Notice2022-18760
Capital Southwest Corporation
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 31, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 168 (Wednesday, August 31, 2022)</title>
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[Federal Register Volume 87, Number 168 (Wednesday, August 31, 2022)]
[Notices]
[Pages 53533-53536]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-18760]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 34688; 812-15226]
Capital Southwest Corporation
August 25, 2022.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice.
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Notice of an application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from section
12(d)(3) of the Act.
Summary of Application: Applicant requests an order to permit a
business development company (``BDC'') to organize, acquire, and
wholly-own a portfolio company that intends to operate as an investment
adviser registered under the Investment Advisers Act of 1940 (the
``Advisers Act'').
Applicant: Capital Southwest Corporation (the ``Company'' or
``Applicant'').
Filing Dates: The application was filed on April 30, 2021, and amended
on September 1, 2021, February 28, 2022, and May 31, 2022.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by emailing the Commission's
Secretary at <a href="/cdn-cgi/l/email-protection#6536000617001104171c16482a03030c0600251600064b020a13"><span class="__cf_email__" data-cfemail="d487b1b7a6b1a0b5a6ada7f99bb2b2bdb7b194a7b1b7fab3bba2">[email protected]</span></a> and serving Applicant
[[Page 53534]]
with a copy of the request, by email. Hearing requests should be
received by the Commission by 5:30 p.m. on September 19, 2022 and
should be accompanied by proof of service on the applicant, 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 <a href="/cdn-cgi/l/email-protection#a7f4c2c4d5c2d3c6d5ded48ae8c1c1cec4c2e7d4c2c489c0c8d1"><span class="__cf_email__" data-cfemail="2e7d4b4d5c4b5a4f5c575d03614848474d4b6e5d4b4d00494158">[email protected]</span></a>.
Addresses: The Commission: <a href="/cdn-cgi/l/email-protection#ebb88e88998e9f8a999298c6a48d8d82888eab988e88c58c849d"><span class="__cf_email__" data-cfemail="693a0c0a1b0c1d081b101a44260f0f000a0c291a0c0a470e061f">[email protected]</span></a>. Applicant:
Michael S. Sarner, Chief Financial Officer, Secretary and Treasurer,
Capital Southwest Corporation at <a href="/cdn-cgi/l/email-protection#85c8d6e4f7ebe0f7c5e6e4f5ecf1e4e9f6eaf0f1edf2e0f6f1abe6eae8"><span class="__cf_email__" data-cfemail="65283604170b0017250604150c110409160a10110d120016114b060a08">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Senior Counsel, or
Kaitlin C. Bottock, Branch Chief, at (202) 551-6825 (Division of
Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: For Applicants' representations, legal
analysis, and conditions, please refer to Applicants' first amended and
restated application, dated March 17, 2022, which may be obtained via
the Commission's website by searching for the file number at the top of
this document, or for an Applicant using the Company name search field,
on the SEC's EDGAR system. The SEC's EDGAR system may be searched at
<a href="https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html">https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html</a>. You
may also call the SEC's Public Reference Room at (202) 551-8090.
Company and Adviser Sub
1. The Company is a Texas corporation that operates as an
internally managed, non-diversified, closed-end management investment
company. The Company has elected to be regulated as a BDC under the
Act. The Company's investment objective is to produce attractive risk-
adjusted returns by generating current income from its debt investments
and capital appreciation from its equity and equity related
investments. The Company's investment strategy is to partner with
business owners, management teams and financial sponsors to provide
flexible financing solutions to fund growth, changes of control, or
other corporate events.
2. Capital Southwest Asset Management LLC (``Adviser Sub'') was
formed as a limited liability company under the laws of the State of
Delaware and will be a direct or an indirect wholly owned portfolio
company of the Company.\1\ As discussed below, the Adviser Sub intends
to operate as an investment adviser registered with the Commission
under the Advisers Act.\2\ The Company expects the Adviser Sub to
receive fees in connection with its management of one or more
privately-offered pooled investment vehicles, registered management
investment companies, BDCs, and/or investment accounts (collectively,
``Managed Accounts'') similar to those received by comparable
investment advisers.
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\1\ Adviser Sub will be a wholly owned portfolio company of the
Company and will also fall within the definition of ``wholly owned
subsidiary'' for purposes of section 2(a)(43) of the Act.
\2\ Adviser Sub has been formed, but it does not intend to
commence operations unless and until the relief requested in the
application has been granted.
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3. The Company is, and the Adviser Sub will be, directly or
indirectly overseen by the Company's seven-member Board of Directors
(the ``Board''), of whom six are not considered ``interested persons''
of the Company within the meaning of section 2(a)(19) of the Act. In
its capacity as the Board of the Advisers Sub's parent company, the
Board will indirectly oversee the Adviser Sub.
4. The Company has elected to be treated for U.S. federal income
tax purposes, and intends to qualify annually, as a regulated
investment company (``RIC'') under Subchapter M of the Internal Revenue
Code of 1986, as amended (the ``Code''). Applicant states that as a
RIC, the Company generally will not pay corporate-level federal income
taxes on any net ordinary income or capital gains that it distributes
to its stockholders as dividends in accordance with the timing
requirements of the Code. To maintain its RIC status, the Company must,
among other things, meet specified source-of-income requirements.
Applicant states that the Company will satisfy the source-of-income
test for purposes of qualifying as a RIC if it derives in each taxable
year at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, gains from the sale
of stock or other securities or currencies, net income from certain
``qualified publicly traded partnerships'' (as defined in the Code) or
other income derived with respect to its business of investing in such
stock, securities or currencies (income from such sources, ``Good RIC
Income'').
5. Applicant states that fee income received in connection with the
provision of services to the Managed Accounts generally would not
constitute Good RIC Income to the Company if it earned such income
directly. Therefore, in order for the Company to maintain its RIC
status while receiving the income from the provision of advisory
services to the Managed Accounts, the Company believes that it is in
the best interests of the Company and its shareholders for the Adviser
Sub to provide advisory services to and to receive fees from the
Managed Accounts instead of the Company providing such services and
receiving such fees directly.
6. Under the Advisers Act, an investment adviser is generally
required to be registered if it has $100 million or more of regulatory
assets under management.\3\ An investment adviser may also register
under the Advisers Act in compliance with rule 203A-2(c)(1) of the
Advisers Act if it expects to be eligible to register an as adviser
within 120 days of registering. Applicant states that the Adviser Sub
will register as an investment adviser under the Advisers Act in
compliance with rule 203A-2(c)(1) of the Advisers Act after the relief
requested in the application is granted to the Company because the
Adviser Sub expects to have $100 million or more of regulatory assets
under management within 120 days of such registration.
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\3\ In addition, an investment adviser to an investment company
registered under the Act or to a company that has elected to be a
BDC with $25 million or more of regulatory assets under management
would also be required to register under the Advisers Act.
Applicants state that the Adviser Sub also may act as an investment
adviser to an an investment company registered under the Act or to a
company that has elected to be a BDC with $25 million or more of
regulatory assets under management after the relief requested is
granted.
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Applicable Law
1. Section 12(d)(3) makes it unlawful for any registered investment
company, and any company controlled by a registered investment company,
to acquire any interest in the business of a person who is either an
investment adviser of an investment company or an investment adviser
registered under the Advisers Act, unless (a) such person is a
corporation all the outstanding securities of which are owned by one or
more registered investment companies; and (b) such person is primarily
engaged in the business of underwriting and distributing securities
issued by other persons, selling securities issued by other persons,
selling securities to customers, or any one or more of such or related
activities, and the gross income of such person normally is derived
principally from such business or related activities. Section 60 of the
Act states that section 12 shall apply to a BDC to the same extent as
if it were
[[Page 53535]]
a registered closed-end investment company.
2. Section 6(c) of the Act provides that the Commission may exempt
any person or transaction 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.
Applicant's Legal Analysis
1. Applicant represents that the Company will own 100% of the
equity interests in the Adviser Sub. However, Applicant states that it
is not expected that the Adviser Sub would also be a broker-dealer that
is primarily engaged in the business of underwriting and distributing
securities issued by other persons. The ownership of the Adviser Sub,
at such point as it becomes registered as an investment adviser, could
thus cause the Company to be in violation of the provisions of section
12(d)(3) unless the requested Order is issued.\4\ In addition, the
Company expects that after the relief requested in the application is
granted the Adviser Sub will act as an investment adviser to investment
companies. To the extent it does so, relief from section 12(d)(3) is
also required because the Adviser Sub acting as an investment adviser
of an investment company would result in the Company acquiring a
security of an investment adviser of an investment company. Therefore,
Applicant requests the Order pursuant to section 6(c) of the Act
granting an exemption from the provisions of section 12(d)(3) of the
Act, to the extent necessary in order to permit the Company to
organize, acquire, and wholly own the securities of the Adviser Sub.
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\4\ Rule 12d3-1(a) and (b) under the Act each provides limited
relief from the restrictions of section 12(d)(3) if the acquired
company derives 15 percent or less of its gross revenues from
securities related activities (as defined in the rule) or the
acquiring company owns not more than five percent of the outstanding
securities of that class of the acquired company's equity
securities. The Company does not believe that it may rely on this
relief with respect to its investment in Adviser Sub, since the
Company expects that a significant portion of the Adviser Sub's
gross revenues will be derived from securities related activities
and the Company will own all of the outstanding securities of the
Adviser Sub.
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2. Applicant states that section 12(d)(3) was intended to: (a)
limit the risk of a registered investment company's exposure to the
entrepreneurial risks, or general liabilities, that are peculiar to
securities-related businesses; and (b) prevent potential conflicts of
interest and reciprocal practices between investment companies and
securities-related businesses. Applicant submits that the Company's
ownership and control of the Adviser Sub does not present the concerns
against which section 12(d)(3) was intended to safeguard.
3. Applicant states that much of the concern regarding
entrepreneurial risks stemmed from the fact that when section 12(d)(3)
was adopted, most securities-related businesses were organized as
privately held general partnerships. As a result, an investment in such
a company would expose an investment company to the unlimited
liabilities of a general partner. Applicant notes that today's
financial services industry is subject to a much more robust body of
regulation, which contributes to a more conservative risk profile for
those companies that comprise the industry. Moreover, Applicant states
that the risks presented by the form of organization of a securities-
related business are no longer as germane as they were at the time of
the adoption of section 12(d)(3) because many formerly closely-held
securities-related businesses have reorganized into corporate forms
that are characterized by limited liability. Applicant asserts in
particular that the Company's shareholders are not exposed to the risk
of unlimited liability associated with an interest in the Adviser Sub
because they are insulated by a layer of liability protection between
the Adviser Sub and the Company, as the Adviser Sub is a separate
entity and is structured as a limited liability company, not a
partnership.
4. Applicant also submits that the Company will own 100% of the
equity interests in the Adviser Sub and, as a result, will exercise
total control over the strategic direction of the Adviser Sub,
including the power to control the policies that affect the Company and
to protect the Company from potential conflicts of interest and
reciprocal practices. Moreover, as a wholly owned portfolio company and
the sole shareholder of the Adviser Sub, the Adviser Sub and the
Company will generally have aligned interests.
5. Applicant states that the Company will adopt policies and
procedures with respect to the Adviser Sub designed to ensure that the
Company and the Adviser Sub are both being operated and managed in the
best interests of the Company's shareholders and that the ownership by
the Company of the Adviser Sub is consistent with the purposes fairly
intended by the policy and provisions of the Act.\5\ Applicant states
that the Company and the Adviser Sub will adopt policies and procedures
to address potential conflicts of interest, including but not limited
to policies and procedures that govern the allocation of expenses,
personal securities trading, and insider trading and confidentiality of
proprietary information.
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\5\ Applicant represents that the Adviser Sub's borrowings, if
any, would be used only for its own legitimate business purposes,
and would not be used directly or indirectly by the Company for its
business purposes unrelated to the Adviser Sub, and that the Company
will adopt procedures to ensure Board oversight of compliance with
this representation.
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6. Applicant notes that the Company and the Managed Accounts may
invest in the same securities or different securities of the same
issuer to the extent consistent with applicable law, regulatory
guidance, or any exemptive order obtained by the Company. The Company
and the Adviser Sub will implement policies and procedures that will
govern the allocation of investment opportunities when investment
advisory personnel of the Company and/or Adviser Sub become aware of
investment opportunities that may be appropriate for the Company and
one or more Managed Accounts.
7. Applicant states that the Company's proposal to enter into the
advisory business through a wholly owned and controlled portfolio
company will benefit the Company's shareholders by: (a) allowing them
to share in the profits from the new advisory business; (b) allowing
that advisory business to be more marketable than if the services were
provided by the Company itself; and (c) limiting any potential
liabilities arising from Adviser Sub's provision of advisory services.
In addition, the growth in the Company's advisory business through the
Adviser Sub will enable the Company to add advisory personnel that it
could not on its own, such as additional portfolio managers and
investment analysts, who will be available to provide advisory services
both to the Company and to the Managed Accounts of the Adviser Sub and
further enhance the experience and relationships of the Company's
investment team. Without the growth of the Company's advisory business
through the Adviser Sub, the Company would not have the ability to
support such additional advisory personnel. Applicant also states that
the Adviser Sub's organization as a wholly owned portfolio company of
the Company and registration as an investment adviser would permit the
Adviser Sub to operate the business of managing the Managed Accounts as
a direct or an indirect wholly owned taxable portfolio company of the
Company, thereby protecting the Company's RIC status.
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8. Applicant represents that the Company's Board, including a
majority of the disinterested directors, found that the Company
organizing, acquiring, and wholly owning 100% of the equity interest in
the Adviser Sub subsequent to its registration as an investment adviser
is in the best interests of the Company and its shareholders. Applicant
agrees that the Board will review at least annually the investment
advisory business of the Adviser Sub to determine whether such business
should be continued and whether the benefits derived by the Company
from the Adviser Sub's business warrant the continued ownership of the
Adviser Sub. Applicant states that shareholders of the Company will be
provided with notice, in advance of, or concurrent with, the Adviser
Sub's start of investment advisory activities.
9. Accordingly, Applicant represents that the requested relief is
both 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 Act.
Applicant's Conditions
Applicant agrees that the Order of the Commission granting the
requested relief shall be subject to the following conditions:
1. The determination to enter into the advisory business through
the Adviser Sub has been made by a vote of at least a majority of the
Board who are not ``interested persons'' of the Company as defined in
section 2(a)(19).
2. The Company will wholly own and control the Adviser Sub. The
Company will not have an investment adviser within the meaning of
section 2(a)(20). Only persons acting in their capacities as directors,
officers or employees of the Company will provide advisory services to
the Company.
3. In each of its annual reports to shareholders and in future
registration statements, the Company will discuss the existence of the
Adviser Sub and the provision by the Adviser Sub of outside advisory
services as well as include an assessment of whatever risks, if any,
are associated with the existence of the Adviser Sub and its provision
of such services.
4. The Adviser Sub will not make any proprietary investment that
the Company would be prohibited from making directly under the
Company's investment objectives, policies and restrictions or under any
applicable law.
5. In assessing compliance with the asset coverage requirements
under section 18 of the Act, the Company will deem the assets,
liabilities, and indebtedness of the Adviser Sub as its own.
6. The Board will review at least annually the investment advisory
business of the Adviser Sub to determine whether such business should
be continued and whether the benefits derived by the Company from the
Adviser Sub's business warrant the continued ownership of the Adviser
Sub and, if appropriate, approve (by a vote of at least a majority of
its directors who are not ``interested persons'' as defined in the Act)
at least annually such continuation. In determining whether the
investment advisory business of the Adviser Sub should be continued and
whether the benefits derived by the Company from the Adviser Sub's
business warrant the continued ownership of the Adviser Sub, the Board
will take into consideration, among other things, the following: (a)
the compensation of the officers of the Company and of the Adviser Sub;
(b) all investments by and investment opportunities considered for the
Company that relate to any investments by or investment opportunities
considered for a client of the Adviser Sub; and (c) the allocation of
expenses associated with the provision of advisory services between the
Company and the Adviser Sub.\6\
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\6\ Such expenses may include: administration and operating
expenses; investment research expenses; sales and marketing
expenses; office space and general expenses; and direct expenses,
including legal and audit fees, directors' fees and taxes.
For the Commission, by the Division of Investment Management,
under delegated authority.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18760 Filed 8-30-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 31, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.