SEC Charges BDC Adviser with Affiliated Transaction Violations and Noncompliance with Co-Investment Exemptive Order

September 16, 2019

On September 13, 2019, the SEC issued a consent order that named Garrison Investment Group LP (“GIG”) and Garrison Capital Advisers LLC (“GCA”) and found violations of the affiliated transaction prohibitions of the Investment Company Act of 1940 (“1940 Act”) and the custody rule under the Investment Advisers Act of 1940 (“Advisers Act”) involving Garrison Capital, Inc. (“GCI”), a business development company (“BDC”) advised by GCA, and private fund clients of GIG. BDCs such as GCI are subject to affiliated transaction rules under Section 57(a)(4) and Rule 17d-1 under the 1940 Act, and commonly request (along with their advisers and potential co-investors) exemptive relief from these provisions to co-invest with other clients of their investment advisers that pursue similar strategies. While GCI was in the process of applying for such an order, the SEC alleged that GCA caused GCI to engage in co-investment transactions with GIG’s private fund clients in violation of the affiliated transaction prohibitions under the 1940 Act. In addition, after the order was issued, GCI co-invested with funds that were in existence at the time GCI’s application was submitted but not named therein (contrary to a representation in the co-investment application), and GIG received upfront transaction fees paid by borrowers to its private fund clients pursuant to prior contractual arrangements between GIG and its private fund clients that the order did not permit. The contractual arrangements between GIG and its private fund clients considered these borrower payments fees for GIG’s services in originating, monitoring and reporting on co-investments but were not mentioned in the co-investment order application. As a result, the application GCI and others submitted to the SEC to receive the order was materially misleading, in violation of Section 34(b) of the 1940 Act. GIG’s receipt of these fees in post-order co-investments did not comply with the order and violated the affiliated transaction prohibitions under the 1940 Act.

GIG was also charged with violations of the custody rule under the Advisers Act (Rule 206(4)-2) because it did not engage an accountant to conduct a surprise examination of a bank account through which loan proceeds and other fees were paid to co-investors and borrowers. The bank account was controlled by GIG’s subsidiary acting as administrative agent for the loan transactions at issue.

The consent order is available here.


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Compliance, Enforcement Actions, Investment Companies, Regulatory