Registered Funds Alert

February 2021

Table of Contents
The SEC Under New Management—
Outlook for 2021 and Beyond

2

A look back at major SEC accomplishments
under Chair Clayton and a look ahead to the
SEC under a new administration.
Click here for more
SEC Overhauls the Framework
Governing the Use of Derivatives byRegulated Funds

6

An overview of key attributes of the
new derivatives rule, which overhauls
the regulatory framework for the use ofderivatives and similar transactions byregulated funds.
Click here for more
The New Fund-of-Funds Rule: The
10
Good, the Bad and the Ugly for ClosedEnd Funds and BDCs
A discussion of potential benefits anddrawbacks of the new fund-of-funds rulewith a focus on implications for closed-end
funds and BDCs.
Click here for more
Notable Transactions: Q3 & Q4 2020

The latest edition of Simpson Thacher’s Registered Funds
15

A list of notable transactions that occurredin the third and fourth quarters of 2020,
including M&A transactions and closed-end
fund IPOs.
Click here for more

Alert discusses suggested areas of focus for the SEC
under its new leadership with a review of the significant
accomplishments of the SEC under Chair Clayton’s term;a summary of the SEC’s new rule regarding the use ofderivatives and other financial transactions and areas
for reconsideration; and our views on the positive andnegative impacts of the SEC’s new fund-of-funds rule on
closed-end funds and BDCs.

Simpson Thacher & Bartlett LLPThe SEC Under New
Management—Outlook for2021 and Beyond

new ETF sponsors to apply for exemptive
relief; and6. Offering reforms for closed-end funds and
BDCs designed to implement legislation
adopted by Congress in 2018 that was
designed to allow funds to utilize some of
the favorable offering rules available tooperating companies (summarized here
and here).

By David Blass, Christopher Healey, Manny Halberstam
and Kate O’Neil

The SEC is now under new management. The
SEC is operating at the time of this writing under
the leadership of Acting Chair and Democratic
Commissioner Allison Herren Lee. Gary Gensler,
former Chair of the CFTC, has been nominated—but
has not yet been confirmed—to become the next
permanent Chair of the SEC.
Though we are in early days, there are many
indications of the future direction of the SEC, andsome clear distinctions with the SEC under Chair Jay
Clayton’s term.
Looking back: To look forward, sometimes it firsthelps to look back to where we have been. Under Chair
Clayton, the SEC will be remembered by those in theasset management industry for numerous, highly
significant rulemakings aimed at that industry. Manyof those rulemakings were intended to be businessfriendly, although as we point out elsewhere in thisAlert, some had negative aspects for the industry.
Among the more consequential rulemakings forregulated funds and their sponsors that were adopted
during Chair Clayton’s tenure were:
1. A long-awaited rule regarding fair value
determinations that allows a fund board todelegate such determinations to the fund’sinvestment adviser (summarized here andhere);
2. A reformulated derivatives rule that
addressed many of the most severe
criticisms of the original rule proposed in2015 (summarized here);
3. A rule permitting fund-of-funds
arrangements intended to replace the needfor basic fund-of-funds structures to obtain
individualized exemptive relief from theSEC (summarized here);
4. A rule package addressing broker-dealer
and investment adviser conduct standards,
including when recommending regulated
fund investments (i.e., Reg BI);
5. A rule providing ETFs the most commonly
needed exemptions that previously required

In addition, Chair Clayton’s Division of Enforcement
led a very significant “voluntary” self-reporting
initiative for investment advisers with undisclosed
conflicts relating to regulated fund share classselection. That initiative, among others, led to a
sharp increase in enforcement actions against
investment advisers under his watch, at least in
number if not scope.
Looking forward: Now, turning the corner, it isvery clear that the new SEC will start with almost
a complete break from the leadership team under
Chair Clayton. Acting Chair Lee has appointed aseries of acting leaders for various positions acrossthe SEC, many of which we anticipate becoming
permanent upon Mr. Gensler’s confirmation. In
particular, we expect personnel brought fromoutside the SEC into acting positions at the SEC arehighly likely to be permanently appointed upon Mr.
Gensler’s confirmation.
What priorities does Mr. Gensler intend to pursue
with this new leadership team? Below are a few
thoughts, supplemented with some suggestions of
our own.
The SEC Will Focus on ESG
It is clear that ESG priorities will rise to the topof the SEC’s regulatory agenda under the Biden
administration, which has identified climate change
in particular as a top policy priority.1 Indeed, the SEC
already has created and staffed a new senior policy
advisor position to advise the agency on ESG matters“

It is clear that ESG priorities will rise to the
top of the SEC’s regulatory agenda under the
Biden administration, which has identified climatechange in particular as a top policy priority.
1.

”

The Biden administration has also called on the Department of Labor toreview its recent “do-good” investing rule, which requires ERISA plan
fiduciaries to put financial considerations above all other considerations
when making investment decisions, and to assess whether the ruleconflicts with the administration’s objectives relating to climate change.
Fact Sheet: List of Agency Actions for Review (Jan. 20, 2021).
2and advance related new initiatives across its offices
and divisions.
One potential implication of the SEC becoming more
active on ESG is a shift to focus non-financial publiccompany disclosure more on what investors are“interested in knowing,” as opposed to the current
focus on materiality.2 This could lead to more publiccompany disclosure not only on environmental
matters, but also disclosure about social justiceand human rights matters, such as workplace
diversity, gender pay ratios and conflict minerals.
Increased ESG disclosures by public companies,
particularly if standardized and comparable acrosscompanies, could facilitate significant innovationin product development for regulated funds. If thisshift occurs in corporate issuer filings, however,
we should anticipate a similar trend for regulated
fund disclosure and regulatory disclosures by asset
management firms.
Specific ESG-related regulatory initiatives that the
SEC may pursue during the Biden administration
could include:• Amending Rule 35d-1 under the 1940 Act,
known as the “Names Rule,” to explicitly
address the naming of funds that pursue an
ESG strategy;• Establishing mandatory standards for
public company disclosures regarding ESG
risks, practices and impacts (while several
public companies voluntarily align their
ESG disclosures with standards publishedby private organizations, such as theSustainability Accounting Standards Board(SASB), there remains a lack of uniform
ESG disclosure standards for all publiccompanies to follow);• Publishing best practice guidance forenhancing ESG investment productdisclosures to foster comparability; and• Publishing guidance clarifying theapplication of fiduciary duty obligations
under the Advisers Act to investment
advisers that make investment decisions or
recommendations for their clients based,
in whole or in part, on non-economic
considerations, such as ESG factors.
2.

In its adopting release for recent amendments to Regulation S-K
disclosure requirements, the SEC declined to add new requirementswith respect to ESG and sustainability matters, opting instead tocontinue emphasizing the SEC’s 2010 guidance on disclosure related
to climate change. Management’s Discussion and Analysis, Selected
Financial Data, and Supplementary Financial Information, Release No.
33-10890; 34-90459; IC-34100; File No. S7-01-20 (Nov. 19, 2020).

We also expect to see a more active effort by SEC
enforcement and examination staff to clamp down
on “greenwashing,” i.e., asset managers conveying a
false impression to investors that a given product orservice they offer is environmentally friendly. This
could take the form of a “green” sweep by the SEC’s
examination division focusing on fund managers’
ESG disclosures and practices.3 It would not surprise
us if the SEC brings a wave of enforcement actionsin the coming years against financial services
companies centering on their ESG disclosures.
The Democratization of Alternative Strategies Might
Proliferate (With Guardrails)
Mr. Gensler was a co-author of the book “TheGreat Mutual Fund Trap,” a book notable for its
argument that actively managed funds perform
worse than passive (index) funds that charge lower
management fees (a more well-known theory today
than when the book was published in 2002). It will
be interesting to see how much weight Mr. Gensler
gives this perspective today given the significant fee
compression that has developed in recent years in themutual fund industry due to increased competition,
and whether this perspective influences his viewof management fees charged for private markets
investment strategies given that passive management
is not an option for private markets investments.
Under Chair Clayton, the SEC laid the groundworkfor increasing retail access to private markets,
including by including a number of targeted requests
for comment on offering such strategies throughregulated funds in a concept release in 2019. Whilesome commentators have suggested a Democratic
administration might not continue this initiative or
may roll back recent progress, we believe there isbipartisan support for increasing fairness in accessto investments and addressing the growing wealthdivide and retirement savings crisis. A Gensler-led
SEC may well view retail access through the lens of
economic equality, one of the top priorities of the
Biden administration, and is expected to prioritize
investor protections in any reform that would expand
retail access.
The SEC’s recent efforts in the retail space under
Chair Clayton focused primarily on direct access to
private markets, including expanding the Accredited
Investor definition to add new categories for natural
persons and simplifying the private offering rules
to ease capital raising burdens for small businesses.
3.

According to former Chair Clayton, the examination division has alreadybeen reviewing disclosures regarding funds and products that pursue
ESG investment mandates to ensure investors are receiving accurate
and adequate information about the material aspects of those strategies.
See Public Statement of SEC Chairman Clayton (Jan. 30, 2020). To
date, however, the SEC has not announced a formal examination sweep
on ESG issues.
3In contrast, under a Gensler-led SEC, expansionof retail access could rely much more heavily on
gatekeepers, such as a registered investment adviser
and the protections under the Investment Company
Act of 1940, to protect those investors. We expect
regulated funds to play a key role in providing amore level playing field for retail investors because
regulated funds invest in a diversified portfolio,
are managed by registered investment advisers
and are overseen by an independent board,offering fundamental investor protections thatcounterbalance many of the risks for retail investors
compared to direct access to private markets
investments. One does not need a partisan lens to seethat Main Street investors do not have access to thesame opportunity set as institutional and high net
worth investors.

Digital currency investments are another investment
strategy that could gain steam in a registered fundwrapper under Mr. Gensler’s SEC. As a professor
at MIT Sloan School of Management, Mr. Gensler
taught courses on blockchain and digital currencies.
Together with his experience leading the CFTC, Mr.
Gensler’s familiarity with these issues may offer hopeto those advocating for the ability to offer regulated
funds that invest in digital assets, which the SEC
currently is hesitant to bless due to significant
questions regarding the ability to safely custody
digital assets.
Mr. Gensler, Please Fix Co-investment Exemptive
Orders
It is no overstatement to say that the SEC’s
co-investment exemptive order framework underthe 1940 Act is broken. Exemptive orders areexcessively granular and do not contemplate—muchless accommodate—the realities of the marketplace,in particular for credit strategies. This is a topic
that we have written about several times in prior
Alerts (e.g., here and here). As discussed in our May
2019 Alert, the co-investment application filed by
FS Global Credit Opportunities Fund presented an
opportunity for the SEC to reform some of the mostsignificant issues with the current SEC framework.
In particular, the FS Application envisioned a broad,
principles-based approach to co-investment relief
rather than a detailed and customized application
unique to the applicant’s business, which we believe
would have been a tremendous step forward.
Regrettably, the FS Application has languished.
Whether the SEC grants the FS Application or
determines to take another route, significant
reform is necessary. Under the current framework,for example, every participant must invest in thesame securities, and in a transaction that involves
multiple securities can force a regulated or private
fund to purchase a security that it otherwise might
not want to hold because the fund otherwise would
be excluded from the co-investment entirely. It
would seem that an investment adviser with afiduciary duty to its clients should be able to make adetermination, possibly with approval by a regulated
fund’s board, that the potential conflicts in having
funds invest in different parts of an issuer’s capital
structure can be managed and that funds should not
be put in a situation of choosing between investing insecurities that are not part of their core investment
strategy or being excluded from an investment
opportunity in its entirety.
The current framework also creates some problems
for private equity strategies as the exemptive relief
might permit a regulated fund to participate intaking a control stake in a portfolio company but
does not provide the relief needed under Section
17(a) of the 1940 Act to permit a regulated fund toparticipate in any subsequent principal transactions
with a portfolio company controlled by the sponsor,
such as a direct follow-on investment.
We encourage—in the strongest terms—the SEC
to develop a new co-investment framework thatprovides a the flexibility needed for regulated funds
to participate in private markets co-investments.
We strongly believe that such relief is needed toallow innovation in the regulated funds space anddemocratize access to private markets strategies.
AFFE Reform for BDCs
Another priority for the SEC’s new leadership totake up is a much-needed change to disclosure
requirements for acquired fund fees and expenses(“AFFE”). The SEC and Congress have taken initialsteps toward reform, but have not yet finalized them.
The SEC requires registered funds that invest inother funds (including BDCs) to include a separate
AFFE line item in the “Fees and Expenses” tablecontained in their SEC disclosure documents. This
separate AFFE line item must include the registered4

fund’s pro rata share of the “acquired fund’s”
expenses (including interest expense), which is thenadded to the registered fund’s overall expense ratio.
The AFFE disclosure disproportionately harms
BDCs, which are generally more expensive to operate
than other registered investment companies andtherefore have higher expense ratios. As a result,sponsors of mutual funds, closed-end funds, ETFs
and other registered investment companies generally
have avoided investing in BDCs and, as discussed ina prior Alert, major index providers have removed
BDCs from their indices (making BDCs ineligible
investments for index funds). The SEC included
some requests for comment regarding AFFE in
the rule proposal for the recently adopted fund offunds rule (but AFFE was not addressed in the finalrule) and the SEC is considering modifications to
AFFE disclosure as part of its Investor Experience
Proposal. Under the Proposal, open-end funds thatinvest 10% or less of their total assets in other fundcould disclose the fees and expenses associatedwith those investments in a footnote to the fee table,
instead of reflecting those expenses as a separate line
item in the fee table.
Separately, the U.S. House of Representatives
introduced legislation in June 2020 that would
require the SEC to adopt rules specifying that, whencalculating the fees and expenses of an acquired
fund, the term “acquired fund” does not include
a BDC. However, the proposed legislation did notreceive a vote under the previous Congress. It
remains to be seen whether the SEC and/or Congress
to finalize efforts to minimize the impact of the AFFE
Rule on BDCs either by adopting the Proposal or
through legislative efforts. The SEC, nonetheless,could show strong leadership by addressing the
AFFE disclosure problems before Congress directs
it to do so, either under the current Congress or afuture one.
Is the SEC Returning to a “Broken Windows”
Enforcement Environment?
In the second half of the Obama administration,
the SEC pursued a “broken windows” enforcement
philosophy in which it punished minor infractions
as a means of deterrence. Under the leadership offormer Chair Clayton, SEC enforcement activity
remained vigorous but shifted away from this broken
windows approach. While the SEC’s enforcement
division set new records in relation to the amountof disgorgement and penalties it obtained during
his tenure, we saw a modest decrease in the numberof SEC enforcement actions that involved minor
infractions. Along this same line, our sense has beenthat the enforcement division took fewer referrals

from SEC examination staff, based on the view that
deterring a minor infraction through a deficiency
letter, rather than through an enforcement action, isa more efficient use of the agency’s resources.
This is expected to change under the leadership of
Mr. Gensler. If confirmed by the Senate, we think Mr.
Gensler likely will steer the SEC back in the directionof a broken windows approach to enforcement(though the SEC may avoid re-embracing the term
“broken windows”). The SEC enforcement division
probably will show a greater willingness to accept
referrals from examination staff and to impose hefty
penalties, as well as take a more aggressive approachto disgorgement in light of recent legislation
extending the statute of limitations to ten years
for disgorgement in cases involving intent-based
violations. This, coupled with Mr. Gensler’s wellknown focus on investor protection, could resultin increased levels of enforcement activity against
managers of regulated funds.

More generally, we expect the SEC, under Mr.
Gensler’s direction, to move away from the agency’s
recent focus on retail investors and to prioritize
more aggressive oversight of the financial services
industry. The asset management unit within theenforcement division probably will see its staffing
levels increase and will be given more autonomy
to pursue novel theories of potential misconduct,
especially with Acting Chair Lee recently restoring
the ability of senior enforcement staff to approveformal investigations, a power that was strippedaway and limited to the co-directors of the division
under the prior administration.
A Gensler-led SEC also likely will show agreater appetite for “sweep” examinations andinvestigations, i.e., targeted examinations orinvestigations conducted by the SEC staff for the
purpose of evaluating a perceived problem or to
educate itself on current industry practices in aparticular area. On the examination side, sweeps
historically have been an important generator of5

SEC enforcement cases, but the SEC under Chair
Clayton’s leadership generally disfavored sweeps. In
all likelihood, some of the sweeps initiated during
the Biden administration will focus on complianceissues specific to regulated funds.
*****
In this Alert we have discussed just a few of thepotential regulatory initiatives that might come topass if Mr. Gensler is confirmed as the next chairof the SEC. We are closely watching to see which
individuals end up filling out the SEC’s leadership
positions, especially in the Division of Investment
Management, and will continue to report on
potential developments in future Alerts.

interpretations with a conditional exemption fromthe asset coverage requirements under Sections
18 and 61 of the 1940 Act. Regulated funds canvoluntarily rely on the rule prior to the Compliance
Date, and must rely on the rule following theCompliance Date in order to enter into derivatives
and similar transactions without such transactions
being subject to the asset coverage requirements
under Sections 18 and 61 of the 1940 Act.
This Alert provides an overview of key attributes of
the rule. This article then revisits issues that wereraised in our prior Alert relating to the proposed ruleand examines the changes that were made to thefinal rule to address those concerns. For backgroundon existing interpretive guidance regarding the useof derivatives and similar transactions by regulated
funds, please see our prior Alert. For those who may
be wondering, the derivatives rule does fall within
the look-back period under the Congressional Review
Act that would allow the new Democratic-controlled
Congress to overturn the rule, but we do not expectthat will occur.
Overview of the Key Attributes of the Rule

SEC Overhauls the
Framework Governing
the Use of Derivatives byRegulated Funds
By Ryan Brizek, Debbie Sutter and Andy Madore

In a widely anticipated action that was years in
the making, the SEC adopted Rule 18f-4 under the1940 Act prior to the conclusion of former Chair Jay
Clayton’s tenure. The rule overhauls the regulatory
framework for the use of derivatives and similartransactions by regulated funds, which for purposesof the rule includes registered closed-end funds,
BDCs and registered open-end funds (including
mutual funds and ETFs but excluding money market
funds). Importantly, regulated funds can continue tofollow the current asset segregation approach wheninvesting in derivatives until the rule’s compliance
date of August 19, 2022 (the “Compliance Date”).
The rule will replace the current asset segregation
approach under which regulated funds enter into
derivatives and similar transactions based on
guidance in SEC Release 10666 and existing staff

In the adopting release, the SEC reiterated its
view that all derivatives and similar transactions
that create future payment obligations fall within
the functional meaning of the term “evidence ofindebtedness” and therefore involve the issuance ofa senior security for purposes of Section 18 of the1940 Act. Under the rule, a “derivatives transaction”
includes any swap, security-based swap, futurescontract, forward contract, option, any combinationof the foregoing, short sale borrowings, or any
similar instrument (such as to-be-announced
investments (“TBAs”) or dollar rolls, in eithercase with a maturity of more than 35 days). In
addition, a regulated fund may choose to treat
reverse repurchase agreements or similar financing
transactions as derivatives transactions for purposesof the rule (which is a change from the proposal,
which would have required funds to treat reverse
repurchase agreements as borrowings).

“

Under the rule, a “derivatives transaction”
includes any swap, security-based swap,
futures contract, forward contract, option,
any combination of the foregoing, short saleborrowings, or any similar instrument (such as
to-be-announced investments (“TBAs”) or dollar
rolls, in either case with a maturity of more than
35 days).

”6

The most significant attributes of the rule and related
requirements include:
1. Derivatives Risk Management Program.
All regulated funds that do not qualify as“Limited Derivatives Users” (discussed
below) must adopt and implement a writtenderivatives risk management program,which is administered by a derivatives
risk manager (“DRM”). The DRM will be
designated by the regulated fund’s board,
must have relevant experience regarding
the management of derivatives risk and may
not be a portfolio manager of the regulated
fund (or, if the DRM is a group, themajority of the group cannot be composedof portfolio managers). The program must
address the following elements, as detailed
in the rule: (1) risk identification andassessment; (2) risk guidelines that provide
for quantitative and measurable criteria;(3) stress testing to evaluate potential
losses to a Regulated Fund’s portfolio understress conditions; (4) backtesting of theVaR calculation model that the regulated
fund uses each business day; (5) internalreporting and escalation of certain
derivative matters to the fund’s portfolio
management and board; and (6) a periodic
review of the program, at least annually, toevaluate the program’s effectiveness.
2. VaR Limit on Fund Leverage Risk.
Regulated funds that are not Limited
Derivatives Users must comply witha relative VaR test based on either adesignated reference index or the regulated
fund’s securities portfolio (collectively, the“designated reference portfolio”), or, if the
DRM reasonably determines in accordancewith the rule that the relative VaR test is not
appropriate, an absolute VaR test based on
the value of the regulated fund’s net assets.
• A regulated fund must determine its
compliance with the applicable VaR testat least once each business day and mustcome back into compliance promptly
after a determination of non-compliance.
If a regulated fund is not in compliancewith the applicable VaR test within
five business days, there are additionalboard reporting requirements and arequirement to report confidentially to
the SEC on Form N-RN.
• Under the relative VaR test, a regulated
fund’s VaR must not exceed 200% of the

VaR of the regulated fund’s designatedreference portfolio. For closed-end
funds and BDCs that have outstanding
preferred stock, this limit is increased
to 250%.
• Under the absolute VaR test, a regulated
fund’s VaR cannot exceed 20% of thevalue of the regulated fund’s net assets.
For closed-end funds and BDCs thathave outstanding preferred stock, thislimit is increased to 25%.
• The VaR test must (i) take into accountand incorporate all significant,identifiable market risk factors
associated with a fund’s investments,(ii) use a 99% confidence level and atime horizon of 20 trading days and(iii) be based on at least three years ofhistorical data. When calculating the
99% confidence level, the SEC confirmedin the adopting release that a regulated
fund may rescale a calculation initiallyperformed at a 95% confidence level.
The changes to the VaR test and related
guidance in the release more closelyalign the rule’s VaR test with the UCITS
Guidelines familiar to global asset
managers, which were proven to be effective
during the market turbulence at the onset of
the COVID-19 pandemic.
3. Reverse Repurchase Agreements. A
regulated fund is permitted to treat reverse
repurchase agreements or similar financing
transactions as derivatives transactions
for purposes of the rule. Similar financing
transactions include tender offer bond(“TOB”) financings, the investment of
securities lending collateral in securities
and the purchase of a security on margin,
but do not include TBAs or the investment
of securities lending collateral in cash or
cash equivalents.
Alternatively, a regulated fund may choose
to treat a reverse repurchase agreement
or similar financing transaction as
indebtedness subject to the asset coverage
requirements of Section 18 of the 1940 Act.
A fund’s election will apply to all reverse
repurchase agreements or similar financing
transactions so that all such transactions
are subject to consistent treatment under
the rule.

7

4. Unfunded Commitment Agreements. A
regulated fund may enter into unfunded
commitment agreements if it reasonably
believes, at the time it enters into suchan agreement, that it will have sufficient
cash and cash equivalents to meet its
obligations with respect to all of its
unfunded commitment agreements, ineach case as they come due.4 In forming
the required reasonable belief, a fund may
take into account the issuance of debt
(e.g., borrowings under a credit facility).
This standard is similar to the one that the
SEC staff has been requesting registrants
adhere to in comment letters related toregistration statements for the past several
years. However, a regulated fund must take
into account its reasonable expectations
with respect to other obligations, and may
not take into account cash that may become
available from the sale or disposition of
any investment at a price that deviates
significantly from the market value of thoseinvestments, or from issuing additional
equity.
A regulated fund must document the basis
for its reasonable belief at the time it enters
into each unfunded commitment and must
maintain such record for at least five years
following the date of the agreement. For
some regulated funds, this may require achange to current recordkeeping practices.
Any regulated fund that historically has
not maintained such records will need todevelop compliance procedures to ensure it
is compliant with the conditions of the ruleby the Compliance Date.
5. Delayed Settlement Cycle Securities. The
rule provides a conditional exemption fromthe requirements of Sections 18 and 61 forregulated funds that invest in a security
with a delayed settlement cycle (including
when-issued and forward-settlingtransactions such as TBAs and dollar rolls),
provided that the fund intends to physicallysettle the transaction and the transaction
will settle within 35 days of its trade date.

annually thereafter, the DRM must provide
the regulated fund’s board with a written
report representing that the derivatives
risk management program is reasonably
designed to manage the regulated fund’sderivatives risks and related information
required by the rule. The DRM mustalso provide periodic written reports tothe board. The board is responsible fordesignating the DRM.
7. Limited Derivatives Users Exception.
Limited Derivatives Users are not required
to adopt a derivatives risk management
program, comply with the VaR limit on
fund leverage risk or comply with the board
oversight and reporting requirements.
To qualify as a Limited Derivatives User,a regulated fund’s derivatives exposure(as defined under the rule, which isgross notional exposure for most typesof derivatives) cannot exceed 10% of its
net assets, excluding certain currency orinterest rate derivatives used for hedging
purposes in accordance with specificrequirements set out in the rule. Limited
Derivatives Users are required, however, toadopt and implement written policies andprocedures reasonably designed to manage
the regulated fund’s derivatives risk. If a
regulated fund exceeds the 10% derivatives
exposure threshold and does not reduce
its exposure within five business days, theregulated fund’s adviser must provide awritten report to the fund’s board informing
it whether the adviser intends to reduce
the exposure promptly, but within no morethan 30 days, or put in place a derivatives
risk management program and comply with
the VaR-based limit on fund leverage risk assoon as reasonably practicable.

6. Board Oversight and Reporting. On or
before the implementation of the derivatives
risk management program, and at least
4.

Many industry leaders commented on the potentially problematic
treatment of unfunded commitments in the initial derivatives rule
proposal in 2015. In response to those comments, the reasonable belief
standard was included in the 2019 re-proposal and adopted in the final
rule. We suggested a similar standard in our 2016 comment letter to the
SEC on the initial proposal.
8

The rulemaking also included new recordkeeping
requirements; amended Form N-CEN, Form
N-PORT and Form N-LIQUID (renamed Form
N-RN) to enhance disclosures regarding the useof derivatives and compliance with the rule; andamended Rule 6c-11 under the 1940 Act to allow
leveraged and inverse ETFs to operate without theneed for exemptive relief. The SEC did not adopt the
proposed sales practice rules related to leveraged andinverse ETFs.
On the Compliance Date, current SEC interpretive
guidance in Release 10666 will be rescinded andstaff no-action letters and other guidance addressing
derivatives and other transactions covered by therule will be withdrawn.
Issues We Wanted Reconsidered and the Result in
the Final RuleAs we noted in our prior Alert on this topic, we
advocated for the changes set out in italics below,
which we thought would improve the rule. Many ofthese changes were incorporated into the final rule.
The DRM should be able to choose which VaR test tocomply with regardless of its ability to identify anappropriate “designated reference index.”
The final rule partially addresses this concern.
The proposed rule required regulated funds to use
the relative VaR test unless they were “unable toidentify” a designated reference index, which createduncertainty regarding the amount of diligence a
DRM was expected to undertake in considering
potential indices. While the final rule still states thatthe relative VaR test is the “default” test, a regulated
fund can use the absolute VaR test if the DRM
reasonably determines that a designated reference
portfolio would not provide an appropriate reference
portfolio for purposes of the relative VaR test, taking
into account the fund’s investments, investment
objectives and strategy.
The reasonableness standard in the final ruleprovides the DRM with much-needed flexibility
in being able to determine which VaR test would
be most appropriate for the regulated fund. This
standard also more clearly states what is expected of
the DRM in making this determination.
The proposed leverage limits should be increased to
a 200% relative VaR limit and a 20% absolute VaRlimit.
This suggested change was incorporated directly into
the final rule, and many in the industry provided asimilar suggestion. These limits are in line with the
UCITS Guidelines, which global asset managers haveoperated under for many years, including during
the current COVID-19 crisis. Such an approachallows global asset managers to streamline their risk
management programs in a manner that has proveneffective during the current market crisis and can be
useful in future market crises.
Related to VaR testing, we also suggested that the
final rule allow a DRM to choose a 95% confidence
level in order to obtain additional observations to
produce a more robust and stable measure of risk,
the results of which could then be rescaled to a 99%
confidence level equivalent. In the adopting release,
the SEC provides interpretive guidance confirmingthat the 99% confidence level required by the rule
may be calculated in this manner.
The “limited derivatives user” definition in the
proposed rule should be revised to modify the 10%
derivatives exposure limit to allow for currency andinterest rate hedging in addition to such limit.
This suggestion was incorporated into the final rule.
The proposed rule required that Limited Derivatives
Users fall into one of two categories: (1) those that
limit their overall use of derivatives to 10% of their
net assets with certain limited adjustments or(2) those that exclusively use derivatives for currency
hedging. At the urging of commenters, the final rule
permits regulated funds to exclude certain currency
and interest rate hedging transactions from the 10%threshold, essentially combining the two bases in
the proposed rule into one objective standard for
Limited Derivatives Users in the final rule.
Reverse repurchase agreements are not analogous
to bank borrowings and should not be subject to the
300% asset coverage requirement.
This proposed change was addressed in the final
rule. The rule gives regulated funds the choice indetermining if they want to treat reverse repurchaseagreements as borrowings or as derivatives
transactions. This approach provides a regulated
fund flexibility to choose an approach that is best
suited to the fund’s investment strategy and/or
operational needs, while still addressing the asset
sufficiency and leverage concerns in Section 18.
During the 18-month compliance period, regulated
funds should evaluate the two options describedabove and decide which is the best method for aparticular regulated fund to use going forward.
Regulated funds should consider that the election
will apply to all reverse repurchase agreements andsimilar financing transactions.

9General Reception of the Rule as Adopted

What’s Next

The final rule has generally been received positively,
particularly with respect to certain changes in the
final rule that address many of the concerns raised
during the comment process. Notwithstanding thesedevelopments, certain individuals at the SEC havepublicly raised concerns about the rule as adopted.
Most of these concerns relate to the omissionof proposed sales practice rules for leveraged
and inverse ETFs that are unrelated to the rule’s
substantive regulation of the use of derivatives andsimilar transactions by regulated funds and outside
the scope of this article.

The SEC has provided for an 18-month transition
period for regulated funds to comply with the ruleand related reporting requirements. Regulated
funds must be in compliance with the rule by August19, 2022.

The New Fund-of-Funds
Rule: The Good, the Badand the Ugly for Closed-End
Funds and BDCs
By Rajib Chanda, Steven Grigoriou and Patrick Quinn

Specifically, Commissioner Lee expresseddisappointment that the final rule did not include
the sales practice rules that were designed to address
investor harms arising from unsuitable purchases
and sales of leveraged and inverse ETFs, which
she says is to the detriment of retail investors.
Commissioner Crenshaw also echoed these concerns
related to the sales practice rules, and further statedthat the final rule “failed to address the significant
risk that derivatives can pose to funds and investors.”Commissioner Crenshaw cited to evidence suggestingthat retail investors buy leveraged and inverse fundproducts without truly understanding their features,
which can lead to significant losses, and believes
the rule as adopted does nothing to address thisproblem.
While the concerns raised by Commissioners Lee
and Crenshaw could be addressed by the SEC insubsequent rulemaking or interpretive guidance, we
believe the SEC is unlikely to revisit the final set ofrules that were adopted. Given the SEC’s current setof policy priorities, however, and the disappointment
expressed by the Democratic Commissioners
regarding the absence of a sales practice rule, wewould not be surprised if the SEC chose to make theadoption of a sales practice rule a priority during the
new administration’s term.

On October 7, 2020, the SEC adopted Rule 12d1-4
and related amendments, which together will replace
the current regulatory patchwork of registered fundof-funds no-action letters, statutory interpretations
and exemptive orders with a rules-based regulatory
framework. As discussed in a prior Alert, Rule12d1-4 was proposed on December 19, 2018 and was
subject to substantial industry comment. The final
Rule has been fairly widely praised by the industry;
however, we think it is more of a mixed bag and hassome significant potential negative effects for the
democratization of private markets investments.
In broad strokes, Rule 12d1-4 will permit a registeredinvestment company or BDC (an “Acquiring Fund”)
to acquire the securities of any other registeredinvestment company or BDC (an “Acquired Fund”)
in excess of the so-called “3/5/10” limits that form
the basis of the anti-pyramiding provisions of the1940 Act, subject to certain limitations on control
and voting.5 Rule 12d1-4 also would require thatan Acquiring Fund relying on the Rule, and its
investment adviser, make certain evaluations
and findings.
The SEC also will rescind, with limited exceptions,current exemptive orders for fund-of-funds
arrangements, as well as Rule 12d1-2, which expands
the types of instruments that open-end funds andunit investment trusts that primarily invest in funds
within the same fund group can invest in whenrelying on Section 12(d)(1)(G) of the 1940 Act.6
5.

Specifically, Section 12(d)(1) of the 1940 Act prohibits an Acquiring
Fund from acquiring: (i) more than 3% of the voting stock of an
Acquired Fund; (ii) securities issued by an Acquired Fund having an
aggregate value in excess of 5% of the value of the total assets of theAcquiring Fund; or (iii) securities issued by Acquired Funds having an
aggregate value in excess of 10% of the value of the total assets of theAcquiring Fund.

6.

In order to continue to invest in the instruments currently permitted byRule 12d1-2 after the effective date of its rescission, such funds will haveto rely on Rule 12d1-4.
10

In this Alert we discuss certain potential
implications of the new rule for closed-end funds
and BDCs. Rule 12d1-4 and related amendments toRule 12d1-1 became effective as of January 19, 2021.
The rescission of Rule 12d1-2 and current fund-offunds exemptive orders will be effective on January
19, 2022. Funds must comply with related changes
to Form N-CEN (requiring funds to report whether
they relied on Rule 12d1-4 or the statutory exception
in Section 12(d)(1)(G) of the 1940 Act during theapplicable reporting period) by January 22, 2022.
The Good
Rule 12d1-4 allows for the creation of new products
Because Rule 12d1-4 would permit any type ofAcquiring Fund to exceed the 1940 Act’s “3/5/10”
limits, closed-end funds and BDCs may now exceed
the “3/5/10” limits without exemptive relief, which
was previously available only to open-end funds andunit investment trusts relying on Rule 12d1-2. By
extending fund-of-funds relief to closed-end funds
and BDCs, we believe that Rule 12d1-4 could allow
for new categories of closed-end products that can
provide investors with the benefit of diversified
access to other funds. For example, closed-end
fund-of-funds could pursue strategies comprised ofBDCs, real estate or other closed-end funds, whichwere previously limited under prior rulemaking or
exemptive relief. For retail investors, the benefit ofthese structures could be to provide indirect accessto funds (or share classes) that an individual investor
might not be able to purchase on their own due toinvestment minimums or investor qualifications“

By extending fund-of-funds relief to closed-end
funds and BDCs, we believe that Rule 12d1-4 could
allow for new categories of closed-end productsthat can provide investors with the benefit ofdiversified access to other funds.

”(e.g., a closed-end fund that charges a performancefee is limited to “qualified clients” with $2.1 million
in net worth or $1 million in assets managed by
the closed-end fund’s adviser). Due to regulatory
requirements prohibiting BDCs from investing morethan 30% of their assets in other funds, BDC’s will
still be practically limited in their ability to takeadvantage of some of the fund-of-fund benefits
provided by Rule 12d1-4 as Acquiring Funds. While
BDCs may face limits in their ability to be Acquiring
Funds, BDCs may see increased interest as Acquired
Funds from funds-of-funds pursuing a BDC-likeinvestment strategy (especially if the SEC addresses
the AFFE issue that artificially curbs the regulated

funds’ interest in investing in BDCs as discussed
earlier in this Alert).
Rule 12d1-4 will also allow fund-of-funds
arrangements when: (i) the Acquiring Fund andAcquired Fund hold themselves out to investors
as being part of the same group of investmentcompanies; or (ii) the Acquired Fund’s investment
adviser is affiliated through control with theAcquiring Fund’s sub-adviser. This provides an
exemption from Section 17 of the 1940 Act, which
otherwise would not permit an Acquiring Fund to“seed” affiliated registered funds and BDCs. Funds
that comply with the conditions in Rule 12d1-4 may
rely upon this exemption from Section 17(a) even if
they are not relying upon the Rule for an exemption
from the “3/5/10” limits. However, we note that theRule 17d-1 prohibition on joint transactions could be
implicated if one regulated fund seeds an affiliatedregulated fund, despite the Section 17(a) exemption.
Depending on the facts of a particular arrangement,
it is possible that the use of an Acquiring Fund’s
assets to seed an affiliated Acquired Fund could
be viewed as impermissibly disadvantaging theAcquiring Fund for the benefit of the Acquired Fund(or its adviser).
Rule 12d1-4 could impact certain closed-end fundactivists that utilize registered funds
The SEC responded to industry comments regarding
certain activism risks that could arise under the
initial proposal for Rule 12d1-4. The final versionof the Rule requires an Acquiring Fund that
does not share the same investment adviser asan Acquired Fund to enter into a fund-of-funds
investment agreement, similar to participationagreements under current fund-of-funds exemptive
orders. In practice, most participation agreements
concern ETFs, which do not have the same activist
concerns as listed closed-end funds and BDCs.
The requirement for an Acquiring Fund to enter
into an investment agreement under Rule 12d1-4
provides registered funds and BDCs with a shield
against activists who utilize registered funds, as anactivist fund could not acquire more than 3% of an
Acquired Fund without entering into an investment
agreement. As a result, managers of closed-end
funds and BDCs can prevent a true activist
from relying on the rule to invest in theirfunds by refusing to enter into an investment
agreement with the activist.
When a potential Acquired Fund determines to allow
an investor to rely on the rule, the Rule lays out
certain terms that an investment agreement must
contain. However, there is no reason an agreement
could not contain additional terms. Potential terms
11for an Acquired Fund that wants to accept the capitalinfusion offered by the potential Acquiring Fund,but is nonetheless concerned about potential future
activist actions, to consider when approached by an
Acquiring Fund include:• Requiring the Acquiring Fund tovote its shares in accordance withboard recommendations;• Agreeing not to initiate any merger or
acquisition activity relating to the Acquired
Fund or to propose or vote for other activist
ventures (e.g., tender offers, open-ending aclosed-end fund);• Agreeing not to make any public statements
related to the Acquired Fund;• Making the terms of the investment
agreement applicable to affiliates/relatedparties of the Acquiring Fund;• Requiring the Acquiring Fund to abide by
Rule 144A trading restrictions as if it werean affiliate for purposes of the Securities
Act of 1933; and• Ensuring obligations apply to the Acquiring
Fund so long as it is invested in Acquired
Fund (even if the Acquiring Fund’s position
drops below 3% of the Acquired Fund’s
shares or the investment agreement
is terminated).
These terms are not typical of current participationagreements and would be appropriate for apotentially hostile or activist Acquiring Fund. It
should be noted that a fund-of-funds investment
agreement can be terminated by the Acquired
Fund without penalty. Upon termination of a fundof-funds investment agreement, the Acquiring
Fund would not be required to divest its interest;
accordingly, an Acquired Fund may want to consider
which provisions will survive termination. Moreover,upon termination of a fund-of-funds investment
agreement, the Acquiring Fund generally would
not be able to rely on an exemption from theSection 12(d)(1)(A) limitations and would therefore
be prohibited from purchasing additional sharesof the Acquired Fund. Thus, even if an Acquired
Fund’s fund-of-funds investment agreements do notcontain shareholder friendly covenants, the power to“freeze” unilaterally an Acquiring Fund’s ownershipof Acquired Fund shares can provide a modicum ofprotection if circumstances with a friendly Acquiring
Fund should change.

Even if a closed-end fund or BDC that is an Acquired
Fund agrees to enter into an investment agreementwith a prospective Acquiring Fund without
protective terms, the “advisory group” of an activist
registered fund will be limited to owning no morethan 10% of the Acquired Fund’s assets. Under Rule12d1-4, an “advisory group” that owns greater than
10% of an Acquired Fund’s assets would be required
to “mirror vote” all of its shares (i.e., in the same
proportion as other shares cast), thereby eliminating
the voting power of the advisory group. Consistent
with prior exemptive orders, an Acquiring Fund must
aggregate all securities owned by its “advisory group”
in assessing both the control and voting thresholds,
which includes an Acquiring Fund’s investment
adviser (or sub-adviser) or depositor, and any person
controlling, controlled by, or under common control
with such investment adviser (or sub-adviser) or
depositor. An Acquired Fund’s advisory group
includes private funds and foreign funds controlled
by or under common control with the investment
adviser. Rule 12d1-4 also prohibits an Acquiring
Fund and its advisory group from controlling an
Acquired Fund within the meaning of the 1940 Act,
which mean the advisory group cannot acquire morethan 25% of the Acquired Fund’s voting securities. In
circumstances where Acquiring Funds are the only
shareholders of an Acquired Fund, pass-throughvoting may be used. An Acquiring Fund that is partof the same fund group as the Acquired Fund and an
Acquiring Fund that has a sub-adviser that acts asadviser to the Acquired Fund will not be subject tothe control and voting requirements.
Use in friendly fund combinations
In the case of a friendly merger of registeredinvestment funds or BDCs, Rule 12d1-4 would permit
the Acquiring Fund to purchase greater than 3% of
the target fund’s shares to help obtain the requisite
shareholder votes for the merger, such as transaction
approvals and/or advisory agreement approvals.
However, any “toehold” investment would be subject
to Schedule 13D/G and Section 16 filings under the
Securities and Exchange Act of 1934, as amended, as
well as anti-trust filings under the Hart-Scott-Rodino
Antitrust Improvements Act and state anti-takeover
statutes such as §203 of the Delaware General
Corporation Law or Maryland Commercial Law§3-603, as applicable.
The BadFailure to extend Rule 12d1-4 relief to private funds
Private funds will continue to be limited to owning
no more than 3% of any single registered fund.
Several industry commenters suggested that12

this limitation be softened with regard to private
funds.7 We were disappointed that the SEC did not
permit private funds to qualify as Acquiring Funds
under Rule 12d1-4, although the adopting releaseencourages private funds to apply for exemptive
orders in order to rely upon similar relief. Expressing
an openness to granting private funds exemptive
relief on this point is a positive development, but is
not necessarily a good use of Staff resources, given
the unlikelihood that there will be significant, orany, differences in the framework under which a
private fund may be an Acquiring Fund under theRule. Given that an Acquiring Fund must enter into
an investment agreement with an Acquired Fundin order to rely on the Rule, we believe that a more
efficient approach would have been to include private
fund relief in this Rule and free up Staff resources forother matters.
BDC AFFE relief not addressed
Despite strong industry support for the proposing
release’s request for comment on potentiallyexcluding BDCs from the acquired funds’ fees andexpenses (“AFFE”) disclosure requirements, the SEC
did not adopt any AFFE changes in the final rule.
Under Form N-1A and Form N-2, a registered fundor BDC must include in its fees and expense tablea separate line item disclosing fees and expenses
in connection with investments in other funds,“

We were disappointed that the SEC did not
permit private funds to qualify as Acquiring
Funds under Rule 12d1-4, although the adopting
release encourages private funds to apply for
exemptive orders in order to rely upon similar
relief.

from the BDC sector. As part of the Rule 12d1-4
proposing release, the SEC solicited comment on
fees and expenses, including with respect to AFFE
disclosure and whether to exempt BDCs in whole orin part, and received substantive feedback requesting
relief. Although the SEC has proposed limited relief
to the AFFE disclosure requirements,8 we believethat Rule 12d1-4 provided a prime opportunity for
the SEC to respond to a substantive need of BDCs.
Activist protections could be more meaningful
We believe that Rule 12d1-4 could have included
more meaningful activist protections for listed
closed-end funds/BDCs, in line with the Staff’s
recent rescission of the Boulder no-action letter andStaff’s statement on control share statutes.9 Proposed
Rule 12d1-4 required mirror voting when an advisorygroup (which includes private and foreign funds)
owned greater than 3% of a closed-end fund’s voting
securities, whereas the final rule only requires
mirror voting at a 10% ownership threshold. Further,
the voting restrictions under Rule 12d1-4 only apply
to an advisory group that includes a registered fundor BDC relying on Rule 12d1-4. Advisory groups witha registered fund or BDC owning less than 3% of an
Acquired Fund or that only include private funds
and foreign funds could still in the aggregate own
greater than 3% of a registered fund’s by splitting
each fund’s individual allocations to less than 3% of
the registered fund’s securities. We believe that the
SEC missed an opportunity to institute meaningfulprotections to protect the interests of shareholdersof listed closed-end funds and BDCs in light of themultiple recent activist actions in the industry andthe growing threat of future activist actions.10”

which is also incorporated into the registered fund’s
total operating expense ratio. The relatively higher
operational costs of BDC investment operations
typically result in higher AFFEs for funds acquiring
BDCs and therefore, higher total expense ratios foran Acquiring Fund. In 2014, in response to industry
concerns regarding the impact of BDC AFFEs on
total expense ratios, certain index providers removed
BDCs as index constituents. In turn, mutual funds
and ETFs that track indices were effectively barredfrom investing in BDCs, resulting in lower market
demand for BDCs and corresponding calls for action
7.

See Comment Letter of Parallax Volatility Advisers (May 1, 2019)(recommending that the SEC exclude private funds from the limits in
Section 12(d)(1) with respect to acquiring ETFs, subject to appropriate
conditions); Comment Letter of TPG Specialty Lending, Inc. (May 2,2019) (proposing that the SEC increase the Section 12(d)(1)(A)(i) limit
for private funds from 3% to 10%).

8.

See Tailored Shareholder Reports, Treatment of Annual Prospectus
Updates for Existing Investors, and Improved Fee and Risk Disclosurefor Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements, 1940 Act Release No. 33963(Aug. 5, 2020). As proposed, funds that invest 10% or less of total assets
in Acquired Funds would be permitted to disclose AFFE information ina footnote to the fees and expenses table instead of a separate line item.

9.

See Commission Division of Investment Management Staff Statement
on Control Share Acquisition Statutes (May 27, 2020) and Boulder
Total Return Fund, SEC No-Action Letter, Nov. 15, 2010 (withdrawn).

10. See, e.g., Comment Letter of Advent Capital Management, LLC (May1, 2019) (encouraging the SEC to state in the Rule 12d1-4 adopting
release that it would look through to underlying private fund advisorygroup holdings when determining Rule 12d1-4 compliance, pursuant
to Section 48(a) of the 1940 Act). See also Comment Letter of the AssetManagement Group of the Securities Industry and Financial Markets
Association (May 2, 2019) (noting that activist firms have “taken
advantage of an inadequate statutory framework” and requesting that
the SEC make private fund investments in closed-end funds and BDCs
subject to the same restrictions as in Section 12(d)(1)(C)).
13

The Ugly
Negative impact on retailization
Rule 12d1-4 will generally prohibit three-tier fund-offunds structures by imposing certain limitations on
the ability of a fund that chooses to be an Acquired
Fund to invest in other funds, subject to limited
enumerated exceptions that are designed to capture
circumstances that do not raise the fee layering andundue influence concerns underlying Section 12(d)(1)of the 1940 Act. Rule 12d1-4 only allows an Acquired
Fund to invest up to 10% of its total assets in otherregistered funds and BDCs and private funds,
without regard to the purpose of the investment ortypes of underlying funds.
We believe that Rule 12d1-4 offered the SEC an
opportunity to continue the regulatory march
towards the democratization of private investments.
The practical impact of the three-tier fund-of-funds
limit is to cut off at the knees a fast-developing
product that is designed to provide retail investors
democratized access to private markets—registeredfunds of private funds. These products have been
touted for use specifically for target date funds,
which are funds of funds that provide diversified
pools for investors, often in retirement plans. As
an example of private market democratization, theDepartment of Labor recently provided ERISA plan
sponsors with a road map to properly incorporate
private equity investments in defined contributionplans, such as target date funds.11 However, thesefunds of private funds will be prohibited from being
Acquired Funds under the new construct. Thus,
11. U.S. Department of Labor Information Letter from Louis J. Campagna
to Jon W. Breyfogle (June 3, 2020).

target date funds that would like to invest in suchfunds will be limited to owning no more than 3% of
any such fund. Given the relative size of the target
date fund universe (very large) and the fund ofprivate funds universe (nascent), this inclusion of theprivate funds limitation in the definition of Acquired
Funds will be a significant headwind for the growthof this industry, a sentiment shared by other industry
participants.12
Beyond the unfortunate impact on funds of private
funds, there are other funds that may be caught
in the cross-fire of this particular provision. For
example, certain entities rely on Section 3(c)(1) or
3(c)(7) and are thus private funds for purposes of thelimitation on the investments of Acquired Funds,
but are not private investment funds in the ordinary
sense in which one thinks of private funds, e.g.,
certain securitization vehicles such as CLOs. Debt
funds with fund-of-fund investors relying on Rule12d1-4 may inadvertently be considered a “middle
tier” fund in a three-tier fund structure if they invest
substantially in CLOs and other structured financevehicles that rely on Section 3(c)(1) or 3(c)(7). Thismay mean, for example, that certain BDCs will beineligible Acquired Funds, blunting some of thepositive impact the Rule could have had.
*****
While we believe that Rule 12d1-4 is beneficial to
the registered fund industry in that it provides aconsistent framework for all market participants,
we believe there that there are several issues that wehope will be addressed in further SEC or Staff action.
12. See, e.g., Comment Letter of Fidelity Fixed Income and Asset Allocation
Funds (May 2, 2019); Comment Letter of Nuveen, LLC (May 2, 2019);
Comment Letter of Federal Regulation of Securities Committee of theBusiness Law Section of the American Bar Association (June 11, 2019).

14

M&A Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Barings BDC, Inc., a publicly traded
BDC.

MVC Capital, Inc., a publicly traded
BDC.

MVC Capital stockholders received 0.94024
Barings BDC shares for each MVC Capitalshare and Barings LLC paid $7 million
directly to MVC Capital stockholders.
Barings BDC’s adviser also entered into a
credit support agreement with Barings BDC,
for the benefit of the combined company, toprotect against net cumulative unrealized
and realized losses of up to $23 million on
the acquired MVC investment portfolio overthe next 10 years. Barings BDC will provide
up to $15 million in secondary-market
support via accretive share repurchases overa 12-month period in the event the combined
company’s shares trade below a specific levelof NAV per share following the completionof the first quarterly period ended after the
consummation of the transaction.

Blackstone, an asset manager withapproximately $584 billion in AUM.

DCI, an asset management firm withapproximately $7.5 billion in AUM.

Acquisition in which DCI will become part ofBlackstone Credit.
(terms not disclosed)

CC Capital Partners, a private
investment firm and Motive
Partners, a private equity firm.

Wilshire Associates, an investment
and advisory firm with more than $1
trillion in assets under advisement
and $73 billion in AUM.

Acquisition.
(terms not disclosed)

FS KKR Capital Corp., a publicly
traded BDC.

FS KKR Capital Corp. II, a publicly
traded BDC.

NAV-for-NAV merger. In connection withthe merger, the board of FSK approved
an amended advisory agreement for the
combined company that will permanently
reduce its income incentive fee to 17.5%
and the look back provision in advisory
agreement will be removed. At the closing of
the merger, the adviser has agreed to waive$90 million of incentive fees spread evenly
over the first six quarters following theclosing.

Macquarie Asset Management,
an asset manager with approximately$554.9 billion in AUM.

Waddell & Reed Financial, Inc.,an asset manager with approximately$68 billion in AUM.

Acquisition for $1.7 billion, with Macquarie
to sell Waddell & Reed’s wealth managementbusiness to LPL Financial Holdings
Inc. for $300 million upon closing of thetransaction.

Morgan Stanley, a financial services
firm that will have approximately $1.2
trillion in AUM and more than $5
billion following the transaction.

Eaton Vance Corp., an asset
management firm that has
approximately $507.4 billion inconsolidated AUM.

Acquisition for an equity value ofapproximately $7 billion.
(further terms not disclosed)

15

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Mount Logan Capital Inc., anasset manager; and Sierra Crest
Investment Management LLC, a
RIA with approximately $4.5 billion in
AUM.

Resource America, Inc., anasset management company withapproximately $4.3 billion in AUM.

Acquisition of certain assets. Upon closing
Sierra Crest will become the investment
advisor of Resource’s closed-end intervalfund, Resource Credit Income Fund.
(further terms not disclosed)

North Square Investments, LLC,
an investment management firm.

Stadion Money Management,
LLC, an investment management
firm with approximately $2.79 billion
in AUM.

Acquisition of mutual funds Stadion Tactical
Growth, Tactical Defensive and Triology
Alternative Return.
(terms not disclosed)

Portman Ridge FinanceCorporation, a publicly tradedbusiness development company.

Harvest Capital Credit
Corporation, a businessdevelopment company.

NAV-for-NAV merger, and Sierra Crest
Investment Management LLC, theinvestment adviser to Portman Ridge,
will pay $2.15 million directly to HCAP
stockholders.

Sun Life Financial Inc., a financial
services firm that has $1,122 billion in
AUM.

Crescent Capital Group LP, acredit investment manager withapproximately $28 billion in AUM.

Acquisition of 51% interest, with an upfront
payment of $276 million and a futurecontinent payment of $62 million based on
certain milestones. The transaction has aput/call option that will allow the transfer ofremaining interests approximately five years
from closing.
(further terms not disclosed)

Victory Capital Holdings, Inc.,an asset management firm withapproximately $132.7 billion in AUM

THB Asset Management, an asset
management firm with approximately$435 million in equity assets.

Acquisition.
(terms not disclosed)

16

3rd Quarter 2020
Listed Closed-End Fund Initial Public Offerings
Aberdeen Standard Global Infrastructure Income Fund
Structure:

Non-diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Fund’s investment objective is to seek to provide a high level of total return with an emphasis on
current income. Under normal circumstances, at least 80% of the Fund’s net assets (plus the amount ofany borrowings for investment purposes) will be invested in U.S. and non-U.S. infrastructure-related
issuers. The Fund considers an issuer to be infrastructure-related if (i) at least 50% of the issuer’s
assets consist of infrastructure assets or (ii) at least 50% of the issuer’s gross income or net profits
are attributable to or derived, directly or indirectly, from the ownership, management, construction,
development, operation, utilization or financing of infrastructure assets.

Investment Adviser:

Aberdeen Standard Investments Inc.

Sub-Adviser:

Aberdeen Asset Managers Limited

Lead Underwriters:

UBS Securities LLC, Wells Fargo Securities, LLC, RBC Capital Markets, LLC and Oppenheimer & Co. Inc.

Nuveen Dynamic Municipal Opportunities Fund
Structure:

Diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Fund’s investment objective is to seek total return through income exempt from regular federal
income taxes and capital appreciation. The Fund seeks to achieve its investment objective by investing,under normal circumstances, at least 80% of its assets in municipal securities, the interest on whichis exempt from regular U.S. federal income tax. The Fund’s portfolio will be actively managed toinvest across the entire municipal securities market, with the ability to allocate opportunistically andwithout limit to municipal securities of any credit quality (including below investment grade municipal
securities) and maturity.

Investment Adviser:

Nuveen Fund Advisors, LLC

Sub-Adviser:

Nuveen Asset Management, LLC

Lead Underwriters:

Morgan Stanley & Co. LLC, BofA Securities, Inc., UBS Securities LLC and Wells Fargo Securities, LLC

17

3rd Quarter 2020 Listed Closed-End Fund
Initial Public Offerings (continued)
BlackRock Capital Allocation Trust
Structure:

Non-diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Trust’s investment objectives are to provide total return and income through a combination ofcurrent income, current gains and long-term capital appreciation. The Trust will invest in a portfolio of
equity and debt securities. Generally, the Trust’s portfolio will include both equity and debt securities. At
any given time, however, the Trust may emphasize either debt securities or equity securities. In addition,
the Trust may invest without limit in “junk bonds,” corporate loans and distressed securities.

Investment Adviser:

BlackRock Advisors, LLC

Lead Underwriters:

BofA Securities, Inc., Morgan Stanley & Co. LLC, UBS Securities LLC, Wells Fargo Securities, LLC andAmeriprise Financial Services, LLC

4th Quarter 2020
Listed Closed-End Fund Initial Public Offerings
Cohen & Steers Tax-Advantaged Preferred Securities and Income Fund
Structure:

Non-diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Fund’s primary investment objective is high current income. The Fund’s secondary investment
objective is capital appreciation. The Fund seeks to achieve its investment objectives by investing atleast 80% of its managed assets (i.e., net assets plus assets obtained through leverage) in a portfolio
of preferred and other income securities issued by U.S. and non-U.S. companies, which may be either
exchange-traded or available over-the-counter. In pursuing its investment objectives, the Fund seeks toachieve favorable after-tax returns for its shareholders by seeking to minimize the U.S. federal income
tax consequences on income generated by the Fund.

Investment Adviser:

Cohen & Steers Capital Management, Inc.

Lead Underwriters:

Morgan Stanley & Co. LLC, BofA Securities, Inc., RBC Capital Markets, LLC, Stifel, Nicolaus & Company,
Incorporated and Oppenheimer & Co. Inc.

18

4th Quarter 2020 Listed Closed-End Fund
Initial Public Offerings (continued)
PGIM Short Duration High Yield Opportunities Fund
Structure:

Diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Fund’s investment objective is to provide total return, through a combination of current income
and capital appreciation. The Fund seeks to achieve its objective by investing primarily in a diversified
portfolio of high yield fixed income instruments that are rated below investment grade, or consideredby the sub-adviser to be of comparable quality. Under normal market conditions and after the initialinvestment period following this offering, at least 80% of the Fund’s investable assets will be invested ina diversified portfolio of high yield fixed income instruments that are rated below investment grade withvarying maturities and other investments (including derivatives) with similar economic characteristics.
High yield fixed income instruments that are rated below investment grade (commonly referred to as“junk bonds”) are regarded as having predominantly speculative characteristics with respect to theissuer’s capacity to pay interest and repay principal.

Investment Adviser:

PGIM Investments

Sub-Adviser:

PGIM, Inc.

Lead Underwriters:

Morgan Stanley & Co. LLC, Wells Fargo Securities, LLC, RBC Capital Markets, LLC, Stifel, Nicolaus &Company, Incorporated and Oppenheimer & Co. Inc.

19

Editors and Contributors

David W. Blass
Partner+1-202-636-5863
david.blass@stblaw.com

Ryan Brizek
Partner+1-202-636-5806
ryan.brizek@stblaw.com

Rajib Chanda
Partner+1-202-636-5543
rajib.chanda@stblaw.com

Benjamin Wells
Partner+1-212-455-2516
bwells@stblaw.com

Allison Scher Bernbach
Senior Counsel+1-212-455-3833
allison.bernbach@stblaw.com

Steven Grigoriou
Counsel+1-202-636-5592
steven.grigoriou@stblaw.com

Christopher P. Healey
Counsel+1-202-636-5879
christopher.healey@stblaw.com

Manny M. Halberstam
Associate+1-212-455-2388
manny.halberstam@stblaw.com

T. Andrew Madore
Associate+1-202-636-5887
andy.madore@stblaw.com

Katherine O’Neil
Associate+1-202-636-5840
kate.oneil@stblaw.com

Patrick Quinn
Associate+1-212-455-2483
patrick.quinn@stblaw.com

Debra Wong Sutter
Associate+1-202-636-5508
debra.sutter@stblaw.com

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who
authored it are rendering legal or other professional advice or opinions on specific facts or matters, nor does the
distribution of this publication to any person constitute the establishment of an attorney-client relationship. Simpson
Thacher & Bartlett LLP assumes no liability in connection with the use of this publication. Please contact yourrelationship partner if we can be of assistance regarding these important developments. The names and office locationsof all of our partners, as well as our recent memoranda, can be obtained from our website, www.simpsonthacher.com.
20SimpsonThacherWorldwide

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21