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Investment Company Act of 1940 — Sections 7(a), 55(a) and 23(c) Carey Credit Income Fund and Carey Credit Income Fund 2015 T

July 15, 2015

Response of the Office of Chief Counsel
Division of Investment Management

IM Ref. No. 20157151458
File No. 814-01117

Our response provides assurance that we would not recommend enforcement action to the Securities and Exchange Commission ("Commission") under certain provisions of the Investment Company Act of 1940 ("Act") against certain business development companies ("BDCs") structured as a master-feeder arrangement, as detailed below.

Specifically, in your letter, dated July 15, 2015, you request assurance that the Division of Investment Management will not recommend enforcement action to the Commission against: (A) the Feeder Funds (as defined below) (i) under section 7(a) of the 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 (as defined below); or (B) the Master Fund under section 23(c) of the Act if the Master Fund repurchases Master Fund Shares (as defined below) in a planned liquidation of a Feeder Fund in accordance with rule 23c-1 under the Act except as described below.

Facts

You represent as follows:

  • Carey Credit Advisors, LLC ("Adviser") and Guggenheim Partners Investment Management, LLC ("Sub-Adviser" and together with the Adviser, "Advisers"), each an investment adviser registered under the Investment Advisers Act of 1940, propose to offer a BDC structured as a master-feeder arrangement for bona fide business reasons, including economies of scale and more efficient portfolio management. The assets of each Feeder Fund will be pooled into one Master Fund, generating significant expense savings. Each Feeder Fund will have a finite term and a target liquidation date so that the Advisers will be able 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 Advisers with the ability to manage the liquidity of the Master Fund based on the liquidity being provided by the Feeder Funds.

  • Carey Credit Income Fund (the "Master Fund") is a closed-end management investment company formed on September 5, 2014 as a statutory trust under the laws of the State of Delaware that has elected to be regulated as a BDC pursuant to section 54 of the Act. The Master Fund’s investment objectives will be to provide shareholders with current income, capital preservation and, to a lesser extent, long-term capital appreciation. The Master Fund intends to meet its investment objectives by investing primarily in large, privately-negotiated loans to private middle market U.S. companies. The Master Fund will engage in a continuous offering on a private placement basis of its common shares (the "Master Fund Shares").[1] The Master Fund 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 (as defined below), 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 Master Fund intends to offer a quarterly share repurchase program in which it will repurchase a certain amount of its outstanding Master Fund Shares at a price equal to the net asset value per share on the last day of the most recent quarterly reporting period via an issuer tender offer under rule 13e-4 under the Securities Exchange Act of 1934 ("Rule 13e-4").

  • The Carey Credit Income Fund 2016 T (the "Existing Feeder Fund") is a closed-end management investment company formed on September 5, 2014 as a statutory trust under the laws of the state of Delaware that will elect to be regulated as a BDC pursuant to section 54 of the Act. The Existing Feeder Fund will engage in a continuous public offering of its common shares for a finite offering period. The Existing Feeder Fund will have a finite term of no more than five years from the closing of the offering (contemplated to be on or before December 31, 2021) and will invest all or substantially all of its assets in the Master Fund.

  • In the future, the Adviser may create other closed-end management investment companies that will elect to be regulated as BDCs pursuant to section 54 of the Act and invest all or substantially all of their assets in the Master Fund (each, a "Future Feeder Fund" and together with the Existing Feeder Fund, the "Feeder Funds"). No Feeder Fund will engage in any investment or borrowing activity, except indirectly through its interest in the Master Fund. Each Feeder Fund will engage in a public offering of its common shares ("Feeder Fund Shares") for a finite offering period and have a finite life of between five and 25 years.[2]

  • Each Feeder Fund intends to offer a quarterly share repurchase program in which it will repurchase a certain amount of its outstanding Feeder Fund Shares at a price equal to the net asset value per share on the last day of the most recent quarterly reporting period via an issuer tender offer under Rule 13e-4. Each such quarterly tender offer will be conducted in parallel with the Rule 13e-4 tender offers conducted by the Master Fund.

  • As a Feeder Fund approaches the end of its finite term, the Feeder Fund’s board of trustees will authorize the liquidation and dissolution of the Feeder Fund. Such Feeder Fund liquidation and dissolution will be effectuated by the purchase by the Master Fund for cash of all of the Master Fund Shares owned by the Feeder Fund in accordance with all the conditions of rule 23c-1 under the Act (except as described below) and the distribution of that cash to the liquidating Feeder Fund’s shareholders.

Legal Analysis

Section 7(a) of the Act

Section 7(a) of the Act generally prohibits an investment company, unless registered under section 8 of the 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 Act makes section 8 inapplicable to a BDC. Therefore, you state, neither the Feeder Funds nor the Master Fund will be registered under section 8. You state that if a Feeder Fund does not satisfy the definition of a BDC in section 2(a)(48) of the Act, unless an exclusion or exception from registration under section 8 is available, each Feeder Fund might be in violation of section 7(a).

You request assurance that we will not recommend enforcement action against the Feeder Funds under section 7(a) of the Act, if each Feeder Fund elects to be regulated as a business development company pursuant to section 54(a) of the Act.

Section 54(a) of the Act

Section 54(a) of the Act generally provides that any company that meets the definition in sections 2(a)(48)(A) and (B) of the Act may elect to be subject to regulation as a BDC under the Act. Section 2(a)(48) of the Act generally 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 Act and makes available significant managerial assistance with respect to the issuers of those securities.[3]

You state that each Feeder Fund will elect to be regulated as a BDC pursuant to section 54(a) of the Act. No Feeder Fund will have any direct operations other than owning Master Fund Shares. You state that the Master Fund intends to invest at least 70% of its assets in assets described in sections 55(a)(1) through (6) of the Act and to make available significant managerial assistance with respect to the issuers of those securities.

Sections 2(a)(48) and 55(a) of the Act

The definition of a BDC under section 2(a)(48) of the Act states that a BDC is operated for the purpose of making investments in securities described in sections 55(a)(1) through (3) of the Act and makes available significant managerial assistance with respect to the issuers of those securities. Those securities generally are issued by an eligible portfolio company, as defined in section 2(a)(46) of the Act. Section 2(a)(46) excludes from the definition of an eligible portfolio company an investment company as defined in section 3 of the Act and any company that would be an investment company but for an exclusion under section 3(c) of the Act. You state that because the Master Fund will be an investment company as defined in section 3(a)(1) of the Act, Master Fund Shares will not be securities issued by an eligible portfolio company or securities described in paragraphs (1) through (3) of section 55(a). You state that because all or substantially all of each Feeder Fund’s assets will consist of Master Fund Shares, each Feeder Fund will (i) not be operated for the purpose of making direct investments in securities described in sections 55(a)(1) through (3) of the Act, and (ii) will not make available significant managerial assistance with respect to issuers of those securities. Accordingly, each Feeder Fund might not satisfy the definition of a BDC in section 2(a)(48).

Section 55(a) of the Act generally prohibits a BDC from acquiring any assets (other than assets described in paragraphs (1) through (7) of the section) unless, at the time of acquisition, at least 70% percent of its total assets (excluding assets for sustaining its business, described in paragraph (7)) are assets described in paragraphs (1) through (6) ("Qualifying Assets"). You state that because all or substantially all of the assets of each Feeder Fund will be invested in Master Fund Shares, no Feeder Fund will have 70% of its assets invested directly in Qualifying Assets. Thus, section 55(a) might prohibit a Feeder Fund from acquiring any assets other than assets described in paragraphs (1) through (7) of section 55(a).

You request assurances that we would not recommend enforcement action against the Feeder Funds under sections 7(a) and 55(a) of the Act if each Feeder Fund includes its respective indirect ownership interest in the Qualifying Assets of the Master Fund as its own investments for purposes of section 2(a)(48) and section 55(a) of the Act.

In support of your request, you state that the Master Fund intends to comply with section 55(a) at all times following its commencement of operations and that the Master Fund expects to make available significant managerial assistance with respect to the issuers of those securities described in sections 55(a)(1) through (3). You represent that the proposed master-feeder structure has been established for bona fide business reasons. You represent that each Feeder Fund will be merely an entity for investing indirectly in the Master Fund’s assets and, as such, should be permitted to include its proportionate interest in the assets of the Master Fund for purposes of satisfying the definition of BDC in section 2(a)(48) of the Act and for purposes of determining the percentage of its total assets that are Qualifying Assets.

You state that under these circumstances, allowing each Feeder Fund to treat its respective indirect ownership interest in portfolio companies of the Master Fund as its own investments and to treat the significant managerial assistance offered to those portfolio companies by the Master Fund as also offered by the Feeder Fund is consistent with the intent behind sections 2(a)(48) and 55(a) of the Act.

Section 23(c) of the Act and Rule 23c-1 under the Act

Section 23(c) of the Act (generally made applicable to a BDC by Section 63 of the Act) prohibits a BDC from purchasing its own securities except under certain limited circumstances, including, among others, as the Commission may permit by rule. Rule 23c-1 under the Act permits a registered closed-end investment company to purchase its securities for cash subject to certain conditions. You request assurance that we would not recommend enforcement action to the Commission against the Master Fund under section 23(c) of the Act if it repurchases Master Fund Shares in a planned liquidation of a Feeder Fund in accordance with rule 23c-1 under the Act except as described below.

Rule 23c-1(a)(3), in relevant part, provides that, if the security to be purchased is junior to any class of outstanding security of the issuer representing indebtedness, all securities of such class must have an asset coverage of at least 300% immediately after such purchase. This provision parallels the provision in section 18(a)(1)(A) of the Act that, in relevant part, makes it unlawful for any registered closed-end investment company to issue any class of senior security representing indebtedness unless, immediately after such issuance, it will have an asset coverage of at least 300%.[4] As a BDC, the Master Fund is subject to section 61(a)(1) of the Act, which provides, in relevant part, that the asset coverage requirement of section 18(a)(1)(A) of the Act applicable to BDCs shall be 200%. Accordingly, you state that the Master Fund will comply with rule 23c-1(a)(3) except that any of its outstanding securities representing indebtedness will have asset coverage of at least 200% immediately after its repurchase of the Master Fund Shares.

Rule 23c-1(a)(4) provides that the seller of the security, to the knowledge of the issuer, not be an affiliated person of the issuer. You state that each Feeder Fund will be an affiliated person of the Master Fund, but that the proposed repurchases of Master Fund Shares from a liquidating Feeder Fund do not raise the potential for abuse that this provision was designed to address.[5] In particular, you note that the finite term of each Feeder Fund and the planned liquidation and dissolution of each Feeder Fund at the end of its finite term are key aspects of the proposed arrangement, which will be clearly disclosed to the Master Fund’s and each Feeder Fund’s shareholders. You further state that all Feeder Funds will liquidate and dissolve in the same planned manner and, therefore, you do not believe that there is a risk of overreaching in the proposed repurchases by the Master Fund from the liquidating Feeder Funds.

Conclusion

Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against: (A) the Feeder Funds (i) under section 7(a) of the 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 except as described above.[6] Any different facts or representations might require a different conclusion. This response expresses our position on enforcement action only and does not represent any legal conclusions regarding the matters discussed in your letter.

Vanessa M. Meeks
Senior Counsel

[1] The Master Fund Shares will not be subject to any sales load or distribution or shareholder servicing fee.

[2] Feeder Fund Shares may be subject to a front-end sales charge and/or an annual distribution/shareholder servicing fee and may be sold under a multi-class arrangement pursuant to a Commission exemptive order.  No Feeder Fund will be offered that has a different sales load and distribution/shareholder servicing fee structure but the same or a similar finite life as another Feeder Fund and the Master Fund will not indirectly create a multi-class structure by using the Feeder Funds to offer different classes of Master Fund Shares.

[3] The term "making available significant managerial assistance" by a BDC is defined in section 2(a)(47) of the Act.

[4] See Investment Company Act Release No. 415 (Dec. 11, 1942) (stating that "[t]he asset coverage requirements of [rule 23c-1(a)(3)] are the same as those prescribed by section 18 of the Act with respect to the issuance of securities and the term asset coverage as used with respect to this condition has the same meaning as defined by section 18(h) of the Act.").

[5] See Investment Company Act Release No. 78 (Mar. 4, 1941) (stating that "[r]epurchases from affiliated persons of the issuer are not within the rule.  The abuses which may flow from such repurchases, and the consequent advisability of permitting them only upon the basis of applications describing the individual transactions, are apparent.").

[6] The Division generally permits third parties to rely on no-action letters to the extent that the third party’s facts and circumstances are substantially similar to those described in the underlying request for the no-action letter.  See Informal Guidance Program for Small Entities, Investment Company Act Release No. 22587 (Mar. 27, 1997), n. 20.  In light of the very fact-specific nature of your request, however, we note that this letter applies only to the entities named herein, and no other entity may rely on the position stated in this letter.  We are willing to consider similar requests from other BDCs.

Incoming Letter

The Incoming Letter is in Acrobat format.

 

http://www.sec.gov/divisions/investment/noaction/2015/carey-credit-income-fund-071515-7a55a23c.htm
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Modified: 05/22/2015