November 4, 2013
Your letter, dated November 1, 2013, requests assurance that the staff of the Division of Investment Management (the “Division”) would not recommend enforcement action to the Securities and Exchange Commission (“Commission”) against New Mountain Finance Corporation (“NMF Corp”) or New Mountain AIV Finance Holdings Corporation. (“AIV Holdings”), each of which has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (“1940 Act”), under section 12(d)(3) of the 1940 Act, as made applicable to BDCs by section 60 of the 1940 Act, if New Mountain Finance Holdings, LLC (“NMF LLC”), which is a BDC wholly owned by NMF Corp and AIV Holdings, registers as an investment adviser under the Investment Advisers Act of 1940 (“Advisers Act”), or if NMF Corp acquires additional common membership units of NMF LLC subsequent to its registering under the Advisers Act.
You state the following:
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. Section 12(d)(3) of the 1940 Act provides, in relevant part, that it is unlawful for any registered investment company to purchase or otherwise acquire any security issued by any person who is a broker, dealer, underwriter, or investment adviser to an investment company or investment adviser registered under the Advisers Act. Sections 12(d)(3)(A) and (B) contain certain exceptions to this prohibition, none of which applies to NMF LLC’s situation. Rule 12d3-1 under the 1940 Act provides a conditional exemption from section 12(d)(3) for certain purchases or acquisitions, but NMF LLC’s situation does not satisfy certain of the conditions of the rule.2 In addition, 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.3
Therefore, you request our assurance that we would not recommend enforcement action to the Commission against NMF Corp or AIV Holdings if NMF LLC becomes an investment adviser registered under the Advisers Act or if NMF Corp acquires additional common membership units of NMF LLC subsequent to its registering under the Advisers Act. In support of your request, you argue that NMF Corp’s and AIV Holdings’ ownership of NMF LLC 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.4 Second, Congress wanted to prevent potential conflicts of interest and reciprocal practices between registered investment companies and securities-related businesses.5
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.6 You argue that shareholders of NMF Corp and members of AIV Holdings will not be exposed to the risks of unlimited liability associated with the NMF LLC’s investment advisory activities because NMF LLC is structured as a limited liability company and not as a partnership.
You also argue that potential conflicts of interest and the risk of reciprocal practices would not be present because the entities in the NMF Structure currently have the same directors, and the shareholders of NMF Corp and the members of AIV Holdings vote on a “pass through” basis with respect to matters requiring a vote of the common membership units in NMF LLC. You note that the NMF Structure was designed for bona fide tax reasons and that once the NMF Structure has accomplished its desired purpose and is collapsed into a single BDC model, the requested relief will no longer be necessary. 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.7
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 NMF Corp or AIV Holdings if NMF LLC registers as an investment adviser under the Advisers Act, or if NMF Corp acquires additional common membership units of NMF LLC subsequent to its registering 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.8
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