Registered Funds Alert

January 2019

Table of Contents
Looking Ahead to 20192

Our thoughts on the state of the industry,including recent trends in productdevelopment, fee structures and M&A
activity.
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SEC Set to Explore Opening
Investments in Private Companies
to Retail Investors

5

Commentary on how Main Street
investors can get more exposure to private
investments.
Click here for more

Rationale of Recent No-Action
7
Letter, if Extended to Other Areas,
Could Go a Long Way Toward
Reducing Unnecessary Burdens on
Fund Boards
A recent SEC no-action letter signals
willingness to reduce the burden on fundboards, allowing them to focus on their coreoversight function.
Click here for more

The Proposed Fund of Funds
Rule—A Good First Step that
Merits Further Consideration

10

Commentary on the SEC’s proposed fundof funds rule, including potentially adding
private funds and protections for closedend funds and BDCs acquired by otherfunds.

The latest edition of Simpson Thacher’s Registered Funds Alert

Click here for morerelease exploring options for retail investors to have greater access

Notable Transactions: Q3/Q4 201814

A list of notable transactions that occurredin the fourth quarter of 2018, including M&A
transactions and closed-end fund IPOs.
Click here for more
Simpson Thacher & Bartlett LLP

discusses observations, trends and predictions for the year ahead,
including: the state of the industry; a highly anticipated concept
to private company investments; the potential ability of a recent
SEC no-action letter to spark reforms regarding the increasingly
heavy burdens placed on fund boards; and suggested improvements
to the SEC’s recent fund of funds rule proposal.

Looking Ahead to 2019
Seismic changes in investor preferences andregulatory requirements are reshaping the landscapeof the registered funds space. Potentially disruptive
technologies loom on the horizon, and fee pressure
and margin compression continue to affect all partsof the industry with no signs of abating. As investors
wonder if the 10-year bull market will finally come toan end, investment managers will have to continue
to innovate to attract and retain investors in 2019.
In these challenges, however, we see some of theclearest opportunities for distinction and growthfrom managers and areas where regulators cantake helpful actions. In this Alert, we explore thestate of the industry as we enter 2019 and discuss
what trends and themes we expect and hope to see
throughout this year.

State of the Industry
The expectations, sophistication and cost-sensitivityof retail investors are all in flux. Investors’
willingness to pay fees for market-matching
performance has plummeted, as the historic bull
market run and rise of exchange-traded funds(“ETFs”) has brought low-cost index investing fully
to the forefront of retail investing. Of the top 20
registered funds by net inflows in 2018, 13 of themwere ETFs, and index funds generally dominate
the list.
At the same time they are pursuing lower-cost
strategies, investors are expecting more for theirmoney. Notwithstanding the immense fee pressure
on the industry, customers are demanding elegant
interactions with their portfolios through online
portals and smartphone applications and even smart
speakers, through which they expect professional
investment advice delivered directly to themon demand and in the format that best fits theirlifestyles. Investors are now also more interested

than ever whether their investment portfolios alignwith their personal beliefs.
All of this is set against a regulatory backdrop thathas seen the SEC undertake significant regulatory
reforms that the industry must adopt midstride.
How the industry will continue to respond to thechanging landscape will largely define the major
trends of 2019, and we think there are three main
strategies that will be deployed: innovating ways tosell new products, reimagining fee structures, andexpansion and consolidation through merger andacquisition activity.
Innovation in Customer Interaction and Products
For investment management firms, reducing frictionin the customer experience is a significant partof attracting and retaining new clients. From themoment of account creation through managing tax
documentation and other materials, keeping andretaining customers requires adjusting to changing
consumer preferences. Millennials, for instance,
overwhelmingly prefer to interact with theirinvestment management platform through intuitive
smartphone applications and web portals. Platforms
that do not provide a smooth customer experiencestruggle to attract younger clients, while those thatexcel in those areas are booming.
Artificial intelligence (“AI”) has been discussed
for many years as a direct investment tool, but thetechnology may also have promising applications inenhancing the customer experience. Sophisticatedinvestors have used technology that is looselyreferred to as AI to interpret massive amounts ofdata and follow simple algorithmic rules for decades.
Historically, its primary use has been geared
towards improving investment selection, but now
AI is being used to augment the way investment
advisers interact with their clients. At least one
firm has begun integrating an AI-based customer
service enhancement initiative into its platform. The
technology works by evaluating communications
with clients by analyzing e-mails, text messages
and other notes. It then applies machine learning
to evaluate other ideas that can be suggested to theclient with the aim of improving the overall investing
experience.
Similarly, investors may soon be able to get
advice from Siri or Alexa. At least one U.S.-based
investment management firm is working towards
offering investment advice through digital voiceassistants (“DVA”). These DVA-based services may
advise clients on the amount they need to invest
or suggest portfolio allocations based on targets
2

set by the client. As the ultimate goal of most DVA
technologies is to seamlessly replicate interactingwith a personal assistant, the regulatory issues
regarding licensing and disclosure are complex.
As more of these potentially disruptive technologies
come to market, it is likely that regulators willattempt, but struggle, to keep up. There are several
potential regulatory issues with the integration oftechnology into providing advice, and the SEC andother regulators may deem some problematic whileothers permissible. This could lead to regulatory
authorities effectively dictating the winners andlosers in the race to bring new products and services
to market, potentially increasing the entrepreneurial
risk of such developments. Industry participants
will have to weigh the advantages of being cuttingedge with the uncertainty of looming regulation.
Historically, such uncertainty has tended to allow
smaller, more nimble advisers to experimentand push the envelope first, and those that do so
successfully become prime targets for acquisition aslarger investment managers will often acquire firmsthat have pioneered new technologies. We expectthat we will see a marked increase in acquisition
activity targeted towards tech-forward investment
management firms that have developed scalable
advisory tools and technologies for enhancing
customer experience.

In addition to improving ways of reaching customers,
investment managers will also be looking to respondto shifting customer demands through new productofferings. Technology has ushered in the rise oftransparency, and it appears to be here to stay. Retailinvestors want to know what they are investingin and now have the tools to find out in a few
keystrokes. It is no surprise then that the practice ofintegrating environmental, social and governance(“ESG”) factors into investing has exploded.
ESG factors cover a wide spectrum of issues thattraditionally are not part of financial analysis. Thismight include a corporation’s response to climatechange, its stance on water management, metrics
regarding how effective their health and safety
policies are, how sustainable their supply chain is,
how they treat their workers, etc. Millennials seemto be more socially aware than prior generations,or at least more interested in congruity between
their values and their actions. We expect investment
managers that provide options allowing investors
to express their own values and to ensure that theirsavings and investments reflect their preferences(especially if it can be done without compromisingon returns) will be in a prime position to capture andretain business in 2019.
Products that offer alternatives to traditional equity
funds also appear ripe for expansion in 2019. With
the potential for the bull market to come to an end,
managers offering private equity options to retailinvestors may be well-positioned to succeed. Private
equity buyout funds have consistently outperformed
equity markets, especially so in worse overall
economic conditions.1 Access to such investment
strategies would be a boon to retail investors,
especially for long-term retirement-focused saving.
Traditionally, registered funds have had relatively
little exposure to private equity. Among otherreasons, the long lock-up periods involved are
generally incompatible with funds that have dailyliquidity needs, such as traditional mutual funds.
With respect to closed-end funds, which are notsubject to daily redemption, the potential for growthis limited by the fact that the SEC staff presently
takes the position only accredited investors may
invest in public closed-end funds that invest morethan 15% of their assets in private equity funds.
As we discuss in greater detail later in this Issue, we
believe for the private equity trend to really take offamong retail investors, regulatory changes would benecessary. Specifically, in 2019 we hope to see the
SEC staff adopt the proposal of the Committee on
Capital Markets Regulation and reverse its position
on applying the accredited investor standard on
a look through basis to public closed-end funds
that invest more than 15% of the in assets inprivate equity funds. Chair Clayton has signaled
his willingness to explore opportunities for retailinvestors to gain exposure to private equity, andrevisiting this position may be an efficient way toopen private equity funds to more retail investors.
Alongside the SEC’s modernization proposals(which we also discuss in greater detail later in this
1. Robert S. Harris, Tim Jenkinson and Steven N. Kaplan, How Do Private
Equity Investments Perform Compared to Public Equity, 14 J. OF INV.
MGEMT. 14, 17 (2016).

3

Issue), we believe the SEC staff could take major
steps in 2019 towards allowing registered funds tooffer innovative products to retail investors while
simultaneously streamlining their operations.
Reimagining Fee Structures
One of the main drivers of falling fees has been flows
into lower-cost funds, primarily illustrated by theoutflows from active funds and inflows to passive
options. Also contributing to declines have been
aggressive fee cuts for passively managed index
funds, which in turn have drawn strong inflows
relative to more expensive passive options.
The funds winning with respect to fund flows are
doing so by leading on cost. As mentioned above,
low-cost index funds dominated the list of top 20
U.S. funds by net inflows. The average expense ratio
among the top 20 registered funds by net inflows in2018 was 0.14%, nearly 40 basis points lower than
the average registered fund.
Even among the top-tier, low-cost index funds,
however, a fee war has raged and resulted in multiple
managers resorting to the nuclear option: (ostensibly)
no-fee funds. These funds have an expense ratio ofzero, no expenses for marketing, and when you buy
directly from the manager, there are no transaction
fees. One of the hurdles to offering zero-fee funds iscreating and maintaining proprietary indices rather
than licensing a well-known index like the S&P 500,
but now a number of firms are launching proprietary
ETF indices allowing them to lower their expense
ratios. We expect to see the trend towards low- to
no-fees index funds that utilize proprietary indicesto continue.

“

Even among the top-tier, low-cost index
funds, however, a fee war has raged and resulted
in multiple managers resorting to the nuclear
option: (ostensibly) no-fee funds.

”

While it is the broad-based market funds that havegone to this model, the precedent has been set andpressure on this portion of the market will persist.
With the advent of zero-commission platforms,
some managers are shifting their revenue generation
models to securities lending, record-keeping services
for 401(k) plans and shareholder servicing fees;changes that are most profitable with significant
scale. That trend also looks to continue in 2019,
and will continue to drive mergers and acquisitions
among the large asset managers seeking the criticalscale to compete in the space.

Active funds are also looking to innovate on
fee structures through the so-called “fulcrumfee” model. A fulcrum model links fees to fundperformance and charges a base fee if a fund does
not outperform its benchmark. To the extent a
fund does exceed the benchmark, an additional
performance fee is assessed. The argument isthat variable fee structures will ultimately deliver
better net returns to investors and incentivize fundmanagers to focus on performance rather thanfundraising. We have our doubts about these fee
structures, and indeed believe that shareholders
would be better served by performance fees that
only compensate managers for over-performance(compared to fulcrum fees), but nonetheless expect
to see more asset managers experiment with thisapproach in 2019 and beyond given the prohibition
on most other performance fees for registered funds.
Growth Through Acquisitions and Consolidation
As we have discussed in a previous Alert, the asset
management industry is in a period of increased
levels of merger and acquisition activity, and we
expect that to continue through 2019 and beyond.
Larger investment managers have effectively
used their scale to bolster profit margins, while
continuing to drive down costs. The gap is only
widening between leading and lagging asset
management firms, and this trend shows no signof slowing. We expect the wave of smaller asset
manager acquisitions to continue as many struggle
to maintain profitability in the face of considering
whether to make the significant capital investments
in technology and product development to match the
expectations of investors. Meanwhile, many larger
investment managers will seek strategic acquisitions
that will bring new product offerings, investment
capabilities or technologies under their umbrellas.
In addition to wholesale mergers or acquisitions, we
expect to see a continued uptick in minority stake
investments in 2019. Certain businesses that are in
adjacent spaces, such as micro-investing, may prove
to be attractive targets to traditional asset managers.
For instance, a leading U.S.-investment manager
recently invested in micro-investing app Acornswith the hopes that it will provide them insight into
younger investors. We expect to see an increase insimilar transactions throughout 2019.
All of this is occurring against a backdrop of divided
control on Capitol Hill and, as of this writing, apotential second government shutdown that may
grind the gears of the SEC to a halt again, just weeks
after a prolonged shutdown. One prediction we know
will come true—2019 will be interesting, if nothingelse.
4SEC Set to Explore Opening
Investments in Private
Companies to Retail Investors
Over the past 20 years, the number of publicly
listed companies has been cut in half and the
public firms that remain are generally older, larger,
slower growing and represent a larger portionof market capitalization. Today, there are fewer
listed companies than there were in 1976, despite
the fact that gross domestic product is threetimes larger now than it was then. The largest 1%of U.S. public companies represent 29% of total
U.S. market capitalization and approximately
140 companies represent more than half of total
market capitalization. In part to address thecontinued erosion of the available opportunity set
for public equity investors, Securities and Exchange
Commission Chairman Jay Clayton announcedin August 2018 that the SEC staff is working on
a concept release that will address retail investor
access to private companies and the exempt offering
framework. We believe it is imperative that theconcept release address the ability of retail investors
to access private companies through commingled
investment vehicles.

“

The largest 1% of U.S. public companies
represent 29% of total U.S. market capitalization
and approximately 140 companies represent morethan half of total market capitalization.

”

Chairman Clayton has acknowledged the dwindlinginvestable universe available to retail investors,
stating during his confirmation hearing before the
Senate Banking Committee that “our public capital
markets are less attractive to business than in thepast. As a result, investment opportunities for Main
Street investors are more limited.” As a result of theshrinking opportunity set in public capital markets
and the growth of private markets, individual
investors have a limited ability to access the complete
U.S. equity market. As many companies wait until
they are more mature to go public, the public market
offers limited exposure to younger companies withpotential for rapid growth, so retail investors lose out
on the opportunity for significant growth potentialthat young companies can offer. Since the public
listing peak in 1996, the average public company
is 50% older and approximately four times larger
than it was 20 years ago. Over the same period, thenumber of companies in the S&P 500 with annual

revenue growth of at least 20% has decreased by half(from 20% of companies to 10% of companies).
Because companies are staying private for longer,
by the time of an initial public offering (the firsttime retail investors are eligible to invest directly),companies have achieved greater scale (both byrevenue and market cap), which some commentators
argue has a dampening effect on future potential
for revenue and returns growth. Private start-up
companies are frequently reaching billion-dollar
valuations before opening up to the public forinvestment—as of April 2018 there were 103 privately
held U.S. start-ups with valuations of over $1 billion
and a total value of $385 billion.
Studies of private equity funds consistently findthat private equity returns—net of fees—outperform
public market alternatives while providing
diversification, lower volatility and protection intimes of market stress.2 Based on an average private
fund duration of five years, the outperformance ofthe most successful private equity funds (e.g., the top
25% of funds) is 7.3% over the S&P 500. To illustrate
the issue for Main Street investors, consider that a$10,000 investment in a retirement fund that earned
7% annually from the S&P 500 over 30 years would
result in an ending balance of $76,123. Alternatively,
if the $10,000 had been invested in a private equity
fund that earned 7.3% above the S&P 500 annually,
the ending balance would be $551,299.
Previously, retail investors could access private
equity investments through employer-sponsored
retirement accounts. As of January 31, 2018,
public defined benefit plans allocated 7.4% of theirinvestments to private equity, which accounted
for 35% of the global aggregate capital invested
in private equity.3 However, over the past several
decades, employers have embraced defined
contribution plans, such as 401(k)s, and shiftedaway from defined benefit plans. The departurefrom defined benefits plans is notable in light ofevidence that defined benefit plans outperformdefined contribution plans. For instance, a Boston
College Center for Retirement Research study
found that, from 2003 to 2012, private defined
benefit plans with more than $100 million ofassets outperformed similarly sized private defined
contribution plans by 1.5% annually. Defined
contribution plans typically do not invest in private
equity. Given the strong performance of private
equity funds and based on review of the Boston
2. See also David Robinson & Berk Sensoy, Cyclicality, Performance
Measurement, and Cash Flow Liquidity in Private Equity, 122 J. Fin.
Econ. 251 (2016); Robert Harris et al., Private Equity Performance: What
Do We Know?, 69 J of Fin. 1851 (2014).
3. Preqin, Global Private Equity and Venture Capital Report 1, 77 (2018).
5

College study, the Committee on Capital Markets
Regulation concluded that the performance ofprivate equity funds is likely contributing to defined
benefit plans’ outperformance relative to defined
contribution plans.
Chair Clayton has flagged several potential areasof focus for the concept release, including whether
rules that limit who can invest in certain offerings
should be expanded to focus on the sophistication of
an investor, the amount of an investment, or othercriteria rather than just the wealth of an investor. We
believe registered funds and registered investment
advisers should be key components of Chair Clayton’sgoal to increase access to capital markets and level
the playing field for retail investors. In this Alert, wesuggest several areas of reform for consideration by
the SEC staff.

informed investors who are not wealthy may be in aposition to take on risks that they understand well.”
One way retail investors can reach the requisite levelof financial sophistication to understand the risks
of investing in private companies is through expert
advice from investment advisers and brokers. In fact,
Regulation D indirectly acknowledges that accessto expert advice can deem an otherwise unqualified
investor de-facto sophisticated so long as the investor
is represented by someone who “has knowledge andexperience in financial and business matters that he[or she] is capable of evaluating the merits and risksof the prospective investment.”4
The SEC should consider expanding the definition of“Accredited Investor” to include any investor who isadvised on the merits of making a private placement
investment by a fiduciary or intermediary that has an
obligation to act in the best interests of the investor,
such as a registered investment adviser or broker.
Ease or Eliminate Restrictions on Closed-End Fund
Access to Private Companies
Unlike mutual funds, which allow for daily
redemptions, shareholders in closed-end funds
generally have no right to redeem. As a result,closed-end funds are well positioned to invest in
illiquid assets, such as private companies and private
equity funds.

Expand the Accredited Investor Definition
To invest directly in securities offerings of privatecompanies and private funds, retail investors
generally need to be “accredited investors.” In
addition, retail investors can gain access toinvestments in private companies through registeredfunds that invest in hedge funds and private equity
funds, but the SEC generally requires that such funds
only be offered to accredited investors.
To meet the accredited investor standard, individual
investors must have earned at least $200,000 inannual net income in each of the past two years
or hold $1 million in net worth, excluding theirprimary residence. This high qualification hurdle
reduces the ability of Main Street retail investors
to gain exposure to private companies throughhedge funds and private equity funds—a recent
Wall Street Journal analysis finds that approximately
87% of U.S. households do not meet the accredited
investor standard.
The existing accredited investor standard is based atleast in part on the presumption that wealth is the
only appropriate proxy for investor sophistication.
However, even the SEC has acknowleged that “wellCertain closed-end funds registered under theInvestment Company Act invest a significant portion(more than 15%) of their assets in private equity
funds and other types of private funds. However,in disclosure comment letters to these funds the
SEC staff has indicated its view that only accredited
investors may invest in a public closed-end fundthat invests more than 15% of its assets in Section
3(c)(7) funds.5 The SEC has not stated the legal or
policy basis for this position. The argument that
Main Street investors should be excluded because
they could not invest directly in such funds is lessconvincing when one considers that registeredfunds often invest in securities in which Main Street
investors cannot directly, such as 144A offerings andother private placement transactions. Because the
SEC staff’s blessing is required for such registeredfunds of funds’ registration statements to become
effective, the industry has had no choice but toacquiesce to this requirement.
4. Regulation D limits the number of non-accredited, financiallysophisticated investors who may invest in an offering to no more than
35. An offering to non-accredited investors is also subject to enhanced
disclosure requirements.
5. See also Wildermuth Endowment Strategy Fund, SEC Comment Letter(October 11, 2013); Cross Shore Discovery Fund, SEC Comment Response
Letter, (Sept. 17, 2015); Resource Real Estate Diversified Income Fund,SEC Comment Letter (Oct. 19, 2012); Oxford Lane Capital Corp., SEC
Comment Response Letter, (Aug. 17, 2015).
6

The SEC and its staff should consider allowing
retail investors to invest in public closed-end funds
that invest more than 15% of their assets in private
equity funds (and/or should expand the definitionof “accredited investor” as proposed above). Public
closed-end funds are subject to extensive disclosure
requirements regarding their allocations to specificprivate equity funds and fees associated with theseinvestments. A public fund of private funds offers
retail investors the opportunity to gain indirectaccess to attractive private fund opportunities
that are otherwise only available to institutional
investors, and public fund sponsors can offer
expertise in selecting and negotiating private fundinvestments. As discussed above, retail investors
need access to private companies to obtain adequate
diversification and superior returns and commingled
investment vehicles managed by investment advisers
who owe fiduciary duties to such vehicles is one
potential source of such access.

private funds managed by an affiliated investment
adviser that has the greatest knowledge of theinvestment strategies and investment characteristicsof the underlying private funds. The SEC can addressaffiliated transaction concerns by imposing certain
limitations, such as:• The registered fund’s board of directors will only
approve fund-level fees for services that are in
addition to and not duplicative of services at theunderlying fund level;• The registered fund will not own more than 25%
of any underlying closed-end funds;• The registered fund will not own more than 25%
of any underlying open-end funds and will be
restricted from seeding open-end funds;• The registered fund will not invest in other fundsof funds and will not invest more than 40% of its
assets in a single fund;• The registered fund will vote its interests in any
underlying fund in the same proportion as thevote of all other shareholders in a particularunderlying fund; and• The registered fund will receive most favorednation treatment with respect to all investments
in underlying funds.

Easing Restrictions on Affiliated Funds of Private
Equity Funds
In addition to the restrictions on closed-end fundsof private funds discussed above, the affiliatedtransaction restrictions of the 1940 Act currently
prevent a sponsor from managing a registeredfund that invests in private funds managed by thesame sponsor. Some registered funds (currently
available only to accredited investors) focus theirinvestments on private funds of a single sponsor,
but the registered funds are managed by a third
party unaffiliated with the private fund sponsor.
However, the unaffiliated investment advisers tosuch funds each charge an annual management fee
in excess of 1% even though the investment strategies
contemplate that each fund will invest at least 80%
of its assets in funds of a specific private equity firms.
A third-party adviser is one way to protect against
conflicts of interest but the SEC should consider
alternative options to permit affiliated funds offunds, subject to certain limitations. Investors will
benefit by having access to a registered fund of

The SEC should consider providing greater
flexibility to permit affiliated “fund-of-private fund”
arrangements similar to fund-of-fund arrangements
involving mutual funds permitted under Section
12(d)(1)(G) of the Investment Company Act and Rule12d1-2 thereunder (as discussed later in this Alert,
the SEC recently proposed Rule 12d1-4 which would
rescind Rule 12d1-2 and related exemptive orders).

Rationale of Recent
No-Action Letter, If Extended
to Other Areas, Could Go aLong Way Toward Reducing
Unnecessary Burdens on
Fund Boards
Boards of registered funds serve a critical“watchdog” function for shareholders, but the growthof responsibilities given to directors, driven largely
by SEC rulemaking, has made it increasingly difficult
for board members to focus on their core function.
7

After a keynote address by Dalia Blass, Directorof the SEC’s Division of Investment Management,at the 2018 Investment Company Institute Mutual
Funds and Investment Management Conference,
participants in the mutual fund industry were eager
to see whether her goal of “understanding where [thefund] board oversight role is most valuable” would
translate into meaningful adjustments to the burdens
placed on fund boards. On October 12, 2018, boards
received some initial relief when the staff of the
SEC’s Division of Investment Management issued ano-action letter to the Independent Directors Council
confirming that the Division would not recommend
an enforcement action if a board relies on reports
from a fund’s Chief Compliance Officer that certaintransactions were effected in compliance with theboard’s procedures for such transactions, in lieu of
the board being required to review such transactions
and make the compliance determination itself (the“IDC No-Action Letter”).

the SEC, and that the regulatory landscape had
continued to change and additional responsibilities
placed on boards over the past decade. The IDC
urged the Division to take a fresh, comprehensive
look at board duties in light of the current state of theindustry. The IDC provided a number of preliminary
recommendations, including changes to the threerules that were subsequently addressed in the IDC
No-Action Letter. At her 2018 keynote address, Ms.
Blass indicated the Staff had met with boards andgroups of independent directors in an attempt torestart the initiative and intended to prioritize these
efforts going forward.

The IDC No-Action Letter was a welcome firststep to improve board efficiency, but there remain
opportunities for the Staff to modernize further
board responsibilities while still protecting
shareholder interests. In this Alert, we provide
background on the SEC’s Board Outreach Initiative,
which ultimately led to the IDC No-Action Letter.
We then discuss an additional area ripe for board
oversight reform: co-investment programs.

The IDC No-Action Letter is the initial result of
these efforts. In the letter, the Staff confirmed it
would not recommend an enforcement action if, inlieu of a board making the required determinations
that any transactions with affiliates covered under
Rules 10f-3(c), 17a-7(e)(3) and 17e-1(b)(3) of theInvestment Company Act of 1940 were compliancewith board-approved policies and procedures
adopted pursuant to such rules, a board were toinstead rely on a report from the CCO to that effect.
The SEC recognized the adoption of Rule 38a-1 underthe 1940 Act reflected the SEC’s view that boards
should oversee compliance matters instead of being
involved in the day-to-day administration of a fund’s
compliance program. The Staff reiterated that theboard’s oversight role with respect to a fund’s overall
compliance program remains unchanged by the IDC
No-Action Letter.

The SEC’s Board Outreach Initiative and the IDC
No-Action Letter
The effort to modernize board duties is not a newendeavor at the SEC. During her address, Ms.
Blass referred to the “Board Outreach Initiative,” aprogram that has existed for over ten years. At his
keynote address at the 2007 Investment Company
Directors Conference, the then-Director of the SEC’s
Division of Investment Management, introduced
the initiative as a way for the SEC to help boards
perform their duties and continue to add value
for shareholders. As part of the initiative, the SEC
solicited direct input from boards, including bymeeting with boards at their regularly-scheduled
meetings. Despite the apparent support for the
initiative, the financial crisis and related Dodd-FrankAct and Financial Stability Oversight Council-driven
rule-making initiatives that followed the crisis took
the focus and momentum away from the Board
Outreach Initiative.
In October 2017, the IDC wrote a letter to Ms.
Blass requesting that the Division renew focus onmodernizing board responsibilities. In that letter,the IDC noted that the earlier initiative had not
resulted in meaningful recommendations from“The IDC urged the Division to take a fresh,
comprehensive look at board duties in light of thecurrent state of the industry.

”

The IDC No-Action Letter signals a notable shift inthe Division’s view on a board’s ability to delegate
additional responsibilities to a CCO to reduce theburden on the board. The SEC previously issued aletter to the IDC and Mutual Fund Directors Forumin which it clarified that a board may rely on a CCO’sreport regarding the transactions covered by therules addressed in the IDC No-Action Letter, but
the board was still required to make compliancedeterminations under the rules. Under the IDC
No-Action Letter, a board is no longer required tomake such determinations.
Co-Investment Programs
We believe a logical next step in light of the IDC
No-Action Letter and the SEC’s reinvigorated
effort to improve board efficiency is for the Staff
8

to take a fresh look at boards’ roles with respect
to co-investment programs. The purpose of theconditions in co-investment exemptive relief
applications is to mitigate conflicts of interest. In
the way that the approval of Apollo Investment
Corporation’s co-investment application signaled
an attempt by the Staff to provide more practicalexemptive relief and to take into account the realitiesof the asset management industry, we believe thenext wave of exemptive relief applications should go astep further and provide an alternative to the current
condition that boards must make certain findings
regarding a potential co-investment transaction.
In our last Alert, we described the evolution of
co-investment exemptive orders that have been
granted by the SEC. In that Alert, we noted that
renewed innovation in co-investment programs
began with the order granted to Apollo in 2016.
Although Apollo’s relief was a successful (albeit
lengthy) negotiation between the Staff and Apollo,
the relief issued to Apollo and subsequent applicants
still requires that the board approve, at minimum,a registered fund’s participation in the initial
co-investment transaction in a given issuer basedon written information provided by the adviser. In
approving a funds participation in a co-investment
transaction, the board is presumably not asked toevaluate an investment on the merits, but instead
must determine that:• (i) the terms of the transaction are reasonable
and fair to the fund and its shareholders and do
not involve overreaching;• (ii) the co-investment transaction is consistent
with the interests of shareholders and theparticipating fund’s current objectives andstrategies;• (iii) the investment by other funds would notdisadvantage the participating fund and theparticipating fund’s participation would not be ona different basis or less advantageous than that ofany other fund(s); and• (iv) the proposed investment will not involve
compensation, renumeration or direct or indirect
financial benefit to the adviser, any other fund,the affiliated funds or any of their affiliatedpersons. The board is also required to approvea fund’s participation in certain follow-on
investments and disposition opportunities.

The IDC No-Action Letter raises considerations
that also are present in co-investment programs.
The IDC No-Action Letter did not seek to changea board’s responsibility to adopt procedures under
the rules; instead, the relief allows a board to
focus on its oversight role by not requiring it todetermine affirmatively that each transaction was
effected in compliance with board-establishedprocedures. Similar to the rules that require a board,
including the majority of independent directors, toadopt procedures that are reasonably designed toprovide that transactions comply with the affiliatedtransaction requirements under the rules, aco-investment exemptive order require the board tooversee the procedures that ensure compliance withthe terms and conditions of the exemptive order.
However, the exemptive orders also require theboard to make the determinations noted above forevery single co-investment in which a registered fundproposes to participate in advance of the investment.
We believe the board’s role with respect toco-investment transactions should be focused onoverseeing the review, approval and allocation
process for these transactions. The board should
not be required to make the transaction-specificdeterminations required by current exemptive
orders. These determinations are more appropriately
within the purview of the adviser’s investment andcompliance personnel and it is not clear that any
meaningful additional protections are gained by
the board signing off on individual transactions. In
practice, these potential co-investment transactions
often come up between board meetings and on
expedited timelines, causing logistical issues for boththe board and the participating funds.
We believe that board reporting from the adviser
on a quarterly basis should replace real-time board
involvement. This approach aligns with the mannerin which the board oversees how an adviser handles
potential co-investment transactions in which a
registered fund declines to participate. In addition,
co-investment programs already require that the
CCO oversee compliance of the program and prepare
an annual report to the board regarding eachfund’s compliance with the terms and conditionsof the exemptive relief order. Similar to the IDC
No-Action Letter, the board should be able to relyon certifications from both the adviser and the CCO
stating that each co-investment transaction met
the four mandatory conditions before a registeredfund participated in the transaction. This change
would allow the board to enhance its oversightfunction, as the board would receive the same levelof information it does currently, just in the context ofa quarterly board meeting during which any issues
could be addressed face-to-face with the adviser.
Fund shareholders will be sufficiently protected by
the CCO’s and adviser’s fiduciary responsibilities
and expertise, guided by the policies and procedures
9approved by the board and the board’s general
oversight. We believe this change is aligned withspirit of Rule 38a-1.
The IDC No-Action Letter and the revival of
the Board Outreach Initiative were welcome
developments in the effort among industry
participants to streamline fund board
responsibilities. We believe the next area of focus
for the Staff should be co-investment programs.
Co-investment program changes could come throughthe exemptive relief process or through the no-action
process with the Staff taking a position that it
would not recommend enforcement if a fund board
were to rely on certifications from the adviser andthe CCO in lieu of making the four determinationsin an exemptive order. Simpson Thacher will be
actively monitoring this area and will address any
developments in future Alerts.

The Proposed Fund of Funds
Rule—A Good First Step That
Merits Further Consideration
The SEC recently proposed new Rule 12d1-4
under the 1940 Act that, if adopted, would provide
an exemption for fund of funds arrangements
where registered funds and business development
companies (collectively, “regulated funds”) acquire
shares of other regulated funds in excess of thestatutory 1940 Act limits. This article provides
background on the fund of funds restrictions in
the 1940 Act, current exemptions to these generalprohibitions and an overview of the requirementsof the proposed rule. The article then examines
potential adverse or unintended consequences ofthe proposed rule and suggests potential revisions
for the SEC staff to consider prior to adopting a
final rule.

Background
Section 12(d)(1) of the 1940 Act restricts the abilityof a regulated fund (an “acquiring fund”) to invest inother funds (“acquired funds”). There are three key
restrictions that apply each time an acquiring fundpurchases shares of an acquired fund, commonlyreferred to as the 3%/5%/10% restrictions (together,
the “12(d)(1) Limits”):

1. an acquiring fund cannot own more than 3%of the total outstanding voting stock of a single
acquired fund (note: the 3% limit also applies
when private funds relying on the exceptionsin Sections 3(c)(1) and 3(c)(7) of the 1940 Act
acquire shares of regulated funds);
2. an acquiring fund cannot invest more than 5%of the value of its total assets in a single acquired
fund; and3. an acquiring fund cannot, in the aggregate,
invest more than 10% of its total assets inacquired funds.

The 1940 Act and the rules thereunder include
certain exemptions from the 12(d)(1) Limits formaster-feeder arrangements, affiliated fund of funds
arrangements, investments in money market funds,
and acquisitions of less than 3% of an acquired fund’s
securities in the aggregate by a regulated fund andall affiliated persons of such regulated fund. The
SEC has also issued numerous exemptive orders (the“Existing Orders”) that allow certain regulated funds
to invest in shares of other regulated funds in excessof the 12(d)(1) Limits, subject to certain conditions
and the execution of a participation agreement
between the acquiring fund and the acquired fund.
Under these participation agreements, an acquired
fund agrees to allow the acquiring fund to acquire
more than 3% of its shares in reliance on the orderand each fund agrees to comply with the applicableconditions of the order. As is often the case with
exemptive orders, the conditions contained in thevarious Existing Orders are generally similar, but
not identical.
Overview of the Proposed Rule
The proposed rule would allow a regulated fundto acquire shares of another regulated fundin excess of the 12(d)(1) Limits, subject to thefollowing conditions:• No private funds may rely on the proposed rule.
The rule would only be available for investmentsby regulated funds. Private funds could not rely10

on the rule as proposed, and thus would still be
restricted to the 3% limit described above.
• No controlling stake. An acquiring fund and its
advisory group will not control (individually orin the aggregate) an acquired fund. Under the1940 Act, control is presumed when a person(or in this case, a group) beneficially owns,
directly or through one of more controlled
companies, more than 25% of another person’s
voting securities. “Advisory group” refers toan acquiring fund’s investment adviser, subadviser or depositor (i.e., sponsor), and any
person controlling, controlled by, or undercommon control with such investment adviser,
sub-adviser or depositor (including other funds
managed by the sponsor).

shares of other funds (including private funds
even though there is otherwise no stattutory
basis for limiting investments in private funds)
in excess of the 12(d)(1) Limits except for certain
limited circumstances, including masterfeeder arrangements, investments in money
market funds for cash management purposes,
investments in wholly owned subsidiaries andinterfund borrowing and lending transactions
pursuant to a SEC exemptive order.
• Additional recordkeeping requirements. The
acquiring fund must maintain and preserve for
not less than five years a written record of theinvestment adviser’s finding that the investment
is in the best interest of the acquiring fund.

• Acquiring funds must either mirror vote or
pass-through vote. If an acquiring fund andits advisory group hold more than 3% of an
acquired fund’s outstanding voting securities in
the aggregate, each holder will either mirror voteits acquired fund shares in the same proportion
as the vote of all other shareholders or seek
voting instructions from its shareholders. The
mechanics of this proposal are identical to the1940 Act voting provisions for master-feeder
funds.
• Redemptions limited to 3% per any 30-day
period. When an acquiring fund holds more than
3% of an acquired fund’s outstanding voting
securities, such acquiring fund may not redeem
more than 3% of the acquired fund’s outstanding
voting securities during any 30-day period.
• Adviser must undertake a periodic evaluation.
Before investing in an acquired fund in relianceon the rule, and no less frequently than annually
thereafter, the acquiring fund’s investment
adviser must evaluate the complexity of thestructure and the aggregate fees associated withthe acquiring fund’s investment in the acquired
fund, and find that it is in the best interest of theacquiring fund to invest in the acquired fund.
The investment adviser of the acquiring fundmust report its findings to the fund’s board.
• Restrictions on complex fund of fund structures.
If a regulated fund intends to be (or at times maybe) an acquiring fund for purposes of the rule,
it must disclose that intent in its registration
statement. No acquiring fund may acquire
shares of another regulated fund in excess ofthe 12(d)(1) Limits if the prospective acquired
fund has disclosed that it may be an acquiringfund under the rule. Under the proposed rule, anacquired fund is also prohibited from acquiring

Key Issues the SEC Should Reconsider
There are a number of aspects of the proposed rulethat should be reconsidered before the SEC adopts
a final rule. Certain of these considerations are
discussed below.
Private funds should be allowed to qualify as
acquiring funds under the rule when investing in
ETFs and other open-end funds
Private funds cannot rely on the proposed rule toinvest in ETFs and other open-end funds. The SEC
should reconsider whether to allow private funds toacquire interests in ETFs and other open-end funds
in excess of the 12(d)(1) Limits under the final rule.
While there are some key additional factors to beconsidered in permitting private funds to rely on therule, as discussed in further detail below it would
not appear to be impractical to address those key
considerations in a revised final rule. If the changes
proposed below are implemented, it would appear
that allowing private funds to invest in regulated
funds in excess of the 12(d)(1) Limits in accordancewith the conditions of the rule would not present any
additional meaningful risks than those associated11with a regulated fund engaging in the same activity.
Certain concerns, such as large-scale redemption
requests by acquiring funds, are less relevant when aprivate fund is an acquiring fund since most private
funds do not offer daily liquidity to their investors.
Like regulated funds, private funds also invest in
ETFs and other regulated funds to gain market
exposures. So long as a private fund complies withthe conditions of the rule, there is no apparent
reason to treat investments by private funds in ETFs
and other open-end funds differently under the rule.
The proposing release explains that private funds
were omitted from the types of funds that can relyon the rule because private funds (i) do not makeannual reports on Form N-CEN, (ii) do not reportacquired fund holdings on Form N-PORT and (iii)
are not subject to the recordkeeping requirementsof the 1940 Act. These concerns should not preclude
private funds from relying on the rule as acquiringfunds because the rule could be revised to require
substantially similar reporting and recordkeeping forprivate funds. For example:• (i) the investment adviser to the private fundcould be required to make the same disclosuresby adding questions to Form ADV Part 1 that
correspond to the questions in Form NCEN,• (ii) private funds that rely on the rule could be
required to submit a confidential monthly reportof acquired fund holdings to the SEC that aligns
with the information on Form N-PORT or similarreporting could be added to Form PF and• (iii) the Advisers Act recordkeeping rule could
be amended to require investment advisers to
private funds that rely on the rule to maintain therecords that will be required of regulated funds
under the 1940 Act.

Although private fund managers may object tothis increased level of required reporting, it is notunreasonable that the ability to rely on an exemptive
rule would require a certain amount of concomitantburden on any party that avails itself of the benefitsof the rule.
The rule should be revised to include appropriate
protections for closed-end funds and BDCs
The rule poses serious concerns for closed-end funds
and BDCs in light of the trend for certain activists
to form multiple funds to invest in listed closed-end
funds and BDCs to seek short-term actions that may
not be consistent with the best interests of long-term
investors. In particular, the option to pass-throughthe vote to acquiring fund investors could be abusedby acquiring funds managed by activist investors.
For example, an activist investor could form a closely
held regulated fund to make activist investments inclosed-end funds or BDCs. Investors in such funds
would be likely to vote in a manner that is consistent
with the activist’s interest—but may be inconsistent
with the best interests of the acquired fund’s longterm investors. To protect closed-end funds andBDCs, the rule should be revised to require mirror
voting if an acquiring fund managed by a different
advisory group holds more than 3% of an acquired
fund’s shares. Acquiring funds managed by thesame advisory group could have the option of mirror
voting or pass-through voting.
Allowing private funds to invest in closed-end funds
and BDCs in reliance on the rule as proposed would
not be in the best interests of long-term investors.
If the voting provisions of the rule are revised torequire mirror voting when investing in a closed-end
fund or BDC, however, then a private fund should
not be precluded from relying on the rule to invest
in closed-end funds and BDCs. This approach would
prevent activist private fund managers from abusing
the rule while allowing private funds to gain desired
investment exposures through investments inclosed-end funds and BDCs.
Acquired funds should be allowed to screen certain
acquiring funds
Existing Orders require an acquiring fund and an
acquired fund to enter into a participation agreement
prior to an acquisition of acquired fund shares thatexceeds the 12(d)(1) Limits. While this requirement
ensures that each party is contractually obligatedto comply with the conditions of the applicable
Existing Order, it also allows an acquired fundto screen prospective acquiring funds—i.e., if theacquired fund declines to enter into the participationagreement, the acquiring fund cannot invest inexcess of the 12(d)(1) Limits. We anticipate that theremoval of the participation agreement requirement
will be a welcome development, but the eliminationof a mechanism to screen prospective acquiringfunds may have adverse consequences for certain
acquired funds. For example, if the acquired fundis listed on a stock exchange, or if the acquiringfund invests through an omnibus account, thenunder the proposed rule the acquired fund may nothave the opportunity to reject an investment by an
acquiring fund before such investment exceeds theSection 12(d)(1) Limits. Closed-end funds and BDCs
may wish to screen prospective acquiring funds toprevent activists from investing in reliance on therule. Open-end funds may wish to screen investors
to manage capacity constraints and redemption risk.
12

The SEC should consider these potential adverse
consequences before finalizing the rule.
A key issue to reconsider is the 3% redemption limit
in any 30-day period, which would impose severe
limitations on the utility of the rule
The rule condition limiting redemptions to not morethan 3% of the acquired fund’s total outstanding
shares during any 30-day period is not a conditionof Existing Orders. The SEC has indicated that the
proposed redemption limit is designed to provide acheck against the influence that an acquiring fundcan have on an acquired fund through the threatof large-scale redemptions. The SEC proposed a
mandatory limit that prohibits redemptions abovea threshold percentage, rather than a permissive
limit that would be at the acquired fund’s discretion
similar to section 12(d)(1)(F) of the 1940 Act, because
the SEC believes an acquiring fund could influencean acquired fund to eliminate (or never establish) a
permissive limit on redemptions.
The proposed redemption limit has the potential to
adversely affect acquiring fund liquidity and may
inhibit current portfolio management techniques—for example, this condition may prevent an acquiringfund from optimally rebalancing its portfolio.
We question the need for the redemption limit,
especially since it is not a condition of the Existing
Orders. We anticipate that the SEC will be presented
with alternatives to the 3% redemption limit. For
example, some commenters may suggest a higher
threshold percentage, relief that would permit theacquired fund to delay redemption payments beyond
seven days under certain circumstances (rather
than simply prohibiting such redemption), and/or
longer notice periods for acquiring funds to redeem acertain percentage of an acquired fund’s shares.

“

We question the need for the redemption limit,
especially since it is not a condition of the Existing
Orders.

”disposing of more than 3% of the acquired fund’s
shares in seven calendar days or less. If a redemption
limit is included in the final rule, the rule should
specify that (i) an investment made in relianceon the rule is liquid for purposes of the liquidity
rule’s 15% illiquid investments limit and (ii) therule’s redemption limit should only be considered
for purposes of the liquidity rule’s classification
requirement .
The rule should not unduly limit the use of efficient
portfolio management techniques by acquired
funds, such as investments in ETFs
The rule prohibits investments by an acquired fundin other funds, subject to certain limited exceptions
that are generally consistent with Existing Orders. As
proposed, however, the rule would prohibit portfolio
management techniques where an acquired fundseeks to invest in ETFs or other funds to efficiently
invest large subscriptions into the fund or to gain
investment exposures to certain asset classes. To
ensure portfolio management decisions are madein the best interests of acquired fund investors, thefinal rule should allow acquired funds to invest a
portion of their assets in ETFs or other funds forthese purposes.
Next Steps
The proposed rule is a necessary step to seek toharmonize the 1940 Act regime for fund of funds
investments and to free up SEC staff resourcesthat are otherwise spent reviewing exemptive
applications for similar relief. It is likely, however,that the proposal draws significant and wideranging comments from the industry. The end of
the rule’s comment period is not yet known because
the proposing release has not been published in theFederal Register due to the partial shutdown of thefederal government. The comment period will end
90 days after the proposing release is published.
Simpson Thacher will be monitoring developments
regarding the proposed rule, which will be addressedin future Alerts.

If the final rule includes a redemption limit, the ruleshould specify that such investments by acquiringfunds will not be deemed illiquid for purposes of theliquidity rule
The SEC states in the release that an open-end
acquiring fund that relies on the rule should takethe 3% redemption limitation into account whenclassifying its investment in the acquired fundas part of its liquidity risk management program
pursuant to Rule 22e-4. In effect, the redemption
limit would prevent an acquiring fund from13

M&A Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

BC Partners Advisors L.P., aleading international investment firmwith over $24 billion of AUM acrossprivate equity, private credit and realestate strategies

KCAP Financial, Inc., a publicly
traded, internally managed businessdevelopment company

Externalization of management, whereby
an affiliate of BC Partners will become themanager of KCAP, KCAP stockholders will
receive a cash payment from BC Partners
of $25 million, BC Partners will contributeup to 100% of its incentive fees earned, if
necessary, to enable KCAP to achieve net
investment income of $0.40 per sharefor the one-year period after closing and
BC Partners will use up to $10 million of
incentive fees earned to purchase newly
issued shares of KCAP stock in the two-year
period after closing

Brown Advisory, Inc., an
investment and strategic advisory
firm with approximately $67 billion inclient assets

Signature Family Wealth
Advisors, a registered investment
adviser with approximately $4.3
billion in client assets

Acquisition(terms not disclosed)

Citizens Financial Group,
Inc., a financial institution withapproximately $158.6 billion in assets

Clarfeld Financial Advisors,
LLC, a wealth management firmwith approximately $6.6 billion in
AUM and approximately $900 in
assets under administration

Acquisition(terms not disclosed)

Dyal Capital Partners, a private
equity and venture capital firm withapproximately $14 billion in AUM,
and a division of Neuberger Berman
Group

Bridgepoint Capital, a Londonbased private equity firm that has
approximately €28.2 billion ofcommitted funds and €18 billion in
AUM

Acquisition of a minority interest, between
15% and 20%, for receipt of a proportion of
Bridgepoint’s dividends and carried interest(terms not disclosed)

EB Safe, LLC, subsidiary ofEmigrant Bank, a privately-heldbank specializing in advising financial
institutions

Fiduciary Network, LLC, an RIA
aggregator with approximately $40
billion in AUM

Acquisition; EB Safe will consolidate 100%
ownership of Fiduciary by exercise its rightof first refusal to acquire the remaining 25%
stake in Fiduciary not already owned(terms not disclosed)

Generational Capital LLC, a partof Generational Group that specializes
in mergers and acquisitions advisory
services

Talis Advisors, a registeredinvestment adviser

Acquisition of majority interest(terms not disclosed)

Genstar Capital, a private equity
firm with approximately $10 billion
in AUM

Cetera Financial Group, a
network of nearly 8,000 financial
advisors

Acquisition of majority interest(terms not disclosed)

14

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Goldman Sachs AssetManagement, an asset manager
whose Alternative Investment &Manager Selection Group has morethan $200 billion AUM

Harvest Partners, a private equity
investment firm

Acquisition of 15% interest(terms not disclosed)

Goldman Sachs AssetManagement, an asset manager
whose Consumer and Investment
Division that has approximately $1.5
trillion assets under supervision

Rocaton Investment Advisors,
an investment consulting firm thathas more than $600 billion in assets
under advisement

Acquisition(terms not disclosed)

iM Global Partner, an investment
and development platform, having
approximately $30.4 billion combined
AUM with partner asset managers
Polen Capital, Dolan McEniry
Capital, Sirios Capital and Dynamic
Beta. iM Global Partner represents
approximately $7.6 billion AUM inproportion to its participations

Dynamic Beta investments(previously branded Beachhead
Capital), a hedge fund advisory firm

Acquisition of 45% interest(terms not disclosed)

Invesco Ltd., an independent
investment management firm withapproximately $888 billion in AUM

OppenheimerFunds, Inc., aglobal asset manager with over $246
billion in AUM

Acquisition for total consideration of
approximately $5.7 billion, including
Massachusetts Mutual Life Insurance
Company, the current parent company
of OppenheimerFunds, receiving
approximately a 15.5% stake in Invesco

Kovitz Investment Group, aninvestment manager, which is part of
Focus Financial Partners

AFAM Capital, an investment
management firm

Acquisition(terms not disclosed)

Kudu Investment Management,
LLC (“Kudu”), a registeredinvestment adviser

Bingham, Osborn &Scarborough, LLC (“BOS”),
a wealth management firm withapproximately $4.7 billion in AUM

Acquisition of minority interest of BOS;
the terms include that BOS will buy backits majority stake from Boston Private
Financial Holdings, Inc. and BOS will own
approximately 68% and Kudu will own
32% of BOS. Boston Private will receive
approximately $21 million of cash at closing
and an eight year revenue share(terms not disclosed)

LibreMax Intermediate
Holdings, LP, an asset management
firm with approximately $2.9 billion
in AUM

KCAP Financial, Inc.’s wholly
owned subsidiaries, Katonah
Debt Advisors, Trimaran
Advisors, L.L.C., (“Trimaran
Advisors”) and Trimaran Advisors
Management, L.L.C.; Trimaran
Advisors has approximately $3
billion in AUM

Acquisition for $37.9 million in cash

15

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Mariner Wealth Advisors, a
wealth advisory firm with more than
$23 billion in client assets underadvisement

Patriot Wealth Management
Inc., a financial management firmand RIA with approximately $792.84
million in AUM and approximately$1.86 billion in locally managed
assetsAcquisition(terms not disclosed)

Markel Corporation, a financial
holding company

Nephila Holdings Limited,
an investment manager withapproximately $12.3 billion AUM

Acquisition of all outstanding shares withfinancing through cash balances on hand(terms not disclosed)

Mercer Advisors Inc., an RIA withapproximately $15 billion in AUM

Beacon Wealth Management,a wealth management firm withapproximately $230 million in AUM

Acquisition(terms not disclosed)

Mercer Advisors Inc., an RIA withapproximately $15 billion in AUM

Bell Wealth Management, a
wealth management firm withapproximately $200 million in AUM

Acquisition(terms not disclosed)

Mercer Advisors Inc., an RIA withapproximately $15 billion in AUM

Sigma Investment Management
Company, a wealth management
firm with approximately $500
million in AUM

Acquisition(terms not disclosed)

Natixis Investment Managers,
an asset management firm with morethan $1 trillion in AUM

WCM Investment Management,
an investment management firmwith approximately $29 billion in
AUM

Acquisition of 24.9% equity interest andlong-term exclusive global distributionagreement(terms not disclosed)

Neuberger Berman, an investment
manager with approximately $315
billion in AUM

Cartesian Re, an insurance-linked
securities manager andIris Re, an affiliate of Cartesian Re,
with combined AUM of more than
$1 billion

Acquisition in which Cartesian Re will
rebrand as NB Insurance-Linked Strategies
and Iris Re will rebrand as NB Reinsurance(terms not disclosed)

PIMCO, a fixed income investment
manager owned by Allianz SE

Gurtin Municipal BondManagement, an asset manager

Acquisition(terms not disclosed)

Pretium Partners, LLC, analternative asset management firmwith more than $10 billion AUM

Selene Holdings LLC, the parent
company of SelecTitle, New Diligence
Advisors LLC and Selene Finance LP,
which provides residential mortgage
and loan services

Acquisition using funds managed by Oaktree
Capital Management, L.P. and RanieriPartners LLC.
(terms not disclosed)

Private Ocean WealthManagement, a wealth management
firm with more than $1.5 billion in
AUM

Mosaic Financial Partners, Inc.,a registered investment adviser withapproximately $620 million in AUM

Acquisition(terms not disclosed)

16

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Robert W. Baird & Co., an asset
and wealth management firm withmore than $200 billion in client assets

Hillary Lyons and Hillary Lyons
Trust Company, a wealth and asset
management firm with more than
$50 billion in client assets

Acquisition(terms not disclosed)

Rockefeller Capital Management
L.P., financial advisory firm withapproximately $18.6 billion in AUM

Greer Anderson Capital LLC, aprivate investment management firm

Acquisition(terms not disclosed)

Sanctuary Wealth Partners, a
wealth manager and a division of theNoyes Group

Winthrop Capital Management,a registered investment adviser withalmost $1 billion AUM

Acquisition(terms not disclosed)

Sequoia Financial Group, a wealthmanagement firm with approximately$4.1 billion in AUM

LJPR Financial Advisors,a fee-only advisory firm withapproximately $776 million in AUM

Acquisition; the terms include both equity
and cash, and no private equity or debt
(terms not disclosed)

Stone Point Capital LLC, a private
equity firm with approximately $19
billion in committed capital

Rialto Capital Management
LLC, an asset management segmentof Lennar Corporation

Acquisition through payment of $340
million in cash at closing to Lennar
Corporation, the parent company. The cash
to pay for the acquisition will come from
Stone Point’s $5.5 billion fund, Trident VII.
Lennar will retain its Rialto’s Mortgage
Finance business and approximately $294
million in fund investments, along with its
carried interests in various Rialto funds, aswell as investments in other legacy Rialto
balance sheet assets

Sun Life Financial Inc.,financial services organization withapproximately $984 billion AUM

GreenOak Real Estate, areal estate investment firm withapproximately $11 billion AUM

Merger of the Sun Life Financial North
American property management firm
Bentall Kennedy with GreenOak Real Estatein which Sun Life Financial will acquire amajority stake in the combined entity named
Bentall GreenOak. Sun Life will contributeits interest in Bentall Kennedy and pay
GreenOak shareholders $146 million in
cash in exchange for a 56% interest in
the combined Bentall GreenOak entity,
with GreenOak shareholders holding theremaining interest. Sun Life will have an
option to acquire the remaining interest in
Bentall GreenOak approximately seven years
from the closing. Sun Life Financial also
will be acquiring the right to a portion of
the GreenOak shareholders’ share of Bentall
GreenOak net income in exchange for a fixedamount to be paid in quarterly installments.
This will result in Sun Life Financial having
the rights to approximately 90% of the
Bentall GreenOak earnings prior to theCompany exercising its option to increase
its ownership level. The transaction will befinanced through surplus cash

17

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

The Mather Group, a wealthmanagement firm with approximately$1.8 billion in AUM

Berman Investment Advisors,a financial planning firm with morethan $1 billion in AUM

Acquisition(terms not disclosed)

TK Partners, a consortium of
institutional investors formed
to acquire Savanna, founded by
Turnbridge Investment Partners,
an affiliate of advisory firm Hodes
Weill & Associates, LP and Seward& Kissel Client, Kudu Investment
Management, LLC

Savanna, a real estate investment
fund manager and developer that has
invested more the $4 billion since1992

Acquisition of minority interest(terms not disclosed)

TPG Sixth Street Partners(“TPG”), a credit platform withapproximately $27 billion AUM

Halycon Capital Management,
an investment management firmwith approximately $10 billion in
AUM

Acquisition by TPG of a new minority
interest and a separate acquisition by Dyal
increasing its existing minority interest. All
equity acquired was newly issued by Halcyon(terms not disclosed)

Triton Pacific Investment
Corporation, Inc., a publicly
registered non-traded businessdevelopment company company;
Triton Pacific Capital Partners is anaffiliated private equity firm withapproximately $1 billion in assets andofferings

Pathway Capital Opportunity
Fund, Inc., a registered closed-end
investment company

Definitive merger agreement creating TP
Flexible Income Fund, Inc., (the “Fund”),
which is jointly owned by Triton and
Pathway through Prospect Flexible Income
Management, an RIC with approximately$6.2 billion in AUM. Pathway shareholders
will receive an undisclosed number of TPIC
shares with a net asset value equal to the
net asset value of the Pathway shares theyhold, as determined shortly before closing.
The Fund will be a non-traded registeredfund structured as a business development
company

Victory Capital Holdings, Inc.,an investment management firm withapproximately $63.6 billion AUM

Harvest Volatility Management,
LLC, a derivative asset management
firm with approximately $12 billion
in AUM

Acquisition through a combination of debt,
equity and cash on the balance sheet, withthe potential for an earn-out over time if
certain growth objectives are met.
(terms not disclosed)

Victory Capital Holdings, Inc.,an investment management firm withapproximately $63.6 billion AUM

USAA Asset Management
Company, a family of companies
providing insurance, banking
and retirement products withapproximately $69.2 billion in AUM

Acquisition for $850 million plus additional
contingent payments based on futurebusiness performance. Victory Capitalwill finance the transaction through a
combination of debt and cash on the balance
sheet

Dyal Capital Partner (“Dyal”),
a private equity and venture capital
firm with approximately $14 billion
in AUM, and a division of Neuberger
Berman Group

18

3rd Quarter / 4th Quarter 2018
Closed-End Fund Public Offerings
American Beacon Apollo Total Return Fund
Structure:

An interval fund that will offer to make repurchases of no less than 5% and no more than 25% of its
outstanding shares at NAV, on a quarterly basis.

Investment
Objectives/Policies:

The Fund seeks to generate attractive risk-adjusted total returns using a multi-sector approach to fixedincome value investing. The Sub-Advisor will invest the Fund’s assets using a multi-sector approachacross a broad range of credit-oriented markets. The Fund is expected to allocate dynamically across thecredit universe to the areas which the Sub-Advisor believes produce the most attractive risk-adjusted
returns. The Sub-Advisor will utilize a flexible value investment style and will allocate the Fund’s
assets across four areas: U.S. corporate credit, global corporate credit, structured credit, and real estate
credit. The Sub-Advisor will seek to invest the Fund’s assets in both secured and unsecured obligations
such as: loans; high yield bonds; stressed or distressed credit assets; securities related to debtor-inpossession financing, rescue financing or exit financing; securities related to a corporate reorganization
or restructuring; corporate notes, bonds and other investments; RMBS; CMBS; asset-backed securities;
emerging market investments; structured credit assets (including CLOs and customized commercial andconsumer obligations); infrastructure and infrastructure-related investments; and any other asset or
instrument having a similar target return profile. The Sub-Advisor may invest in any level of the capital
structure, including senior, mezzanine and subordinated debt.

Manager:

American Beacon Advisors, Inc.; Sub-Advisor: Apollo Credit Management, LLC

Distributor:

Resolute Investment Distributors, Inc.

American Beacon Sound Point Enhanced Income Fund
Structure:

Interval fund that will offer to make repurchases of no less than 5% and no more than 25% of its
outstanding shares at NAV, on a quarterly basis.

Investment
Objectives/Policies:

The Fund seeks to provide high current income and, secondarily, capital appreciation. The Fund seeks
to achieve its investment objectives by investing primarily in a variety of credit-related instruments,
including corporate obligations and securitized and structured issues of varying maturities. Corporate
obligations may include fixed and floating-rate securities and bank loans, among others, issued by
U.S. or foreign (non-U.S.) entities. The mix of assets in which the Fund may invest will be flexible
and responsive to market conditions; however, the Manager and Sub-Advisor expect, under normal
circumstances, bank loans to constitute at least 40% of the Fund’s managed assets. Bank loans may
include first-lien and second-lien loans, among other loan types. Securitized issues primarily include
CLOs, and structured notes generally include CLNs. The Fund also expects to have exposure to equityrelated securities, which typically include the equity tranches of securitized issues. Instruments may
be issued by public or private entities and may be restricted as to the type of entity or investor that
may transact in them. The Fund may invest without limit in securities rated below investment grade
and in unrated securities. The Fund may invest in the obligations of companies undergoing an actualor anticipated corporate event, transaction or other catalyst, which is sometimes referred to as “eventdriven” investing.

Manager:

American Beacon Advisors, Inc.

Distributor:

Resolute Investment Distributors, Inc.
19

3rd Quarter / 4th Quarter 2018
Closed-End Fund Public Offerings (continued)
Broadstone Real Estate Access Fund
Structure:

An interval fund that will provide limited liquidity by offering to make quarterly repurchases of each classof shares at that class of shares’ NAV.

Investment
Objectives/Policies:

The Fund’s investment objective is to seek to generate a return comprised of both current income
and long-term capital appreciation with low-to-moderate volatility and low correlation to the broader
markets. Under normal circumstances, the Fund intends to invest at least 80% of the Fund’s net assets
in a portfolio of institutional quality real estate and real estate-related investments, which will becomprised of the following primary asset classes: (i) Direct Real Estate Investments, (ii) Private CRE
Investment Funds, (iii) Publicly Traded CRE Securities, and (iv) CRE Debt Investments.

Manager:

Broadstone Asset Management, LLC

Distributor:

ALPS Distributors, Inc.

Flat Rock Opportunity Fund
Structure:

An interval fund that will offer to make repurchases of no less than 5% and no more than 25% of its
outstanding shares at NAV, on a quarterly basis.

Investment
Objectives/Policies:

The Fund’s investment objective is to generate current income and, as a secondary objective, long-term
capital appreciation. The Fund expects to invest primarily in the equity and, to a lesser extent, in the
junior debt tranches of CLOs that own a pool of senior secured loans made to companies whose debt israted below investment grade or, in limited circumstances, unrated (“Senior Secured Loans”). We may,
to a lesser extent, invest in (i) debt and equity securities issued by business development companies,(ii) Senior Secured Loans directly, (iii) fixed income securities and (iv) investment funds that provide
exposure to Senior Secured Loans and fixed income securities. The CLOs in which we intend to invest
will generally be comprised of Senior Secured Loans that meet specified credit and diversity criteria andare subject to concentration limitations in order to create an investment portfolio that is diversified byborrowers and industries.

Manager:

Flat Rock Global, LLC

Distributor:

ALPS Distributors, Inc.

20

3rd Quarter / 4th Quarter 2018
Closed-End Fund Public Offerings (continued)
NexPoint Healthcare Opportunities Fund
Structure:

Interval fund that will offer to make repurchases of no less than 5% of its outstanding shares at NAV,
on a quarterly basis.

Investment
Objectives/Policies:

The Fund’s investment objective is to seek total return consisting of current income and longerterm capital appreciation. The Fund pursues its investment objective by investing, under normal
circumstances, at least 80% of its total assets in the securities of Healthcare Companies. A company will
be deemed to be a Healthcare Company if, at the time the Fund makes an investment in a company, 50%
or more of such company’s sales, earnings or assets arise from or are dedicated to healthcare products orservices or medical technology activities. Healthcare Companies are considered by the Adviser to include
companies in one or more of the following sub-sectors: pharmaceuticals, biotechnology, managed
care, life science and tools, healthcare technology, healthcare services, healthcare supplies, healthcare
facilities, healthcare equipment, healthcare distributors, health and wellness, cosmetics and skin careand Healthcare REITs. Additionally, we consider the term Healthcare Company to include companies
that are materially impacted by the healthcare industry, such as a contractor that primarily derives its
revenue or profit from the construction of hospitals. The Fund may invest in equity and debt securities.

Manager:

NexPoint Advisors, L.P.

Distributor:

Highland Capital Funds Distributor, Inc.

OFI Carlyle Private Credit Fund
Structure:

An interval fund that will offer to make repurchases of no less than 5% and no more than 25% of its
outstanding shares at NAV, on a quarterly basis.

Investment
Objectives/Policies:

The Fund’s investment objective is to produce current income. The Fund seeks to achieve its investment
objective by opportunistically allocating its assets across a wide range of credit strategies. Under normal
circumstances, the Fund will invest at least 80% of its assets in private fixed-income securities andcredit instruments. The Fund will opportunistically allocate its assets across any number of the following
credit strategies: (a) liquid credit (including publicly traded debt instruments and Treasury securities);(b) direct lending (including first lien loans, second lien loans, unitranche loans and mezzanine debt);(c) opportunistic credit (including private credit solutions, special situations and market dislocations);and (d) loans and structured credit (syndicated loans and CLOs). To a lesser extent, the Fund also may
invest in distressed credit (distressed-for-control debt and equity investments).

Manager:

OC Private Capital

Distributor:

OppenheimerFunds Distributor, Inc.

21

3rd Quarter / 4th Quarter 2018
Closed-End Fund Public Offerings (continued)
Pioneer ILS Bridge Fund
Structure:

An interval fund that will offer to make repurchases of no less than 5% and no more than 25% of its
outstanding shares at NAV, on a quarterly basis.

Investment
Objectives/Policies:

The fund’s investment objective is total return. The fund invests primarily in insurance-linked securities(“ILS”). ILS include event-linked bonds (also known as insurance-linked bonds or catastrophe bonds),
quota share instruments (also known as “reinsurance sidecars”), collateralized reinsurance investments,
industry loss warranties, event-linked swaps, securities of companies in the insurance or reinsurance
industries, and other insurance- and reinsurance-related securities. Because ILS are typically rated
below investment grade or unrated, a substantial portion of the fund’s assets ordinarily will consistof below investment grade (high yield) debt securities. Investment in securities of below investment
grade quality involves substantial risk of loss. Securities in which the fund may invest may also be
subordinated or “junior” to more senior securities of the issuer.

Manager:

Amundi Pioneer Asset Management, Inc.

Distributor:

Amundi Pioneer Distributor, Inc.

RiverNorth Opportunistic Municipal Income Fund, Inc.
Structure:

A limited term fund, terminating on or before October 25, 2030 unless otherwise determined by theFunds’ Board of Directors.

Investment
Objectives/Policies:

The Fund’s primary investment objective is current income exempt from regular U.S. federal income
taxes. The Fund’s secondary investment objective is total return. Under normal market conditions, theFund will seek to achieve its investment objectives by investing, directly or indirectly, at least 80% of
its Managed Assets in municipal bonds, the interest on which is, in the opinion of bond counsel to theissuers, generally excludable from gross income for regular U.S. federal income tax purposes, except thatthe interest may be includable in taxable income for purposes of the Federal alternative minimum tax(“Municipal Bonds”0. In order to qualify to pay exempt-interest dividends, which are items of interest
excludable from gross income for federal income tax purposes, the Fund will seek to invest at least 50%
of its Managed Assets directly in such Municipal Bonds.

Manager:RiverNorth Capital Management, LLC

Distributor:

First Dominion Capital Corp.

22

3rd Quarter / 4th Quarter 2018
Closed-End Fund Public Offerings (continued)
Variant Alternative Income Fund
Structure:

Interval fund with quarterly repurchase offers of no less than 5% of the Fund’s Shares outstanding at
NAV.

Investment
Objectives/Policies:

The Fund’s primary objective is to provide a high level of current income. Capital appreciation will beconsidered a secondary objective. Under normal market conditions, the Fund will seek to achieve its
investment objective by investing, directly or indirectly through a wide range of investment vehicles, amajority of its net assets in alternative income-generating investments. Such investments are typicallydomestic and foreign privately-held investments that are outside of traditional public equity and bondmarkets. These positions typically generate an interest payment, pay dividends, or have other formsof distributions that generally accrue value over time. These assets may include, but are not limited to,real estate equity and debt securities, life settlements, receivables, specialty finance, litigation financerelated investments, royalties, transportation finance, collateralized loan obligation warehouse facility
investments, as well as purchases of interests in private credit funds in the secondary market. The
Fund may also invest in public securities, including public debt, master limited partnerships, businessdevelopment companies, and preferred stock. The Fund will allocate its investments across multiple
strategies in both developed and emerging markets with varying levels of liquidity and credit quality,
including distressed and defaulted investments. The Fund may use derivative investments and may
have exposure to long and short positions across its asset classes to obtain the desired risk exposure
consistent with its investment strategies.

Manager:

Variant Investments, LLC

Distributor:

Foreside Fund Services, LLC

23

Simpson Thacher’s dynamic, long-standing Registered Funds Practice encompasses all
aspects of the investment management business. Our practice focuses on alternative asset
managers seeking to access retail investor channels, asset management mergers andacquisitions, and advising on cutting-edge regulatory policy and strategy matters.
David W. Blass • +1-202-636-5863 • david.blass@stblaw.com
David Blass is a Partner in Simpson Thacher & Bartlett LLP’s Investment Funds Practice. David is a leading
regulatory lawyer in the funds industry and has advised on matters involving innovative registered funds
products, Investment Advisers Act compliance, SEC examination and enforcement matters, and broker-dealer
regulatory compliance. Prior to joining Simpson Thacher, David served as General Counsel of the Investment
Company Institute (ICI), where he was responsible for the full range of legal and regulatory matters affecting
the asset management industry, including investment company, capital markets, pension and tax issues. He alsopreviously was Chief Counsel of the SEC’s Division of Trading and Markets.

Rajib Chanda • +1-202-636-5543 • rajib.chanda@stblaw.com
Rajib Chanda is a Partner in the Washington, D.C. and New York offices of Simpson Thacher & Bartlett LLP,
and is the Head of the Firm’s Registered Funds Practice. Rajib’s practice focuses on all aspects of issues facing
registered investment advisers and sponsors of registered funds. Rajib has particular experience working withalternative asset managers seeking to access retail investor channels through mutual funds, business development
companies, closed-end funds, exchange-traded funds and permanent capital vehicles. He also works extensively
with more traditional registered fund sponsors and works closely with the firm’s asset management M&Agroup on transactions involving registered advisers and funds. In addition, Rajib provides counsel to boardsof registered funds, and has substantial experience advising companies on issues relating to social media andcybersecurity.

Sarah E. Cogan • +1-212-455-3575 • scogan@stblaw.com
Sarah Cogan is Of Counsel in the New York office of Simpson Thacher & Bartlett LLP. Sarah’s practiceencompasses all aspects of the registered funds industry and she represents closed-end investment companies,
open-end mutual funds, investment advisers and independent directors of investment companies. She has aparticular expertise in advising underwriters and sponsors in offerings by closed-end funds and businessdevelopment companies. In addition, Sarah advises fund clients on corporate and securities law, including
investment management, regulatory, compliance and M&A matters.

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

Rafael VasquezCounsel+1-212-455-3566
rvasquez@stblaw.com

Benjamin Wells
Counsel+1-212-455-2516
bwells@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 your relationship partner if we can be of assistanceregarding these important developments. The names and office locations of all of our partners, as wellas our recent memoranda, can be obtained from our website, www.simpsonthacher.com.
24

SimpsonThacherWorldwide

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SOUTH AMERICANew York
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New York, NY 10017+1-212-455-2000

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Japan+81-3-5562-6200

25