Investment Company Act of 1940 –Section 12(d)(3)
Main Street Capital Corporation
November 7, 2013
RESPONSE OF THE CHIEF COUNSEL'S OFFICE
DIVISION OF INVESTMENT MANAGEMENT
IM Ref. No. 201210197
File No. 814-00746
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:
- The Parent Company, a Maryland corporation, is an internally managed closed-end investment company that in 2007 elected to be regulated as a BDC pursuant to section 54(a) of the 1940 Act.1 In 2010, the Parent Company registered as an investment adviser under the Advisers Act. In 2012, the Parent Company entered into a subadvisory agreement with another BDC ("Another BDC") and its external investment adviser ("Subadvisory Contract"), pursuant to which it receives advisory fees for its services ("Subadvisory Fees").
- For federal income tax purposes, the Parent Company has made an election to be treated as a regulated investment company ("RIC") under the Internal Revenue Code of 1986 (the "Code"), and intends to continue to make such election in the future. As a RIC, the Parent 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, but to maintain its RIC status, the Parent Company must, among other things, meet specified source-of-income requirements. The Parent Company will satisfy these source-of-income requirements 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, net income from certain "qualified publicly traded partnerships," or other income derived with respect to its business of investing in securities ("Good RIC Income").
- The Subsidiary, a Delaware limited liability company, manages the day-to-day operational and investment activities of the Parent Company and its SBIC Subsidiaries. The Subsidiary employs all of the Parent Company's investment personnel and other employees and is subject to the Parent Company's supervision and control. Currently, the Subsidiary is not providing any investment advisory services to any parties other than the Parent Company and the SBIC Subsidiaries. The Subsidiary is a taxable entity under the Code.
- The Parent Company would like to assign the Subadvisory Contract to the Subsidiary. Investment management fee income received for investment advisory services, such as Subadvisory Fees, does not constitute Good RIC Income for the Parent Company. Because the Subsidiary is a taxable entity under the Code, however, such fee income, if earned by the Subsidiary and subsequently distributed to the Parent Company, would constitute Good RIC Income for the Parent Company. You represent that the utilization of the Subsidiary as a tax "blocker" entity in this manner is a lawful method of tax planning under the Code.
- If the Subsidiary were to serve as an investment adviser to Another BDC, the Subsidiary would be required to register under the Advisers Act. Registration of the Subsidiary under the Advisers Act, in turn, would trigger the prohibition in section 12(d)(3) of the 1940 Act, made applicable to BDCs by section 60 of the 1940 Act, on the Parent Company purchasing or otherwise acquiring any security issued by an investment adviser registered under the Advisers Act.
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.
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").
Acquisitions of Securities or Interests, Investment Company Act Release No. 3542 (Sept. 21, 1962).
Exemption of Acquisitions of Securities Issued by Persons Engaged in Securities Related Businesses, Investment Company Act Release No. 19204 (Jan. 4, 1993) (proposing release), at nn. 10-11 and accompanying text; Exemption of Acquisitions of Securities Issued by Persons Engaged in Securities-Related Businesses, Investment Company Act Release No. 19716 (Sept. 16, 1993) (adopting release), at n. 4 and accompanying text; Exemption for Acquisition by Registered Investment Companies of Securities Issued by Persons Engaged Directly or Indirectly in Securities Related Businesses, Investment Company Act Release No. 13725 (Jan. 17, 1984) (proposing release).
5 Id. See also
Securities Trading Practices of Registered Investment Companies, Investment Company Act Release No. 10666 (Apr. 18, 1979) ("the legislative history ... suggests that its purpose principally was to prevent investment companies ... from exposing their assets to the entrepreneurial risks of an investment banking business, as would be the case where an investment company took a partnership interest in a broker/dealer").
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.