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Business Development Company Admits Books, Records and Reporting Violations as Well as Internal Control Failures

Dec. 4, 2018

ADMINISTRATIVE PROCEEDING
File No. 3-18912

Washington, D.C., December 4, 2018 -- The Securities and Exchange Commission today announced that KCAP Financial, Inc., a New York based business development company, has admitted that it failed to properly account for distributions it received from its wholly-owned Asset Manager Affiliates ("AMAs") by recording the entirety of those distributions as dividends when a majority of the funds received were in fact a return of capital.

As explained in the SEC's Order, under Generally Accepted Accounting Principles, distributions can be recorded as dividends only when they are paid from current or accumulated tax basis earnings and profits. From at least 2010 through the third quarter of 2014, KCAP failed to properly analyze the approximately $35.8 million in distributions it received from its AMAs and recorded all of the distributions as dividends, despite completing quarterly tax accrual worksheets demonstrating that certain AMAs lacked current or accumulated tax basis earnings and profits from which to pay dividends in certain periods. Approximately $22.3 million (62.3%) of the funds received should not have been recorded as dividends and were actually a return of capital. Additionally, to maintain its status as a Regulated Investment Company for federal income tax purposes, and to avoid paying an excise tax on undistributed income, KCAP distributed approximately 98% of its investment income, including income from AMAs, to its shareholders through quarterly distribution payments. By failing to record the distributions it received from the AMAs in conformity with GAAP, a significant portion of the quarterly distributions KCAP paid to its shareholders were a return of capital and not dividends. The quarterly distribution payments were not accompanied by a contemporaneous written statement disclosing the source of the funds distributed as required by Rule 19a-1 under the Investment Company Act of 1940.

The SEC's Order found that KCAP violated the reporting, books and records, and internal accounting controls of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. In addition the Order found that KCAP violated Section 19(a) of the Investment Company Act and Rules 19a-1 and 38a-1(a)(1) thereunder. KCAP admitted the findings in, and consented to the entry of, the Commission's cease-and-desist Order.

The SEC's investigation was conducted by Noel Gittens, Richard Haynes, and John Bowers and was supervised by Cheryl Crumpton, Dwayne Brown, George Bagnall and Antonia Chion.

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