Registered Funds Alert

October 2019

Table of Contents
Our Comment Letter on Ways to
Expand Investor Access to Private
Company Investments ThroughRegistered Funds

2

A summary of what we believe to be thekey regulatory barriers that discouragesponsors from offering private equity,
private credit and other private markets
investment strategies to a broader group ofinvestors.
Click here for more

Lyfting Our Spirits: The SEC’s
7
Reengagement With Section 3(b)(2)of the 1940 Act May Provide an Avenue
for Non-Investment Companies to Obtain
Clarity About Investment Company Act
Status and Reduce Compliance Costs
Our thoughts on a recent development in1940 Act status determinations.
Click here for more

Key Themes From Comments on
11
SEC Proposals Regarding Securities
Offering Reforms for Business
Development Companies and ClosedEnd Investment Companies
Analysis of industry comment lettersregarding the SEC’s rule proposal.
Click here for more

Notable Transactions: Q2 & Q3 2019 14
A list of notable transactions that occurredin the second and third quarters of 2019,
including M&A transactions and closed-end
fund IPOs.
Click here for more

The latest edition of Simpson Thacher’s Registered Funds Alert
discusses recent developments in the registered funds industry,including: our views in response to an SEC call for comment on
expanding investor access to private company investments; a closer
look at a recent development in determining whether a company
is subject to the 1940 Act; and a summary and analysis of industry
comment letters on the SEC’s rule proposal that would modify
the registration, communications and offering rules for BDCs andregistered closed-end investment companies.

Simpson Thacher & Bartlett LLPIn June 2019, the SEC issued a long-awaited concept
release seeking comments “on possible ways tosimplify, harmonize, and improve the exempt
offering framework to promote capital formationand expand investment opportunities while
maintaining appropriate investor protections.”
Notably, one of the stated goals of the concept
release was to “examine whether [the SEC] shouldtake steps to expand issuers’ ability to raise capitalthrough pooled investment funds, and whether
retail investors should be allowed greater exposure
to growth-stage issuers through pooled investment
funds in light of the potential advantages ofinvesting through such funds.”
As previewed in our January 2019 Alert, we believethat registered investment companies and BDCs
may be one of the best ways to increase investor
access to investment strategies that invest in private
and growth-stage issuers, as significant investor
protections are built in to the foundation of theexisting regulatory framework for these types offund structures. We submitted comments on theconcept release on September 24, 2019, focusing on
what we believe to be the key regulatory barriers
that discourage sponsors from offering private
equity, private credit and other private markets
investment strategies to a broader group ofinvestors. Our comment letter is reproduced below.
***

from the initial concept phase to negotiations withinvestors and intermediaries and the ultimate launchof a fund. Many of these alternative asset managers
specialize in the types of investment strategies that
the Commission in the Concept Release considers
making more widely available to investors. These
strategies include private equity, private credit,
infrastructure and real estate strategies (generally
referred to herein as private markets strategies).
While there are a variety of reasons that a regulated
fund product ultimately may not launch, in ourview restrictions based in the 1940 Act and theInvestment Advisers Act of 1940, as amended (the“Advisers Act”), that were not designed with private
markets strategies in mind too frequently stifle theefforts of our clients to offer these strategies to abroader range of investors through regulated funds.
As Chairman Jay Clayton has suggested,“appropriately structured funds” are one way to“facilitate Main Street investor access to private
investments in a manner that ensures incentivealignment with professional investors—similar to our
public markets—and otherwise provides appropriate
investor protections.”1 We agree, and in this comment
letter we wish to share with the Commission our
experience regarding the regulatory hurdles thatmost frequently prevent managers from offering
more investors access to investment strategies thatare readily available to institutional investors.

Dear Secretary Countryman:
We welcome the opportunity to comment on thequestions raised by the U.S. Securities and Exchange
Commission (the “Commission”) with respect toways to simplify, harmonize and improve the exempt
offering framework to promote capital formationand expand investment opportunities for retailinvestors while maintaining appropriate investor
protections. Simpson Thacher & Bartlett LLP has
significant experience representing investment
advisory firms, asset managers and other financial
institutions that sponsor and advise pooled
investment vehicles, including registered investmentcompanies and business development companies(collectively, “regulated funds”) and private funds
that operate pursuant to an exemption or exclusionfrom the definition of investment company under theInvestment Company Act of 1940, as amended (the“1940 Act”). We submit the following comments on
our own behalf and the views contained herein do
not necessarily reflect the views of any of our clients.
Overview
We frequently assist alternative asset managers
in their development of regulated fund products,

The illiquid nature of the investments inherent
to most private markets strategies requires any
regulated fund pursuing such a strategy to be
structured as a closed-end fund. Accordingly, there
are two primary structures for regulated funds
to offer more investors access to these types ofinvestment strategies: (a) closed-end funds of funds,
which invest indirectly through private funds (i.e.,
funds of private funds); and (b) closed-end funds,or BDCs, each of which invest directly in private
markets. We recommend that the Commission
1.

Remarks to the Economic Club of New York, (September 9, 2019),
https://www.sec.gov/news/speech/speech-clayton-2019-09-09.
2

consider six regulatory reforms to remove several
key impediments that discourage alternative
asset managers from offering their strategies to abroader audience:With respect to closed-end funds of private funds,
we recommend that the Commission:(i) allow regulated funds to invest in affiliatedprivate funds;(ii) allow regulated funds of private funds to list on
stock exchanges;
With respect to closed-end funds and BDCs thatinvest directly in private markets strategies, werecommend that the Commission:(iii) allow regulated funds to incentivize managers
to produce strong investment performance forthe benefit of investors;(iv) permit regulated funds to engage intransactions with portfolio companies that
may, subsequent to an initial transaction, be
deemed to be a portfolio affiliate of an affiliatedprivate fund;alignment of interests between management of theregulated fund and underlying private funds andenhanced visibility into the value of a position ina private fund. Additionally, a regulated fund that
can invest in affiliated funds may be better from an
investor’s perspective compared to a regulated fundthat directly pursues a private markets strategy
by co-investing alongside affiliated private funds.
Investors in private funds frequently negotiate
limitations on the ability of a sponsor to allocate
opportunities to other funds. Regulated funds that
can invest in affiliated private funds would not bedisadvantaged by such limitations.
Regulated funds are already permitted to invest inaffiliated mutual funds under Section 12(d)(1)(G) of
the 1940 Act. We appreciate that the Staff historicallymay have had different conflict of interest concerns
when the underlying funds are private funds.
However, we believe the Commission could impose
reasonable restrictions on a fund of affiliated private
funds structure to mitigate these concerns. For
example, below are several potential limitations
that would mitigate the risk of overreaching by
a manager:3(v) permit regulated funds additional flexibility inpublicly reporting the values of investments inprivate issuers; and(i) To avoid impermissible layering of fees, theregulated fund’s board of directors will only
approve fund-level fees for services that are in
addition to and not duplicative of services at
the underlying affiliated private fund level;(vi) permit tender offer funds to use the intervalfund repurchase process and rely on rules that
permit automatic effectiveness of registration
statement amendments.

(ii) To avoid the concern that retail investor money
will be used to “seed” funds with untested
or potentially unattractive strategies, theregulated fund cannot own more than 25% of
any affiliated closed-end private funds;

Recommendations to Promote Funds of Private
Funds(iii) To address similar seeding concerns, theregulated fund cannot own more than 25% of
any affiliated open-end private funds and will
be restricted from seeding affiliated open-end
private funds;

Allow Regulated Funds to Invest in AffiliatedPrivate Funds
The inability of a regulated fund to invest in affiliatedprivate funds may be the single most significant
barrier to offering more investors access to private
equity strategies through regulated funds.2 The
restrictions on principal transactions between aregulated fund and its affiliates in Sections 17 and
57 of the 1940 Act generally prohibit a private fundfrom selling its securities to an affiliated regulated
fund. As a result, regulated funds of private equity
funds are only permitted to invest in private funds
managed by unaffiliated sponsors. Regulated
funds of affiliated private funds may offer investors
certain benefits unavailable to a fund that invests
in unaffiliated private funds, including better
2.

See Concept Release at 190-191, Question 120.

(iv) To avoid being deemed to be formed for the
purpose of investing in a particular private
fund, the regulated fund will not invest morethan 40% of its assets in a single affiliatedprivate fund;(v) To avoid complex control structures, theregulated fund will vote its interests in any
affiliated private fund in the same proportion
as the vote of all other shareholders in aparticular affiliated private fund or seek
instructions from its shareholders; and3.

See Concept Release at 188, Question 115.
3

(vi) To ensure that the terms of the affiliatedtransaction with the affiliated private fund are
not disadvantageous to the regulated fund,the regulated fund will receive substantiallysimilar treatment with respect to all
investments in affiliated private funds as thetreatment received by similar investors.

artificial constraints on a closed-end fund’s ability to
pursue an investment strategy focused on less liquid
investments, as managers must source liquidity
for investors through sales of portfolio holdings,
which can disadvantage investors and would be
unnecessary for listed funds whose investors cantrade shares on an exchange. We urge the Staff torevise its position and permit funds of private funds
to be accessible to all investors, and allow such funds
to list on national securities exchanges.

If the Commission were to permit regulated funds
to invest in affiliated private funds, with appropriate
limitations, such as those set forth above, it would
remove one of the key deterrents that prevents
alternative asset managers from making theirstrategies available to more investors.
Allow Regulated Funds of Private Funds to List on
Stock Exchanges
The staff of the Commission’s Division of Investment
Management (the “Staff”) has taken a positionin the disclosure review process and relatedcomment letters4 that a regulated fund that invests
a significant portion (more than 15%) of its assets
in private funds can only be offered to accredited
investors.5 To our knowledge, the Staff has neverfully explained the legal or policy basis for its
position, and there is no statute, rule or regulation
imposing this limitation.
We understand that initial and continuing listing
standards for major national securities exchanges
do not restrict regulated funds of private funds
from listing and trading on exchanges, as they are
generally agnostic as to a listed fund’s investment
strategy.6 Therefore, the only reason regulated
funds of private funds are unable to list on an
exchange is the Staff’s position that limits thesefunds to accredited investors. This deprives
shareholders of a regulated fund of private fundsof one of the primary liquidity options that would
normally exist for a closed-end fund, and readily
available, frequent liquidity should be viewed as
an enhancement to investor protection.7 Currently,
because funds of private funds are unable to list on
a stock exchange, they are forced to find alternativemeans to provide liquidity to investors, typicallythrough periodic share repurchases. This places
4.

See, e.g., Sierra Total Return Fund, SEC Comment Letter (Mar. 11,2016); Wildermuth Endowment Strategy Fund, SEC Comment Letter(Oct. 11, 2013); Resource Real Estate Diversified Income Fund, SEC
Comment Letter (Oct. 19, 2012).

5.

See Concept Release at 188, Question 114.

6.

We note that the Committee on Capital Markets Regulation also has
submitted comments agreeing with this analysis.

7.

See Concept Release at 192-193, Questions 128-129.

Recommendations to Promote Funds That Invest
Directly in Private Markets Strategies
Allow Regulated Funds to Incentivize Managers to
Produce Strong Investment Performance for the
Benefit of Investors
Section 205(a)(1) of the Advisers Act generally
prohibits a manager from receiving compensation
based on a share of capital gains upon, or capital
appreciation of, the assets of a registered closedend fund unless the offering of the fund is limited
to “qualified clients.”8 BDCs, on the other hand,are permitted to pay a manager an incentive fee on
capital gains without the qualified client limitation.
The 1940 Act’s restrictions on a BDC’s investment
strategy prevent some funds from using a BDC
structure. For example, a BDC must invest at least
70% of its assets in U.S. issuers, so a global private
equity strategy would not fit a BDC structure.9
In addition, that 70% requirement also excludes
investments in investment companies (or certain
exempt investment companies), and thus indirect
equity investments through co-investments offeredby third-party sponsors may also be ineligible when
made through funds created for the benefit of dealspecific co-investors.

8.

The qualified client standard is a higher threshold than the accredited
investor standard, requiring a natural person to have a net worth of atleast $2.1 million (excluding the value of a primary residence).

9.

See 15 U.S.C. 80a-54.

4

The Commission should consider adopting an
exemptive rule that would permit registered closedend funds to pay a similar incentive fee on capitalgains.10 In our view, the justification for treating
BDCs and closed-end funds differently in thisrespect has eroded over time. Congress adopted the
BDC structure in 1980 to promote investment inprivate U.S. issuers by facilitating venture capitaltype strategies where a fund’s gains are based on
capital appreciation.11 However, the BDC structure
has not led to widespread investment in equity
strategies, for the reasons noted above and others(such as the lack of exemption from state securities
laws for unlisted BDCs, unlike for closed-end funds).
Closed-end funds, because they are more flexible,

are more likely vehicles for investments in private
markets than BDCs. Thus, nearly 40 years later, as
policymakers find themselves again looking for ways
to facilitate investments in private companies, wesuggest that fee parity between registered closed-end
funds BDCs is one way to facilitate such investment.
The Commission has significant discretion
under Section 205(e) of the Advisers Act to adopt
exemptions to Section 205(a)(1), and we believe it
would be appropriate to permit registered closed-end
investment companies that pursue private markets
strategies to pay their managers an incentive fee
based on capital gains.
Fulcrum fees, permitted for registered investmentcompanies under Section 205(b)(2) of the Advisers
Act, provide a poor substitute for traditional
incentive fees. The mandated symmetry of fulcrum
fees, where a base fee must increase or decrease inequal increments based on performance, results ina manager being paid a relatively high fee for poor
10. See Concept Release at 191, Question 123.
11. See H.R. Rep No. 96-1341, at 19 (“[the bill] was designed to provide
exemptions . . . for certain qualified venture capital companies incertain circumstances.”), and at 27 (1980) (“. . . registered investment
advisers to business development companies would in certain instances
be permitted to receive ‘performance fees,’ geared to appreciation of
the companies’ portfolios.”); S. Rep No. 96-958, at 42 (1980) (notingthat performance fees for BDC managers are subject to scrutiny under
Section 36(b) of the 1940 Act).

performance. A traditional incentive fee provides
a more market-tested (and investor friendly)
approach and incentivizes a manager to produce
strong long-term returns. Decades of market
practice in the private fund space have resulted insophisticated institutional investors negotiating
standard concepts that are frequently incorporated
into BDC incentive fees. Two features in particular,“hurdles” and “lookbacks,” are common devices in
BDC performance fee structures that are derived
from similar concepts used by private funds tocreate incentive alignment between a sponsor andinvestors, and could be implemented for closed-end
funds that invest in private markets.
A hurdle helps to ensure that no performance fee
is paid unless a fund beats a specified performancethreshold for a specific period. Many BDCs havehurdles that are based on longer term lookback
periods, sometimes going back to the fund’s
inception. This essentially means that if the fundfails to achieve strong performance continually, thefund will have to make up for any underperformance
during the lookback period before the manager
will be entitled to receive additional incentive fees.
The hurdle and lookback structure is a significant
deterrent to speculative short-term risk taking by
a manager, and effectively mitigates the investor
protection concerns that a fulcrum fee structure wasdesigned to address. We believe that a traditional
incentive fee structure offers benefits to bothinvestors and managers when compared to fulcrum
fees, and urge the Commission to allow closed-end
investment companies to adopt fee structures similar
to BDCs.

“

We believe that a traditional incentive fee
structure offers benefits to both investors andmanagers when compared to fulcrum fees,
and urge the Commission to allow closed-end
investment companies to adopt fee structures
similar to BDCs.

”

Permit Regulated Funds to Engage in Transactions
With Portfolio Companies That May, Subsequent toan Initial Transaction, Be Deemed to Be a Portfolio
Affiliate of an Affiliated Private Fund
Regulated funds pursuing a direct private equity
strategy face two affiliated transaction issues under
Sections 17 and 57 of the 1940 Act. First, thesefunds often plan to co-invest alongside a manager’s
affiliated private funds, which generally would beprohibited under the 1940 Act’s proscription on anaffiliated person of a regulated fund, and affiliated5persons of such persons, acting jointly with the fund.
Fortunately, the Commission has streamlined theco-investment exemptive relief application process
in recent years, removing co-investments as a major
gating item in the product development process.
Co-investment exemptive orders still take months toreceive, and the conditions historically imposed on
managers create a significant administrative burden,
but the Commission’s flexibility in these exemptive
orders has removed what previously was the single
largest gating item to pursuing a private markets
regulated fund.12
A second 1940 Act affiliated transaction restriction,
however, will also need to be addressed to encourage
investment in private markets by regulated funds.
In addition to joint transactions with affiliates,
Sections 17 and 57 of the 1940 Act prohibit principaltransactions between a regulated fund and its
first- and second-tier affiliated persons. While
co-investment exemptive relief may permit aregulated fund to initially make a co-investment withaffiliated funds, there currently is no explicit relief
that allows a regulated fund to engage in subsequenttransactions with a portfolio company that (by virtueof the initial co-investment) became an affiliatedperson of an affiliated private fund. Rule 17a-6
permits two affiliated regulated funds to transact
with a jointly-affiliated portfolio company but thisexemption may not be available if an affiliatedprivate fund is involved. We recommend that theCommission either amend Rule 17a-6 to fix thisdisparity, authorize the Staff to incorporate similar
relief into co-investment exemptive orders or to issue
similar interpretive guidance, or confirm that such
relief is implicit in existing co-investment orders.
Permit Regulated Funds Additional Flexibility in
Publicly Reporting the Values of Investments in
Private Issuers13
In addition to representing alternative asset
managers, we have significant experience
representing private operating companies who haveconsidered accepting capital from regulated funds.
From the perspective of private operating companies,
the requirement that a regulated fund must publicly
report the value of its investment in each portfolio
company makes an investment by a regulated fundunattractive.14 To facilitate regulated fund investment
12. We urge the Commission and its Staff to grant the new form of coinvestment exemptive relief sought by FS Global Advisors, LLC (FileNo. 812-15016), as it would further significantly reduce unnecessary
burdens on managers while retaining the core investor protections ofpreviously granted co-investment orders.

in private issuers, we believe the Commission should
consider narrowly tailored exceptions to reporting
individual portfolio values in private portfolio
companies. For example, we recommend that aregulated fund be permitted to report an aggregate
value for small positions in multiple privatecompanies, such as those where the regulated fundand its affiliates hold less than 5% of the issuer’s
equity securities. This would address a particularconcern of private issuers that the public may see aregulated fund report a valuation that differs fromthe private issuer’s own valuation, even though
the regulated fund, as a minority investor, may
be missing critical information about the issuer’s
business. Alternatively, the Commission could
consider permitting a regulated fund to publish theprivate issuer’s own valuation alongside the fund’sreported value, or the ability for the private issuer tonote its disagreement with the valuation. In the eventa private issuer disagrees with the fund’s valuation,
this would provide private issuers with a mechanism
to attempt to correct the public record regarding theissuer’s valuation. We encourage the Commission toseek public comment on potential other solutions tothis limitation on the attractiveness of regulated fundinvestment in private markets, from the perspectiveof the private operating companies.
Permit Tender Offer Funds to Use the Interval Fund
Repurchase Process and Rely on Rules That Permit
Automatic Effectiveness of Registration Statement
Amendments
Tender offer funds have more flexibility thaninterval funds to determine the timing and extent ofrepurchases, but must adhere to tender offer rules
under the Securities Exchange Act of 1934 whileinterval funds have a streamlined process under
Rule 23c-3 of the 1940 Act.15 This added flexibility
has led funds that pursue a private markets strategy
to choose the tender offer fund structure, but the
inefficiencies of this structure create unnecessary
costs for shareholders. The Commission should allow
tender offer funds to utilize the same streamlined
repurchase process that interval funds can use,
thereby reducing costs for tender offer funds without
sacrificing investor protections.16 We recommendthat the Commission allowing tender offer funds torely on Rule 486 under the Securities Act of 1933,
which allows interval funds to file certain updates totheir registration statements that become effective
automatically. Providing this parity with intervalfunds may also make a wholesale revision of Rule

13. See Concept Release at 187, Question 111.

15. See Concept Release at 177.

14. See generally, Article 6 of Regulation S-X.

16. See Concept Release at 191, Question 121.

6

23c-3 under the 1940 Act, applicable to intervalfunds, unnecessary.17
Conclusion
The Commission’s openness to consider theseimportant issues has the potential to lead tosignificant innovation in the regulated funds
space and provide corresponding benefits toretail investors. We appreciate the opportunity tosubmit, and the Commission’s consideration of, ourcomments.

Lyfting Our Spirits: The
SEC’s Reengagement With
Section 3(b)(2) of the1940 Act May Provide an
Avenue for Non-Investment
Companies to Obtain Clarity
About Investment Company
Act Status and Reduce
Compliance Costs
The 1940 Act contains at least one conceptual
oddity—a corporate issuer that clearly does notoperate an investment company business can finditself unable to avoid falling within the 1940 Act’s
definition of an investment company. The result forthat company is harsh. It would be subject to thefull panoply of regulations imposed by the 1940 Act,
including requirements and restrictions related tocapital structure, corporate governance, borrowing,
and transactions with affiliates. Also harsh aresome of the steps such a company must take to
avoid being deemed an investment company. Manycompanies are forced to go so far as restructuring
and committing to significant restrictions on how
they manage their business to avoid inadvertently
being deemed an investment company subject to the1940 Act.
We are happy to report that the SEC and its staff
have recently reengaged with an existing provision in
the 1940 Act that can provide some relief by allowing
the SEC to affirmatively declare that a corporate
issuer is not an investment company. Simpson
Thacher recently assisted Lyft, Inc. in obtaining such
exemptive relief in connection with its initial public
offering earlier in 2019. The relief effectively provides

17. See Concept Release at 188-191, Questions 116-120.

Lyft with a permanent exemption from the 1940
Act and the restrictions it would impose on Lyft’s
business operations and cash management strategy.
We think this underutilized tool could help morebusinesses put the 1940 Act behind them for good.
This Alert discusses issues that arise under the 1940
Act definition of the term “investment company,”
how the exemptive relief obtained by Lyft works
and the prospects and potential benefits for otherbusinesses that might seek similar relief. The
SEC’s recent renewed openness to these types of
exemptive applications signals that there may be an
opportunity for other interested applicants to resolve
potential investment company status issues throughthe exemptive process, thereby removing artificial
constraints on their businesses and clearing any
doubt regarding its investment company status going
forward.
The Definition of “Investment Company” Under the1940 ActThe 1940 Act’s regulations and restrictions generally
only apply to a company that meets the definitionof the term “investment company.” The restrictions
around investment companies are onerous and any
business that does not purposefully intend to operate
as a registered investment company should stridently
seek to avoid falling within the term’s definition.
Several common scenarios exemplify the problem.
Asset-Lite Operating Companies and the
Objective Test
Section 3 of the 1940 Act contains a multi-part
definition of the term “investment company,” butthe most relevant prong of that definition is often
referred to as the “objective test.” Conceptually, theobjective test is most easily discussed by referring to“good assets,” which do not count toward the limit of
the investment company test, and “bad assets,” which
do count toward that limit. Certain intangible assets
are discarded as not assets at all for these purposes.18
If, on an unconsolidated basis, more than 40 percentof the value of a business’s total assets (exclusive of
any U.S. government securities and cash items) arebad assets, then the company is said to be a “prima
facie investment company.”“Bad assets” under the objective test is a broad
category and essentially includes every kind of
security other than U.S. government securities and18. Under U.S. Generally Accepted Accounting Principles (“GAAP”),
intangible assets, such as internally developed intellectual property andgoodwill, generally are not treated as “assets” unless obtained throughan acquisition, and therefore often do not appear on a company’s
financial statements.
7

securities issued by majority-owned subsidiaries.
Investments commonly associated with investment
funds, such as long-term debt investments and noncontrolling equity stakes, would be considered bad
assets. But so too are common cash management
investments such as commercial paper andcommercial bonds, even if they are only short-term
investments, in many circumstances.
The objective test is meant to be an easy-to-apply,
bright-line test, but it struggles to categorize manybusinesses appropriately today. The objective test
presumes that more than 60% of a non-investmentcompany’s value will be made up of its property,
equipment, inventories, receivables and other good
assets. This presumption about a business’ asset
mix may have been an easy and effective way to
distinguish investment companies from operatingcompanies when the 1940 Act was written, but today
the methodology presents significant challenges.
Increasingly, companies find that they are prima
facie investment companies because the bulk of
their value is actually intangible and intertwinedwith their internally developed intellectual property,
or such other value that is intangible and therefore
has no value as an “asset” for purposes of the 1940
Act test, even though the real-world value may besubstantial (for example to a potential acquirer ofthe business).
The problem is further compounded when an assetlite company has substantial cash on hand from acapital raise and that cash cannot be immediately
deployed into the operations of the business. Cash isa “neutral asset” under the objective test. A company
that holds substantial amounts of cash may find thata relatively small amount of bad asset investments
may cause the company to fail the objective test.

Example: Imagine that a technology company
with $60 million in tangible good assets raises $1
billion from investors to fund future operations. To
simplify the exercise, assume this company has nodebt. Under the objective test, if the company werethen to invest more than $40 million into shortterm corporate bonds, the company would exceed
the 40% threshold for bad assets and inadvertently
become an investment company. This is because
all of the cash it raised would be excluded from theobjective test calculations. The total value of thebusiness, as per the 1940 Act, would be just the $60
million in good assets plus whatever bad assets it
acquires after the fundraise, even though investors
and management rationally perceive the value of thebusiness to be much higher.
By investing just 4% of the $1 billion it raised into
bad assets, the business would become subject toregulation as though it were a mutual fund. No
reasonable investor would think that an investment
in such a company is akin to investing in a mutual
fund, but nevertheless the business would be a
prima facie investment company in the eyes of
the 1940 Act and need an exemption to avoid
burdensome regulation.

Intercompany Loans Under the
Objective Test
A company with a complicated structure thatinvolves internal lending may also find the objective
test challenging. Under the objective test, anintercompany loan is generally considered a bad
asset for the entity that makes the loan and holds thenote. Two notable exceptions include where the loan
is made by a parent company to its direct or indirect
majority-owned subsidiary (in which case the parent
company may treat the intercompany loan as agood asset) or where the entity that makes the loan
qualifies for the “finance subsidiary” exception under
Rule 3a-5 of the 1940 Act.
For many businesses, parent, subsidiary and sister
entities make and receive loans to and from one
another regularly for cash flow, tax and otherimportant business purposes, and the financesubsidiary exception is not nearly broad enoughto capture this common practice. The financesubsidiary exception was created to ensure a very
specific type of subsidiary that borrows money andrelends it internally would not itself be, and would
not cause its parent to be, deemed an investmentcompany. On the one hand, the existence of the
exception demonstrates that the Commission isaware of the challenge in applying the objective test.
On the other, the exception is too narrow to capture8the vast majority of corporate subsidiaries. The result
is that the general practice of intercompany lending,when not performed by one of these purpose-createdfinance subsidiaries, can very easily result in thelending entity being deemed an investment company.
We can think of no policy rationale why the internalmanagement of cash within an enterprise should
result in a company being an investment company
under the 1940 Act. Nevertheless, if more than 40%
of a subsidiaries’ assets are intercompany loans, itwould be a prima facie investment company andneed an exemption, because without one the entire
value of that subsidiary would be a “bad asset” forpurposes of applying the objective test to the parent.

“

We can think of no policy rationale why theinternal management of cash within an enterpriseshould result in a company being an investmentcompany under the 1940 Act.

”

Businesses That Operate Through Certain Joint
VenturesBusinesses that seek to operate through joint
ventures also expose the objective test’s limitations.
Under the objective test, securities issued bymajority-owned subsidiaries are treated as good
assets, but the 1940 Act’s definition of majorityowned subsidiaries is rigid and can be strainedwith respect to many joint ventures. The definitionof majority-owned subsidiaries includes only thosesubsidiaries of which the parent owns 50% or moreof the outstanding voting securities.
Many businesses do not need to consider the 1940
Act implications of entering a joint venture, but
for some the joint venture will represent such a
substantial part of their business that 1940 Act
considerations become paramount. Joint ventures
can be majority-owned subsidiaries with careful
structuring and only two participants, but an
unequal distribution of voting rights or more than
two participants arguably prevents any joint venturefrom being treated as a majority-owned subsidiary.
While there are still potential arguments to avoid
treating such a joint venture as a bad asset, they
are uncertain, and there is no good reason why abusiness that legitimately intends to enter into a
joint venture should have to worry about potential
regulation under the 1940 Act because of how thejoint venture is structured.
This particular difficulty also impacts certain
investment vehicles that should fall completely
outside of the 1940 Act because they do not invest

in securities. Many real estate investment trusts(“REITs”) invest only in interests in real property,
and interests in real property are not securities
under the 1940 Act. There is even a specificexemption for businesses that primarily invest inreal estate in Section 3(c)(5)(C). The operation of
the 1940 Act, however, also means that an issuer
that wishes to make real estate investments throughthe use of a joint venture would potentially beunable to meet the requirements of that exception
or otherwise pass the objective test. These results
are counterintuitive. The same issuer could invest
in the real estate directly (such as by jointly taking
title to the property with other investors) and avoid
being deemed an investment company, but cannot
freely do so indirectly using a corporate structure(even if structuring the investment in this way ismore beneficial from a business perspective) without
falling under the scope of the 1940 Act. Accordingly,
managers of REITs spend an inordinate amountof time structuring solutions to satisfy 1940 Act
requirements and/or forego certain beneficial
investment opportunities for the sole purpose of
avoiding being deemed an investment company.
The Usual Approaches to Investment Company
Status Issues
Many businesses currently work around or mitigate
the investment company status problems describedabove without approaching the SEC directly, but
those approaches come with drawbacks. In many
instances, businesses choose to do nothing otherthan carefully monitor their balance sheets and limit
their investments to avoid inadvertently becoming an
investment company under the objective test. That
solution is inefficient because it can dramaticallylimit the business’ investment flexibility. The
decision to have a conservative corporate treasury
investment program or avoid a joint venture should
be motivated by legitimate operational concerns, notfear of an overreaching regulation that was neverintended to constrain non-investment company
businesses.
Alternatively, a business may choose to take certain
interpretive positions with respect to key portions of
the 1940 Act to reason their way out of complianceissues. A prima facie investment company might
may rely on Section 3(b)(1) of the 1940 Act, whichallows the entity to self-determine that it is primarily
engaged in a non-investment company businessand therefore excluded from the definition of aninvestment company. There is, however, only alimited amount of applicable guidance available on
Section 3(b)(1) and not every issue has been exploredfully.

9

The inherent uncertainty of self-determination
can pose some practical barriers to operations
and expansion. When accessing capital markets orengaging in other significant corporate transactions
such as mergers and acquisitions, businesses areusually required to represent that they are notrequired to register as an investment company
under the 1940 Act. When a business chooses torely on self-determination, it must also accept
that counterparties may not accept its reasoned
determination that it is not an investment company.
Lyft and Section 3(b)(2) of the 1940 Act
Section 3(b)(2) allows the SEC to unambiguously
declare that an individual applicant is not an
investment company, full stop. An applicant
interested in that relief provides the SEC with
relevant information about its business, activities
and assets, and asks that the SEC declare that it is
not an investment company. If the SEC agrees, itpublicly issues an order finding that the applicant isprimarily engaged in a business other than that of aninvestment company (a “3(b)(2) Order”).
In theory, obtaining a 3(b)(2) Order is an attractive
alternative to the approaches discussed above,
but in practice it has been rarely used. Despite theclear advantages of having a formal and permanent
decision regarding investment company status,
applying for a 3(b)(2) Order has been a rarely utilized
option in recent years. Before 2011, dozens of 3(b)(2)Orders had been granted, including to household
names such as Microsoft and Yahoo!. Since 2011, anduntil Lyft’s 3(b)(2) Order, the SEC only issued four
such Orders. Moreover, several well-known operatingcompanies have applied for a 3(b)(2) Order without
success. We believe that trend may be coming to an
end.
Lyft successfully applied for and received a 3(b)(2)Order in a very short timeframe. Like many othertechnology companies with high valuations,the cash-heavy and asset-lite nature of Lyft’s
business left uncertainty about whether it should
technically be subject to regulation under the 1940
Act, especially if only its GAAP balance sheet isconsidered. As discussed in Lyft’s application, using
only the company’s GAAP balance sheet, Lyft’s bad
assets represented 78% of the company’s assets.
But under Lyft’s own calculations, which accountfor intangible assets, bad assets represented just
26.5% of the company’s assets. Lyft argued that theexemptive relief was needed to clarify its 1940 Act
status to counterparties, and so that it would nothave uncertainty regarding its status after the influxof cash from its IPO.

An application for a 3(b)(2) Order is a public filingthat details the reasons the applicant believes it isprimarily engaged in a business other than owningor trading in securities. The argument in a 3(b)(2)Order application is primarily driven by the factors
outlined in In re Tonopah Mining,19 the formative
case distinguishing operating companies frominvestment companies for purposes of the 1940 Act.
The five-factor Tonopah test looks to:(i) a company’s historical development;(ii) its public representations of policy;(iii) the activity of its officers and directors;(iv) the nature of its present assets; and(v) the sources of its present income.

Lyft argued that each of the five Tonopah factors
demonstrates that it is an operating company andnot an investment company. Notably, in discussing
the nature of the company’s assets, Lyft’s application
represented that it currently held no bad assets otherthan Capital Preservation Investments (“CPI”),
which are short-term investment-grade and liquid
fixed income and money market investments thatearn competitive market returns and provide a low
level of credit risk. CPI is not a concept unique to
Lyft’s application, but Lyft’s circumstances wereparticularly clean in that all of its bad assets could
be characterized as CPI. Even though CPI are badassets under the objective test, the discretionary
nature of 3(b)(2) Orders allows the SEC to make adetermination about whether the company’s CPI
investments truly should be deemed to make it aninvestment company.
Overall, the SEC concluded that Lyft is not primarily
engaged in an investment company business. Lyft’s
application for a 3(b)(2) Order contains certain
representations about how Lyft will manage its assets
going forward, including that no more than 10% of
its total assets will be bad assets other than CPI andthat Lyft will refrain from engaging in speculative
investing practices. So long as it maintains
compliance with those two representations, the SEC
has declared that Lyft is not an investment company
and will not be in the future.
Lessons From Lyft’s SuccessWe believe that Lyft’s success will allow others tofollow suit. For a long time most of the significant
19. 26 S.E.C. 426 (1947).
10developments with respect to investment company
status questions have been delivered throughno-action positions and staff commentary on offering
documents. A few months before the SEC considered
Lyft’s request, however, Chair Clayton reemphasized
the SEC’s view that staff commentary and no-action
positions are not binding on the Commission andcreate no legally enforceable rights. If the SEC wants
to evaluate and opine on the applicability of the 1940
Act and the rules thereunder more directly, 3(b)(2)Orders are one clear path forward. Increased use ofthis type of exemptive relief would have substantial
benefits in clarifying the scope of regulation andreducing ongoing compliance burden without theneed for amending any parts of the 1940 Act or therules and regulations thereunder.
From the perspective of businesses, 3(b)(2) Orders
provide certainty and virtually maintenance-freecompliance with the 1940 Act. Unlike alternative
approaches to resolving 1940 Act status issues,a 3(b)(2) Order addresses the issue conclusively
and would require far less ongoing 1940 Actspecific monitoring and compliance. Unlike theself-determination approach, the board of thecompany does not need to refresh its internal basis
for deciding the company is not an investmentcompany continually.

BDCs and CEFs and suggested ways that the SEC
could clarify certain aspects of the proposed rules. In
this Alert, we summarize the key themes in industry
comment letters submitted to the SEC with respect
to the proposed rules. In total, the SEC received 20
comment letters regarding the offering reforms.
Comment Letters Expressed General Support for theRules as Proposed, but Identified Two Critical Areas
for Improvement
In 2018, Congress passed legislation that directly
requires most elements of the proposed rules,
and that legislation was the result of sustained
advocacy efforts by the industry. Unsurprisingly,
industry comment letters were supportive of the
proposed rules in general, especially those portions
that were derived from the prompting legislation.
Notwithstanding the general support, the prevailingweight of industry opinions did suggest modifications
to the proposals around two issues of note: (i) the
criteria that would permit a CEF or BDC to qualify
as a Well-Known Seasoned Issuer (“WKSI”); and(ii) the circumstances that could disqualify a CEF or
BDC from qualifying as a WKSI.

Lyft’s 3(b)(2) Order was somewhat of an ideal casefor quick action, but Lyft is not the only businessthat is well-situated to receive relief. The SEC should
embrace the opportunity to remove unnecessary
burdens on businesses seeking to access capital
markets by making it an ongoing priority to evaluate
applications for 3(b)(2) Orders in all appropriate
circumstances.

Key Themes From Comments
on SEC Proposals Regarding
Securities Offering Reforms
for Business Development
Companies and Closed-End
Investment Companies
Earlier this year, the SEC proposed rules thatwould modify the registration, communication,and offering processes for business development
companies (“BDCs”) and registered closed-end
investment companies (“CEFs”) to align moreclosely with the rules that apply to traditional
operating companies. In our previous Alert, weoutlined the five main reforms that would benefit

The Misplaced Emphasis on Public Float
The Proposed Reliance on Using Public Float toClassify a WKSI Frustrates the Intent Behind theOffering Reforms by Disqualifying the Majority of
CEFs and BDCs
As highlighted in our previous Alert, the proposal
would amend the WKSI definition to include
qualifying CEFs and BDCs and therefore allow
those qualifying funds to take advantage of theoffering flexibility (i.e., automatic effectiveness ofregistration statements) that comes with a WKSI
status. In order to qualify for WKSI status, the SEC
proposed that a BDC or CEF must have at least $700
million in public float. The SEC also proposed a $75
million public float requirements for a BDC or CEF
to qualify as a “seasoned issuer,” which allows filing11

of short-form registration statements. The public
float standard was proposed by the SEC because it
believed this standard was an appropriate proxyfor investor awareness. Specifically, the SEC notedthat tailoring the definition to public float “is meant
to capture issuers . . . whose disclosures and othercommunications are subject to market scrutiny byinvestors, the financial press, analysts, and others.”
The SEC concluded that it was appropriate to offer
WKSI flexibility to entities that are widely followed
and closely examined in the marketplace.

“

The public float standard would effectively
eliminate a majority of BDCs and CEFs from
qualifying as a WKSI.

”The public float standard would effectively eliminate
a majority of BDCs and CEFs from qualifying asa WKSI. As one commenter noted, as of June 30,
2018, only 14% of BDCs and 12% of CEFs out of theuniverse of funds outlined in the proposal could
meet the $700 million public float requirement.
Furthermore, interval funds would rarely qualify asa WKSI since their shares are almost never listed on
an exchange (the proposing release noted that “onlyone interval fund is currently exchange-traded”).
Several commenters, including the Investment
Company Institute (the “ICI”), highlighted thefundamental inconsistencies between that thestrict public float requirement and Congressional
intent. The legislation mandating the proposed
rules was meant to alleviate some of the regulatoryburdens that were impeding capital growth for
CEFs and BDCs. In this respect, the ICI noted that
Congress even discussed creating legislation thatwould require the SEC to adopt rules that would
allow certain funds, including interval funds, to betreated as WKSIs. In sum, most commenters mostly
argued that the insistence on using a public float
requirement goes directly against the motivations
behind the proposed offering reforms.
Tying WKSI Status to Public Float Ignores the
Operational and Regulatory Differences Between
Operating Companies and BDCs and CEFs
While market scrutiny may be necessary for
operating companies, numerous commenters notedthat BDCs and CEFs already have regulations inplace that serve as an appropriate proxy for investor
awareness and institutional due diligence. Unlike
operating companies, BDCs (through election)
and CEFs are subject to the strict oversight andgovernance requirements of the 1940 Act. While thevaluation of operating companies can be complex

and often times subjective in certain respects, the1940 Act imposes general valuation guidelines for
all BDCs and CEFs. This is an important distinction
between BDCs/CEFs and operating companies, as
one commenter indicated, “because, as all funds are
subject to the same requirements and guidelines,
it gives fund shareholders, and the market,
comfort that the valuations are appropriate andcomparable.” Furthermore, as other commenters
pointed out, BDC and CEF valuations and holdings
are more transparent compared to standard
operating companies. BDCs, CEFs and intervalfunds are required to disclose their net asset value
periodically—sometimes daily—and provide routine
public reports regarding their fund holdings. This
type of transparency allows investors to monitor
their investment on their own, without needing torely exclusively on institutional scrutiny in the formof research and analysis provided by brokerage firms
and underwriters.
Moreover, the governance and oversight requiredby the 1940 Act further reduces dependence onmarket reports or institutional scrutiny. Commenters
conceded that BDCs and CEFs may not receive
the same level of coverage from the financial
media as operating companies, but pointed to the
responsibilities of independent directors under the1940 Act in mitigation of the coverage discrepancy.
Independent directors are required for approval offundamental agreements including contracts with
the investment adviser and underwriters. The 1940
Act also imposes certain requirements on BDCs and
CEFs such as adoption of compliance programs,
restrictions on certain share classes, and restrictions
on leverage. This combination of internal governanceoversight and strict regulatory guardrails provides
investors in BDCs and CEFs with a similar level ofprotection as investors in large operating companies.
The WKSI Criteria Should be Modified to Allow More
Traded and Non-traded BDCs and CEFs to Benefit
Fully From the Offering Reforms
The majority of commenters urged the SEC toexpand the definition of a WKSI to include NAV. For
example, one commenter suggested defining a WKSI
to have “either a NAV or a public float of $700 million
or more.” The ICI suggested that the SEC should
not use public float in any instance to classify BDCs
or CEFs as WKSIs. That comment letter stressedthat the rules and regulations that guide BDCs
and CEFs already serve as an appropriate proxyfor institutional scrutiny and investor protection.
Instead of imposing any public float requirement,
the ICI suggested that a BDC or CEF could qualify
as a WKSI if it meets the other registrant andtransaction requirements of Form S-3. This includes
12being subject to the requirements of Exchange Act
Sections 12 or 15(d) or the 1940 Act Section 30 for atleast one year and the timely filing of all reports andsubsequent materials required to be filed under the
Exchange Act during the previous year. Regardlessof the alternative proposed, the widespread industry
belief was that public float should not be a strict
requirement for WKSI status.
The Negative Impact of the Proposed “Ineligible
Issuer” Definition
The proposal also includes certain provisions
that would disqualify an otherwise eligible BDC
or CEF from WKSI status. In particular, one ofthese provisions states that a BDC or CEF would
be ineligible for WKSI status if, “within the past
three years any person or entity that at the time wasan investment adviser to the issuer, including any
sub-adviser, was made the subject of any judicial
or administrative decree or order arising out ofa governmental action that determines that theinvestment adviser aided or abetted or caused theissuer to have violated the anti-fraud provisions of
the federal securities laws.”

out exceptions for certain rules adopted under
Section 206(4). While those rules are undoubtedly
important, violations should not lead to an
immediate loss of WKSI status for affiliated BDCs.
Additionally, a BDC or CEF would be disqualified
so long as its investment adviser “at the time” it
was found to have violated anti-fraud provisions offederal securities laws. This clause of the proposed
ineligible issuer definition could lead to a scenario
in which a BDC or CEF is deemed an ineligible
issuer due to the actions of an adviser that is nolonger managing the BDC or CEF (e.g., if the fundsubsequently terminated its relationship with theadviser). The commenter asked the SEC to clarify
this element of the definition so that there is a logicalnexus between the violation and the time period
in which the BDC or CEF seeks to take advantage
of WKSI status. These suggestions exemplify
the general concern among commenters that the
proposed rules would obstruct BDCs and CEFs fromrealizing the full benefits of the offering reforms.
Comment Letters Expressed General Support for
Additional Proposals
The SEC did not limit the scope of the rule proposal
to the four corners of the prompting legislation. The
proposed rules also included additional initiatives
related to offering reform that were not mandated
by Congress, and therefore were not a product ofindustry lobbying efforts. Still, industry commentersgenerally supported the additional proposals. Those
proposals included:This disqualification provision would appear to
go beyond the scope of the standards applicableto traditional operating companies by factoring inwhether external advisers caused a BDC or a CEF
to violate the anti-fraud provisions of the federal
securities laws. One commenter noted that the new
definition could lead to unintended consequencesfor BDCs. For example, the SEC has viewed Section
206(4) of the Advisers Act as an anti-fraud provision,and a violation of the rules adopted pursuant to
Section 206(4) could result in disqualification under
the proposed rules. The commenter pointed out, thatin reality, many of the rules adopted under Section
206(4) were designed to prevent anti-fraud violations(e.g., Rule 206(4)(7), which requires adoption of awritten compliance program). As a result, a BDC
could become an “ineligible issuer” and lose WKSI
status because an adviser or sub-adviser violated
a technical requirement that did not involve any
actual fraud. The commenter proposed carving

1. Allowing interval funds to pay registration feeson an annual net basis (no later than 90 days
after the fund’s fiscal year) by amending Rules
23c-3 and 24f-2. These amendments would
allow interval funds to use the same registration
fee payment method as mutual funds and ETFs.
Numerous commenters supported this proposal,
and also asked the SEC to extend this privilege
to other types of entities such as tender offer
funds and exchange traded products (“ETPs”).
2. Adding a Management’s Discussion of Fund
Performance (“MDFP”) section in CEF periodic
reports. The proposed section was derived
from the Management Discussion and Analysis(“MD&A”) section found in public filings for
operating companies. The ICI supported this
proposal, noting that narrative disclosure
through the lens of management provides
investors with another perspective to aid theirunderstanding of fund performance and therelevant markets.

13

M&A Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Affiliated Managers Group, Inc.,an asset management company withapproximately $778 billion in AUM

Garda Capital Partners, LP(“Garda”), an investment manager
with approximately $4 billion in AUM

Acquisition of equity interest under which
the senior partners of Garda will continue
to hold a majority of the equity of Garda anddirect day-to-day operations(further terms not disclosed)

Assured Guaranty US Holdings,
Inc., a subsidiary of Assured
Guaranty Ltd. (“Assured
Guaranty”), a financial guaranty
insurance company

BlueMountain CapitalManagement, LLC(“BlueMountain”), an asset
management firm with approximately$19.3 billion in AUM

Acquisition for approximately $160 million,
with at least $114.8 million payable in cash
and the rest payable ether in cash, commonshares, one-year promissory note or a
combination of the foregoing, at Assured
Guaranty’s election. Also, Assured Guaranty
will contribute $60 million in working capitalto BlueMountain at closing, another $30
million within a year of closing, and plans toallocate $500 million of its financial guaranty
subsidiaries’ portfolios to BlueMountainfunds, CLOs and separately managed
accounts over a three-year period.

Blackstone Alternative AssetManagement L.P., Blackstone’s
hedge fund solutions group, withapproximately $81 billion in AUM

BC Partners LLP, an international
investment firm with over €22 billion
in AUM

Acquisition of minority interest(terms not disclosed)

Blackstone Alternative AssetManagement L.P.

Marlin Equity Partners, LLC, aprivate equity investment firm withapproximately $6.7 billion of AUM

Acquisition of minority interest(terms not disclosed)

CenterSquare Investment
Management, global investment
manager with approximately $10 billion
in AUM

RGC Longview, a real estate
investment manager managing
approximately $1.8 billion ofprivate real estate debt and equity
investments

Acquisition(terms not disclosed)

Charles Schwab Corporation,a financial services company withapproximately $3.7 trillion in client
assetsUnited Services Automobile
Association (“USSA”)
Investment Management
Company, a financial services
company

Acquisition for $1.8 billion in cash

Colony Capital, Inc., (“Colony”)
an investment management firm withapproximately $40 billion in AUM

Digital Bridge Holdings LLC,(“Digital”) an operator of companies
with nearly $20 billion in assets
under management

Acquisition for $325 million that iscomprised of 2/3 cash and 1/3 units of limited
partnership interest in Colony’s Operating
Partnership, with the equity subject to alock-up burning off ratably on the 1st, 2nd
and 3rd anniversaries of the deal. Paymentof approximately 10% of the consideration isdeferred until after the expiration of certain
seller indemnification obligations following
completion of the Digital 2019 audited
financial statements.

(further terms not disclosed)

14

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Dyal, a division of the investment
management firm, Neuberger Bermanthat has approximately $15.4 billion in
AUM

HGGC, a private equity withapproximately $4.3 billion in
cumulative capital commitments

Acquisition of passive minority stake(terms not disclosed)

Federated Investors Inc.
(“Federated”), an investment
manager with approximately $494.9
billion in AUM

PNC Capital Advisors LLC(“PCA”), an indirect subsidiary of
PNC Financial Services Group, Inc.
(“PNC”), with approximately $54.6
billion in AUM

Acquisition under which approximately $9billion in assets from three PNC government
and treasury money market funds willbe transitioned through mutual fundreorganizations. Approximately $2.7 billion
in equity mutual fund assets and $700
million in fixed-income mutual fund assets
will be reorganized from 15 PNC funds
into ten existing and three new Federated
funds. After the deal closes, PCA will
manage approximately $21 billion of custom
liquidity and fixed-income solutions and
PNC’s Institutional Advisory Business willcontinue to manage $26 billion in outsourced
chief investment officer services. Federated
Investors will pay PNC a total purchase priceof $52 million.

First Busey Corporation, afinancial holding company withapproximately $9.54 billion in assets

Investors’ Security Trust
Company, a wealth managementcompany

Acquisition(terms not disclosed)

FWM Holdings, parent company
of Forbes Family Trust, a RIA withmore than $5 billion in AUM

Optima Fund Management,a private investment firm withapproximately $2 billion in AUM

Acquisition(terms not disclosed)

Goldman Sachs Group, Inc.,an investment banking, investment
management and securities firm withapproximately $500 billion assets
under supervision

United Capital financial
Partners, Inc., a RIA withapproximately $25 billion of AUM

Acquisition for $750 million in cash
(further terms not disclosed)

iM Global Partner, an investment
and development platform withapproximately $8.6 billion in AUM

Scharf Investments, LLC,
an equity value firm that has
approximately $3.4 billion in AUM

Acquisition of 40% interest(terms not disclosed)

Investcorp, an alternative
investments manager withapproximately $22.5 billion in AUM

Mercuary Capital Advisors
Group, L.P., an investment advisory
and institutional capital raising firmthat has raised more than $170 billion

Acquisition(terms not disclosed)

Kudu Investment Management,
LLC, an investment advisor withapproximately $19 billion in AUM

EJF Capital LLC, an asset
management firm with approximately$7.6 billion in AUM andapproximately $3 billion in structured
products

Acquisition of minority interest(terms not disclosed)

15

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Kudu Investment Management,
LLC, an investment advisor withapproximately $19 billion in AUM

First Long Island Investors, a
wealth management company thatoversees approximately $1.6 billion in
assetsAcquisition of minority interest

LPL Financial Holdings Inc.
(“LPL”), a broker-dealer in the retailfinancial advice market

Allen & Company (“Allen”),
a broker-dealer and RIA withapproximately $3 billion in client assets

Acquisition under which the purchaseagreement provides for an initial purchaseprice and a potential contingent payment basedon the portion of Allen’s client assets that are
onboarded to LPL’s platform above a specified
threshold; estimated transaction multiple of ~7x
post-synergy EBITDA(further terms not disclosed)

Macquarie Investment Management(“Macquarie”), a global asset manager
with more than $374.8 billion in AUM
and Cetera Financial Group (“Cetera”), a
financial advisory network

Foresters Financial, a financial
services organization

Acquisition by Macquarie of assets related to the
U.S. asset management business(terms not disclosed)

Mariner Wealth Advisors, a wealthadvisory firm with approximately $22
billion in AUM.

Singer Xenos Schechter Sosler
Wealth Management, a wealthmanagement firm with more than $1.3
billion in AUM

Acquisition(terms not disclosed)

Portman Ridge FinanceCorporation (“PTMN”), a publicly
traded BDC managed by Sierra Crest
Investment Management, an affiliate of
BC Partners Advisors L.P. and LibreMax
Capital LLC

OHA Investment Corporation (“OHAI”),
a publicly traded BDC managed by Oak
Hill Advisors, L.P.

In connection with the transaction, OHAI
stockholders will receive a combination of (i)a minimum of $8 million in cash from PTMN
(as may be adjusted as described below); (ii)
PTMN shares valued at 100% of PTMN’s net
asset value per share at the time of closing of
the transaction in an aggregate number equal
to OHAI’s net asset value at closing minus the$8 million PTMN cash merger consideration (asmay be adjusted as described below); and (iii)
an additional cash payment from Sierra Crest,
the external adviser to PTMN, of $3 million in
the aggregate. If the aggregate number of sharesof PTMN stock to be issued in connection withthe merger would exceed 19.9% of the issued
and outstanding shares of PTMN common
stock immediately prior to the transaction
closing, then the cash consideration payable by
PTMN will be increased to the minimum extent
necessary such that the aggregate number ofshares of PTMN common stock to be issued inconnection with the merger does not exceed
such threshold.

Principal Financial Group, aninvestment management and insurancecompany

Wells Fargo & Company
Institutional Retirement & Trust,a financial services company withapproximately $827 billion in assets

Acquisition with a purchase price of $1.2 billion
and an earnout of up to $150 million tied tobetter than expected revenue retention, payable
two years post-closing.

Acquisition by Cetera of the U.S. broker dealer
and advisory business16

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

RegentAtlantic Capital, LLC, a wealthbased management firm with nearly $3.8
billion in AUM

Hillview Capital Advisors, LLC,
a wealth management firm withapproximately $890 million in AUM

Acquisition(terms not disclosed)

Resolute Investment Managers, Inc.
(“Resolute”), an asset management
platform with approximately $70 billion
in AUM

Green Harvest Asset Management(“Green Harvest”), an asset
management with approximately $40.5
million in AUM and $116 million in
assets under advisement

Acquisition of minority interest under which
Resolute will provide additional distribution
resources and operational support to Green
Harvest, which will continue to operate
independently

Reverence Capital Partners, a private
investment firm

Advisor Group, an independent
wealth management platform withapproximately $268 billion in client
assetsAcquisition of 75%(terms not disclosed)

Silvercrest Asset Management
Group Inc., a RIA with approximately$19 billion in AUM

Cortina Asset Management,
LLC, an asset management firm withapproximately $1.7 billion in AUM

Acquisition(terms not disclosed)

Wafra Inc., an investment firm withmore than $23 billion in AUM andLandmark Partners, LLC, a private
equity and real estate company withapproximately $27 billion in committed
capitalSiris Capital Group, LLC, a private
equity firm

Acquisition of passive, non-voting minority
positions(terms not disclosed)17

2nd Quarter and 3rd Quarter 2019
Closed-End Fund Public Offerings
Angel Oak Financial Strategies Income Term Trust
Structure:

Non-diversified, limited term, closed-end management company

Investment
Objectives/Policies:

The Fund seeks current income with a secondary objective of total return. The Fund invests primarily
in debt issued by financial institutions, including subordinated debt, unrated debt, senior debt andhigh yield securities, focusing on those in the U.S. community bank sector. The Fund may also invest
in common equity, preferred equity, convertible securities, warrants, and trust-preferred securities of
those institutions. The Fund will, under normal circumstances, invest at least a majority of its net assets
plus the amount of any borrowings for investment purposes in debt securities issued by U.S. community
banks. To a lesser extent, but up to 50% of the Fund’s net assets plus the amount of any borrowings forinvestment purposes, under normal circumstances, the Fund may also invest in similar securities ofother U.S. and foreign financial services companies that are not U.S. community banks and may be of
any size. The Fund will, under normal circumstances, invest at least 80% of the value of its net assets
plus the amount of any borrowings for investment purposes in the securities of financial institutions.
The Fund will, under normal circumstances, invest no more than 30% of its net assets plus the amountof any borrowings for investment purposes in securities issued by non-U.S. issuers.

Manager:

Angel Oak Capital Advisors, LLC

Distributor:

U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services

18

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

Simpson Thacher’s
dynamic, long-standing
Registered Funds Practiceencompasses all aspects of the investment

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

management business. Our practice focuseson alternative asset managers seeking to accessretail investor channels, asset management
mergers and acquisitions, and advising on
cutting-edge regulatory policy andSarah E. CoganOf Counsel+1-212-455-3575
scogan@stblaw.com

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

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

strategy matters.

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

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