SEC Issues No-Action Letter Allowing Unique Master-Feeder BDC

July 15, 2015

The SEC granted no-action relief to Carey Credit Advisors, LLC (Adviser) and Guggenheim Partners Investment Management, LLC (Sub-Adviser), allowing them to offer a business development company (“BDC”) structured as a master-feeder fund arrangement. The assets of each feeder fund will be pooled into a single master fund. The feeder fund will have a finite term and a target liquidation date, allowing the Adviser and Sub-Adviser to manage the maturity and duration of the master fund’s fixed income portfolio efficiently to generate the necessary liquidity to fund the known upcoming liquidation. The master-feeder structure also will provide the sub-adviser with the ability to manage the liquidity of the master fund based on the liquidity being provided by the feeder funds.

The master fund is organized as a closed-end management investment company and elected to be regulated as a BDC. The master fund will engage in a continuous offering on a private placement basis of its common shares. It will have an indefinite life and will not list its shares on a securities exchange. The only shareholders of the Master Fund will be the feeder funds, the Adviser, and an affiliate of the Sub-Adviser who have provided seed capital. The master fund’s income, gains, deductions, losses and distributions will be allocated only to the feeder funds and the Adviser and affiliate of the Sub-Adviser based on their proportionate interest in the master fund.

The SEC staff granted no-action relief from Section 7(a) of the 1940 Act, which generally prohibits an investment company, unless registered under Section 8 of the 1940 Act, from offering to sell, selling or delivering after sale any security or any interest in a security, or otherwise engaging in any business in interstate commerce. Section 6(f) of the 1940 Act makes Section 8 inapplicable to a BDC. Neither the feeder funds nor the master fund will be registered under Section 8. In addition, the SEC staff provided no-action relief from Section 54 of the 1940 Act. This relief was necessary because Section 54(a) of the 1940 Act generally provides that any company that meets the definition in Sections 2(a)(48)(A) and (B) of the 1940 Act may elect to be subject to regulation as a BDC under the Act. Section 2(a)(48) of the 1940 Act defines a BDC to be any closed-end investment company that operates for the purpose of making investments in securities described in sections 55(a)(1) through (3) of the 1940 Act and makes available significant managerial assistance with respect to the issuers of those securities. The feeder funds, as passive investing entities, would not meet these requirements. The master fund would meet those requirements.

The SEC staff therefore granted no-action relief to the feeder funds (i) under Section 7(a) of the 1940 Act if each elects to be regulated as a BDC pursuant to Section 54 of the Act or (ii) under Section 55(a) of the Act if, for purposes of determining the composition of its assets under Section 55(a), each feeder fund looks to its proportionate ownership interest in the assets of the master fund; or (B) the master fund under Section 23(c) of the Act if the master fund repurchases master fund shares in a planned liquidation of a feeder fund in accordance with Rule 23c–1 under the Act.

Click here to access the no-action letter.


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Investment Advisers, Investment Companies