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No-Action Relief Allows Business Development Companies to Hold Shares of Affiliated Advisers

Posted in Fund Regulation, Investment Adviser Regulation

In two recent no-action letters, the SEC staff expanded the ability of business development companies (BDCs) to invest in registered investment advisers.  Although Section 12(d)(3) of the Investment Company Act of 1940 generally prohibits a registered investment company – including a closed end fund that elects to be treated as a BDC – from acquiring securities of issuers that are in the securities business, the staff provided assurances that it would not recommend enforcement action.

In each letter requesting no-action relief, the BDC argued that the proposed transactions did not raise the concerns underlying Section 12(d)(3).  In particular, the BDCs argued that these concerns related to an investment company’s ownership of a brokerage or underwriting business, rather than an investment advisory business.  The staff did not express “any legal conclusion or interpretive conclusion” in granting the relief.  Rather, it provided limited assurances based on narrow facts.

The two letters are discussed in more detail in our client alert.