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Red Oak Blog

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Thursday, December 5 2013

SEC Non Action Recommended for Closed End Investment Company upon Subsidiary’s Registration as an Investment Adviser

The response of the SEC Chief Counsel’s Office, Division of Investment Management on November 7, 2013 recommends no enforcement action to the Commission against the Parent Company, upon the Subsidiary’s registration as an investment adviser. David Joire, Senior Counsel at the SEC Chief Counsel’s Office explained that the Parent Company is an internally managed closed end investment company that elected to be regulated as a business development company and is registered as an investment adviser. The Parent Company then entered into a Subadvisory Agreement with another Business Development Company. Now, the Parent Company is wanting to assign to its Subsidiary this Subadvisory Agreement. The Subsidiary employs all of the Parent Company’s investment personnel and other employees and is subject to the Parent Company’s supervision and control.

The conflicting issue is that if the Subsidiary Company were to serve as an investment adviser to Another Business Development Company, the Subsidiary Company would be required to register under the Adviser Act, which would trigger Section 12(d)(3) of the 1940 Act which generally provides that it is unlawful for any registered investment company to purchase or otherwise acquire any security issued by any person who is, among other things, an investment adviser registered under the Advisers Act, which is applicable to a business development company as if it were a registered closed-end investment company.

However, the Chief Counsel’s Office did not recommend such enforcement action to the Commission under Section 12(d)(3) of the 1940 Act. Supporting facts included (1) the subsidiary is organized as an LLC which limits liability to the Company’s stockholders, (2) conflicts of interest would not be present because the Subsidiary is wholly owned by the parent company, (3) the Parent Company could provide advisory services directly but conduct them through the Subsidiary for bona fide tax planning reasons, and (4) the concern of this rule was primarily to address an investment company’s ownership of an underwriting business, rather than the ownership of an advisory business. To read the Chief Counsel’s response in full, please click here.