on the existence 
of the relief, a statement that the Adviser may be compensated in 
Shares in lieu of cash and any potential risks associated with relying 
on the relief. Such risk disclosure may explain that third party 
shareholders would not have priority over the Adviser or its affiliates 
with respect to receiving liquidity during any periodic tender or 
repurchase offers and that may have the effect of diluting third party 
shareholders with respect to any such offers.
    20. Applicants believe the proposed arrangement does not raise 
dilution concerns associated with other forms of equity-based 
compensation, such as stock options. The Fund would issue Shares to the 
Adviser at the greater of their current NAV per share and their current 
offering price, and the Fund would increase its assets in direct 
proportion to the Shares issued to the Adviser, forestalling any 
dilutive effect.
    21. Applicants believe the requested relief is appropriate and in 
the interest of the Funds' shareholders because when an Adviser elects 
to receive its Advisory Fees in Shares, it would increase fund assets 
available for investment purposes and create better alignment of 
interests between the Fund and the Adviser. Absent the requested 
relief, a fund would be required to hold a greater amount of investable 
assets in cash for payment of Advisory Fees or could be forced to 
liquidate assets at unfavorable times or prices to pay Advisory Fees in 
cash, which could be problematic for a fund that invests primarily in 
illiquid assets. For any Fee Calculation Period where the Adviser 
elects payment in Shares, the advance notice provided by the Adviser's 
election would allow the Fund to deploy the cash that would otherwise 
need to be held for payment of Advisory Fees, reducing cash ``drag'' 
and opportunity costs for the Fund.
    22. Applicants assert that the requested relief further aligns the 
interests of an Adviser with those of Fund shareholders because the 
Adviser has more so-called ``skin in the game.'' As opposed to payment 
in cash, an Adviser would invest in the Fund alongside, and at the same 
price as, other investors. This would further align the interests of 
Fund shareholders and the Fund's Adviser because the Adviser's 
realizable compensation for any past payment is tied to maintaining or 
increasing the NAV per share price until the Adviser liquidates such 
Shares.
    23. Applicants state that the Commission has previously provided 
exemptive relief to allow internally managed closed-end funds and BDCs 
to issue restricted stock, and in some cases, stock options, as part of 
a compensation package for employees, officers, and directors. 
Applicants believe the rationale for such relief is similar to the 
requested relief because both would provide for investment strategy 
alignment while allowing the funds to maximize cash available to 
investments.

[[Page 85787]]

Applicants' Conditions

    Applicants agree that any order granting the requested relief would 
be subject to the following conditions:
    1. Each Fund will adopt an Advisory Agreement that specifies that 
its Adviser may opt to receive Shares in lieu of cash payment of 
Advisory Fees. Such Advisory Agreement will contain:
    a. A precise formula for determining the number of Shares to be 
issued as compensation to the Adviser for each applicable Fee 
Calculation Period, including the date upon which the calculation shall 
be performed, stating that the number of Shares that an Adviser will 
receive will be equal to the quotient of (x) the sum of Advisory Fees 
elected by the Adviser for payment in Shares and (y) the greater of (i) 
the current NAV per share of the class of Shares the Adviser will 
receive, as determined by or under the supervision of the Fund's board 
of directors in accordance with section 23(b) of the Act and (ii) the 
current offering price of the class of Shares the Adviser will receive.
    b. A provision ensuring that such Adviser must elect in advance of 
each Fee Calculation Period whether the Advisory Fees for that Fee 
Calculation Period will be payable in cash, Shares of the Fund, or some 
combination of cash and Shares of the Fund, and if a combination of 
cash and Shares, what the breakdown will be.
    2. Any Shares received by an Adviser in lieu of cash payment of 
Advisory Fees will have the same rights and obligations as Shares of 
the same class issued to other investors in the Fund, except that an 
Adviser will mirror vote any Shares received in lieu of cash payment of 
Advisory Fees in the same proportion as the vote of all other 
shareholders that are not (i) an Adviser or its control affiliates, and 
(ii) to the Adviser's knowledge, affiliates of the Adviser (excluding 
control affiliates), for so long as the Adviser serves as the 
investment adviser to the Fund. The Adviser will not receive 
preferential voting, dividend or liquidity rights with respect to its 
Shares and will be subject to the same fees and expenses applicable to 
the Fund's other shareholders in the relevant class.
    3. Each Fund will disclose in its registration statements and proxy 
statements (i) that its Adviser may be compensated in Shares in lieu of 
cash payments in reliance on the relief, (ii) that its Adviser will 
commit not to sell any Shares received in lieu of a cash payment of 
Advisory Fees for at least 12 months from the date of issuance, except 
in exceptional circumstances (in such a case, the Adviser will keep a 
record of the reason for selling the Shares within 12 months and the 
records will be maintained and preserved in accordance with rule 204-
2(e)(1) under the Advisers Act), and (iii) any potential risks related 
to relying on the relief. For any Fee Calculation Period during which 
the Adviser has elected to receive all or a portion of its Advisory 
Fees in Shares, the Fund will post a notice to that effect on the 
Fund's website. The Fund will maintain and make publicly available on 
the Fund's website a historical record of how the Adviser was 
compensated for each Fee Calculation Period during the Fund's last 
three fiscal years. The Fund will include, in response to any item on 
the applicable form for registration of securities requiring a 
description of the Adviser's compensation (currently Item 9 of Form N-
2), a cross-reference noting the availability of such historical 
information on the Fund's website.
    4. The requested relief will expire on the effective date of any 
Commission rule under the Act that provides relief addressing the 
ability of closed-end investment companies to pay their investment 
advisers their advisory fees in shares in lieu of paying an equivalent 
amount in cash.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-28749 Filed 12-28-20; 8:45 am]
BILLING CODE 8011-01-P