[Federal Register Volume 75, Number 226 (Wednesday, November 24, 2010)]
[Notices]
[Pages 71744-71746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29559]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29500; 812-13698]
Fifth Street Finance Corp., et al.; Notice of Application
November 18, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 18(a), 55(a), and 61(a) of the Act.
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Summary of the Application: Applicants request an order to permit: (1)
A business development company to look to the assets of its wholly-
owned subsidiaries, rather than the business development company's
interest in the subsidiaries themselves, in determining whether the
business development company meets certain requirements for business
development companies under the Act, and (2) the business development
company to adhere to a modified asset coverage requirement.
[[Page 71745]]
Applicants: Fifth Street Finance Corp. (``Fifth Street''), Fifth
Street Management LLC, Fifth Street Mezzanine Partners IV, L.P., FSMP
IV GP, LLC, FSF/MP Holdings, Inc., FSFC Holdings, Inc., Fifth Street
Funding, LLC and Fifth Street Fund of Funds LLC.
Filing Dates: The application was filed on September 9, 2009, and
amended on February 18, 2010, and November 15, 2010.
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 writing to the Commission's Secretary
and serving applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on December 13, 2010, and should be accompanied by proof of
service on the Applicants, 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: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090. Applicants, 10 Bank Street,
12th Floor, White Plains, New York 10606.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at
(202) 551-6868, or Janet M. Grossnickle, Assistant Director, 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 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. Fifth Street, a Delaware corporation, is an externally managed,
non-diversified, closed-end investment company that has elected to be
regulated as a business development company (``BDC'') under the Act.
Fifth Street is a specialty finance company that provides capital and
advisory services to small and mid-size companies throughout the United
States.
2. Fifth Street conducts, and expects to continue to conduct, a
portion of its business through its current and future subsidiaries
operating in the manner described in the application, all of whose
equity securities are owned or will be owned directly or indirectly by
Fifth Street and that are consolidated by Fifth Street for financial
reporting purposes (each, a ``Subsidiary''). Fifth Street currently has
six Subsidiaries, Fifth Street Mezzanine Partners IV, L.P. (the ``SBIC
Subsidiary''), its general partner, FSMP IV GP, LLC (the ``SBIC GP''),
FSF/MP Holdings, Inc., FSFC Holdings, Inc., and Fifth Street Fund of
Funds LLC (together with FSF/MP Holdings, Inc. and SFC Holdings, Inc.,
the ``Blocker Subsidiaries''), and Fifth Street Funding, LLC (the
``Financing Subsidiary'').
3. The SBIC Subsidiary, a Delaware limited partnership, is a small
business investment company (``SBIC'') licensed under the Small
Business Administration (``SBA'') to operate under the Small Business
Investment Act of 1958 (``SBIA''). The SBIC Subsidiary relies on
section 3(c)(7) of the Act. The SBIC GP, a Delaware limited liability
company, is the sole general partner of the SBIC Subsidiary. Fifth
Street is the SBIC GP's sole member and owner. The SBIC GP is the sole
general partner of the SBIC Subsidiary, and Fifth Street is the sole
limited partner of the SBIC Subsidiary.
4. Fifth Street intends to operate the SBIC Subsidiary through the
SBIC GP for the same investment purposes as Fifth Street, and the SBIC
Subsidiary will invest in the same kinds of securities as Fifth Street.
The operations of both the SBIC Subsidiary and the SBIC GP will be
consolidated with those of Fifth Street for financial reporting
purposes. The assets of the SBIC Subsidiary and the SBIC GP are
recorded on Fifth Street's balance sheet, and thus are considered
assets of Fifth Street for U.S. generally accepted accounting
principles purposes.
5. The Financing Subsidiary, a Delaware limited liability company,
is a wholly-owned subsidiary through which Fifth Street established a
credit facility for its on-balance sheet borrowings. It is excluded
from the definition of investment company under Section 3(c)(7) of the
Act. The sole purpose of the Financing Subsidiary is to provide a
legally separate entity to hold investments as collateral supporting
Fifth Street's financings. Fifth Street solely controls the operations
of the Financing Subsidiary, including the acquisition and disposition
of assets by the Financing Subsidiary.
6. Fifth Street utilizes wholly-owned subsidiaries, the Blocker
Subsidiaries, to hold interests in certain of Fifth Street's portfolio
companies. The Blocker Subsidiaries are excluded from the definition of
investment company under section 3(c)(7) of the Act. The Blocker
Subsidiaries are structured as Delaware corporations or limited
liability companies and hold certain investment assets that are
structured as pass-through tax entities in order to allow Fifth Street
to continue to qualify as a regulated investment company for tax
purposes.\1\
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\1\ Applicants represent that these Blocker Subsidiaries are a
lawful method of tax planning under the Internal Revenue Code and
are frequently used by companies seeking to elect to be treated as
regulated investment companies. Fifth Street has obtained an opinion
from tax counsel from the firm of Sutherland Asbill & Brennan LLP
confirming the appropriateness of this structure.
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7. The Financing Subsidiary and the Blocker Subsidiaries are not
operating companies and do not have any employees. The Financing
Subsidiary and the Blocker Subsidiaries exist solely for the benefit of
Fifth Street and do not provide any services to any other company.
Fifth Street makes and will continue to make available significant
managerial assistance to the issuers of securities held by the
Financing and Blocker Subsidiaries to the extent required by section
2(a)(48)(B).\2\
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\2\ For the purposes of Section 2(a)(48)(B), Fifth Street will
treat securities held by the Subsidiaries as if they were held
directly by Fifth Street.
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Applicants' Legal Analysis
A. Relief for Fifth Street To Deem Assets Held by Its Subsidiaries To
Be Owned by Fifth Street for Purposes of Determining Its Compliance
With Section 55(a) of the Act
1. Section 2(a)(48) of the Act generally defines a BDC to be any
closed-end investment company that operates for the purpose of making
investments in securities described in section 55(a)(1) through (3) of
the Act and makes available significant managerial assistance with
respect to the issuers of these securities. Section 55(a) of the Act
requires a BDC to have at least 70 percent of its assets invested in
assets described in sections 55(a)(1) through (7) (``Qualifying
Assets''). Qualifying Assets generally include securities issued by
eligible portfolio companies as defined in section 2(a)(46) of the Act.
Section 2(a)(46)(B) generally excludes from the definition of an
eligible portfolio company an investment company, as defined under
section 3 of the Act, and a company that would be an investment company
but for the exclusion from the definition of investment company in
section 3(c) of the Act.
[[Page 71746]]
2. Section 6(c) of the Act, in relevant part, permits the
Commission to exempt any transaction or class of transactions from any
provision of the Act 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. Applicants request an order pursuant to
section 6(c) to allow Fifth Street to deem the assets of its current
and future Subsidiaries as its own assets for purposes of determining
its compliance with section 55(a).
3. Applicants state that each Subsidiary will be formed as a
limited liability company (``LLC''), a corporation (``Corporation'') or
a partnership (``Partnership''). Fifth Street and/or one or more other
Subsidiaries at all times will be the only members of each Subsidiary
that is an LLC and will collectively hold all of the ownership
interests in the LLC Subsidiary. No LLC Subsidiary will admit any
person other than Fifth Street or another Subsidiary as a member, and
no LLC Subsidiary will issue interests other than to Fifth Street or
another Subsidiary. Fifth Street and/or one or more other Subsidiaries
at all times will own and hold all of the outstanding equity interests
in each Subsidiary that is formed as a Corporation. Fifth Street and/or
one or more other Subsidiaries will at all times be the sole limited
partner of any Subsidiary that is formed as a Partnership and the sole
owner of such Subsidiary's general partner. Applicants also state that
since Fifth Street, directly or indirectly through another Subsidiary,
owns or would own the entire equity interest in any current and future
Subsidiaries, any activity carried on by them will, in all material
respects, have the same economic effect on Fifth Street's stockholders
as if carried on directly by Fifth Street.
B. Relief for the Company To Adhere to a Modified Asset Coverage
Requirement
1. Applicants request an exemption pursuant to section 6(c) of the
Act from the provisions of sections 18(a) and 61(a) of the Act to
permit Fifth Street to adhere to a modified asset coverage requirement.
2. Section 18(a) of the Act prohibits a registered closed-end
investment company from issuing any class of senior security or selling
any such security of which it is the issuer unless the company complies
with the asset coverage requirements set forth in that section. Section
61(a) of the Act makes section 18 applicable to BDCs, with certain
modifications. Section 18(k) exempts an investment company operating as
an SBIC from the asset coverage requirements for senior securities
representing indebtedness that are contained in section 18(a)(1)(A) and
(B).
3. Applicants state that a question exists as to whether Fifth
Street must comply with the asset coverage requirements of section
18(a) (as modified by section 61(a)) solely on an individual basis or
whether Fifth Street must also comply with the asset coverage
requirements on a consolidated basis because Fifth Street may be deemed
to be an indirect issuer of any class of senior security issued by the
SBIC Subsidiary. Applicants state that they wish to treat the SBIC
Subsidiary as if it were a BDC subject to sections 18 and 61 of the
Act. Applicants state that companies operating under the SBIA, such as
the SBIC Subsidiary, will be subject to the SBA's substantial
regulation of permissible leverage in its capital structure.
4. Section 6(c) of the Act, in relevant part, permits the
Commission to exempt any transaction or class of transactions from any
provision of the Act 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. Applicants state that the requested relief
satisfies the section 6(c) standard. Applicants contend that, since the
SBIC Subsidiary would be entitled to rely on section 18(k) if it was a
BDC itself, there is no policy reason to deny the benefit of that
exemption to Fifth Street.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
Relief From Section 55(a)
1. Each Subsidiary will be formed as a LLC, a Corporation or a
Partnership. Fifth Street and/or one or more other Subsidiaries at all
times will be the only members of each Subsidiary that is an LLC and
will collectively hold all of the ownership interests in the LLC
Subsidiary. No LLC Subsidiary will admit any person other than Fifth
Street or another Subsidiary as a member, and no LLC Subsidiary will
issue interests other than to Fifth Street or another Subsidiary. Fifth
Street and/or one or more other Subsidiaries at all times will own and
hold all of the outstanding equity interests in each Subsidiary that is
formed as a Corporation. Fifth Street and/or one or more other
Subsidiaries will at all times be the sole limited partner of any
Subsidiary that is formed as a Partnership and the sole owner of such
Subsidiary's general partner.
2. The existing Subsidiaries, and any future Subsidiaries, may not
acquire any asset if the acquisition would cause Fifth Street to
violate section 55(a).
3. No person shall serve or act as investment adviser to a
Subsidiary unless the board of directors and stockholders of Fifth
Street shall have taken the action with respect thereto also required
to be taken by the board of directors of the Subsidiary and
stockholders of the Subsidiary as if the Subsidiary were a BDC.
Relief From Section 18(a)
4. Fifth Street will not issue or sell any senior security and
Fifth Street will not cause or permit the SBIC Subsidiary to issue or
sell any senior security of which Fifth Street or the SBIC Subsidiary
is the issuer except to the extent permitted by section 18 (as modified
for BDCs by section 61); provided that immediately after issuance or
sale by any of Fifth Street or the SBIC Subsidiary of any such senior
security, Fifth Street individually and on a consolidated basis, shall
have the asset coverage required by section 18(a) (as modified by
section 61(a)), except that, in determining whether Fifth Street on a
consolidated basis has the asset coverage required by section 18(a) (as
modified by section 61(a)), any senior securities representing
indebtedness of the SBIC Subsidiary shall not be considered senior
securities and, for purposes of the definition of ``asset coverage'' in
section 18(h), will be treated as indebtedness not represented by
senior securities.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29559 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P