July 14, 2017
A Small Entity Compliance Guide1
Business and industrial development companies, or BIDCOs, are companies that operate under state statutes that provide direct investment and loan financing, as well as managerial assistance, to state and local enterprises. Because they invest in securities, BIDCOs frequently meet the definition of “investment company” under the Investment Company Act. Section 6(a)(5) of the Investment Company Act exempts BIDCOs from most provisions of that Act subject to certain conditions (“BIDCO exemption”). One of these conditions permits BIDCOs to purchase debt securities issued by an investment company or private fund (e.g., hedge fund) if the debt security meets a standard of credit-worthiness established by the Commission. On November 19, 2012, the Commission adopted rule 6a-5 to establish this credit quality standard. Rule 6a-5 is effective on December 24, 2012.
New Credit Quality Standard
Rule 6a-5 deems a debt security issued by an investment company or private fund to be eligible for purchase by a BIDCO that relies on the BIDCO exemption if the board of directors or members of the BIDCO determine, at the time of purchase, that the debt security is:
- subject to no greater than moderate credit risk; AND
- sufficiently liquid that it can be sold at or near its carrying value within a reasonably short period of time.
Debt securities (or their issuers) that are subject to a moderate level of credit risk demonstrate at least average credit-worthiness relative to other similar debt issues (or issuers of similar debt). Moderate credit risk means the security is considered to have current low expectations of default risk and the issuer has an adequate capacity for payment of principal and interest. In making credit quality determinations, a BIDCO's board of directors or members (or its or their delegate) can also consider credit quality reports prepared by outside sources, including ratings of a nationally recognized statistical rating organization (“NRSRO”) that the BIDCO board or members conclude are credible and reliable for credit quality determinations.
As a result of rule 6a-5, section 6(a)(5) also limits a BIDCO’s investments in mutual funds to mutual funds that invest at least 65% of their assets in debt securities issued by investment companies or private funds that meet the credit quality standard in rule 6a-5.
The adopting release for rule 6a-5 can be found on the Commission’s website at http://www.sec.gov/rules/final/2012/ic-30268.pdf. The proposing release can be found on the Commission’s website at http://www.sec.gov/rules/proposed/2011/33-9193.pdf. The text of the rule can be accessed through the “Laws and Rules” section of the Division of Investment Management page of the Commission’s website at http://www.sec.gov/divisions/investment.shtml.
Contacting the Commission
The Commission’s Division of Investment Management is happy to assist small BIDCOs with questions regarding the new rule. The Division’s Office of Chief Counsel answers questions submitted by e-mail and telephone. You can submit a question by e-mail to email@example.com and a staff member of the office will call you to discuss your question. In addition, you can contact the Office of Chief Counsel at (202) 551-6825.
1 This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.