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Investment Company Act of 1940 –Section 12(d)(3)
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RESPONSE OF THE CHIEF COUNSEL'S OFFICE |
IM Ref. No. 201210197 |
Your letter, dated November 7, 2013, requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the "Commission") against Main Street Capital Corporation (the "Parent Company"), a business development company ("BDC"), under section 12(d)(3) of the Investment Company Act of 1940 (the "1940 Act"), as made applicable to BDCs by section 60 of the 1940 Act, if Main Street Capital Partners, LLC, a wholly owned subsidiary of the Parent Company (the "Subsidiary"), registers as an investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act").
You state the following:
Section 12(d)(3) of the 1940 Act 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. Section 60 of the 1940 Act makes section 12(d)(3) of the 1940 Act applicable to a BDC as if it were a registered closed-end investment company. The Commission has indicated that the prohibited acquisitions under section 12(d)(3) are not limited to the original acquisitions of stock, but may occur as a result of subsequent events.2 Therefore, you request our assurance that we would not recommend enforcement action to the Commission against the Parent Company if the Subsidiary becomes an investment adviser registered under the Advisers Act.
In support of your request, you argue that the Parent Company's ownership of the Subsidiary as an investment adviser registered under the Advisers Act raises none of the concerns underlying section 12(d)(3) of the 1940 Act. You state that these concerns were two-fold. First, Congress wished to limit the exposure of registered investment companies to the entrepreneurial risks of a securities-related business, including those of a registered investment adviser.3 Second, Congress wanted to prevent potential conflicts of interest and reciprocal practices between registered investment companies and securities-related businesses.4
You state that the first concern stems from the fact that, in 1940, when section 12(d)(3) was adopted, most securities related businesses were organized as privately held general partnerships.5 You argue that the proposed arrangement would not expose the Company's stockholders to the risk of unlimited liability because the Subsidiary is organized as a limited liability company. You also argue potential conflicts of interest and the risk of reciprocal practices would not be present because the Subsidiary is wholly owned by the Parent Company, and the Parent Company and the Subsidiary are directly or indirectly overseen by the Parent Company's six-member Board of Directors. You note that the Parent Company could provide advisory services directly and would be conducting these activities through the Subsidiary for bona fide tax planning reasons. Finally, you state that this concern in the context of section 12(d)(3) was raised by Congress primarily with respect to an investment company's ownership of a brokerage or underwriting business, rather than the ownership of an advisory business.6
Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under section 12(d)(3) of the 1940 Act against the Parent Company if the Subsidiary registers as an investment adviser under the Advisers Act. This letter expresses our position on enforcement only, and does not express any legal conclusion or interpretive conclusion on the issues presented. Because our position is based on the facts and representations in your letter, any different facts or representations may require a different conclusion.
David Joire
Senior Counsel
1 The Parent Company makes investments both directly and through its two other wholly owned subsidiaries, each of which is a Delaware limited partnership and a small business investment company licensed by the Small Business Administration to operate under the Small Business Incentive Act of 1958 ("SBIC Subsidiaries").
4 Id.
6 Compare section 12(c)(2)(B) in H.R. 8935, 76th Cong. (3d Sess. 1940) at 30, S. 3580, 76th Cong. (3d Sess. 1940) at 30, and Investment Trusts and Investment Companies: Hearings on S. 3580 before the Subcomm. on Securities and Exch. of the Senate Comm. on Banking and Currency, 76th Cong (3d Sess. 1940), pt. 1, at 10 ("Senate Hearings") with section 12(d)(3)(B) of the 1940 Act. See also H.R. Rep. No. 76-2639, at 16 (1940); S. Rep. No. 76-1775, at 15-16 (1940); Senate Hearings, pt. 1, at 243.
The Incoming Letter is in Acrobat format.
http://www.sec.gov/divisions/investment/noaction/2013/mainstreetcapital110713.htm
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