Registered Funds Alert

May 2020

Table of Contents
Summary of COVID-19 Relief forRegulated Funds

2

An overview of COVID-19-related relief
available to Regulated Funds.
Click here for more

The SEC Proposes a New Rule
Regarding Fair Valuation Practices
for Regulated Funds

9

An overview of the SEC’s re-proposed
valuation rule that would codify guidance onfair valuation practices.
Click here for more

SEC Positioned to Adopt Rule
12
Governing Regulated Funds’ Useof Derivatives and Other Transactions
Commentary on the SEC’s proposal to
update its approach to the regulation offunds’ derivatives use.
Click here for more

Notable Transactions:
Q4 2019 & Q1 2020

17

A list of notable transactions that occurredin the fourth quarter of 2019 and the firstquarter of 2020.
Click here for more

The latest edition of Simpson Thacher’s Registered Funds
Alert discusses regulatory relief granted in response to
the COVID-19 pandemic; reviews a highly anticipated rule
proposal that would codify practices for fair valuing certain
portfolio holdings; and provides our views on the SEC’s rules
regarding the use of derivatives and other transactions.

Simpson Thacher & Bartlett LLP

Summary of COVID-19 Relief for Regulated Funds
As the coronavirus disease 2019 (“COVID-19”) pandemic continues across the globe, regulators have moved to provide
targeted relief aimed at lessening the impact felt by regulated funds. To help you stay informed, we have publishedcomprehensive summaries of the available relief, available at the Simpson Thacher COVID-19 Resource Center. In addition,
the chart below provides an at-a-glance overview of the relief granted thus far. Additional, short-form guidance published by
the SEC staff can be found on the SEC’s website.

Closed-End Funds (“CEFs”)
Relief Granted(and link to STB
alert)

Application

Applicable Conditions Board Approval(other than approvalor notice)Suspending
Requirements of Inperson Board
Meetings

An in-person board meeting
is not required for the boardof a CEF to enter into, renew
or materially amend
investment advisory
contracts, underwriting anddistribution agreements andRule 12b-1 1 plans, and selectits independent public
accountant.

Reliance on the relief isnecessary or appropriate
due to circumstances related
to current potential effects
of COVID-19 (some boards
have been approving a
resolution to this effect at
the non-in-person meeting).

Filing Deadlines
Extended for Form
N-CEN, Form
N-PORT and Annual
and Semi-Annual
Reports

A CEF may delay filing its
Form N-CEN and Form NPORT filings and annual andsemi-annual reports past thedeadlines required by
Section 30(e) and Rule 30e-1
thereunder.

A CEF must file theNot required.
applicable reports as soon aspracticable, and must do sono later than 45 days after
the original due date.

Required.

Notice Requirements

ReliefExtends Until

None.

August 15, 2020

Prompt disclosure on the
CEF’s website and notice to
SEC staff at IMEmergencyRelief@sec.gov
stating intent to rely on therelief.

June 30, 2020

The board must
ratify the actions
taken pursuant to
the exemptive relief
at its next in-person
meeting.

With respect to Form N-CEN
and Form N-PORT, the form
eventually filed must include
a statement of the filer stating
it relied on the relief and thereason it was unable to filesuch report on a timely basis.
Disregarding Prior
Notice Timing
Requirements forRule 23c-2 Filings

A CEF may call or redeem
securities by filing Form
N-23C-2 on a date that iscloser in time to the call or
redemption than therequired 30 days prior tocalling or redeeming
securities.
Form N-23C-2 must be filed
prior to: any call or
redemption of existing
securities; thecommencement of any
offering of replacement
securities; and providing
notice to the existing
shareholders whose
securities are being called orredeemed.

A CEF must ensure that thefiling of the notice on an
abbreviated time frame ispermitted under relevant
state law and the fund’s
governing documents, andensure that the noticeotherwise complies with
Rule 23c-2.

Not required.

Prompt notice to SEC staff at August 15, 2020
IM-EmergencyRelief@sec.gov
stating the fund’s intent torely on the order.

1 Unless otherwise indicated, all section and rule references herein are to sections of, and rules under, the 1940 Act.

2

Closed-End Funds (“CEFs”)
Relief Granted(and link to STB
alert)

Application

Delayed Delivery ofFund Prospectuses
for Subsequent
Purchases

A relying fund is permitted
to delay delivery of its
prospectus to investors.

Delaying or
Changing the
Location of
Shareholder
Meetings

A CEF may change the date, Any changes must also
time or location of its
comply with applicable stateshareholder meeting without law requirements.
mailing additional soliciting
materials or amending its
proxy materials.

Not required to relyon the relief (butrequired to set orchange meeting
details).

A CEF must issue a press
release and file theannouncement as definitive
additional soliciting material
on EDGAR and take allreasonable steps necessary to
inform other intermediaries
in the proxy process of suchchange.

Modifications toInterfund Lending

A CEF may make loans
through an existing
interfund lending (“IFL”)
facility in an aggregate
amount that does not exceed
25% of its current net assets
or make additional loans
subject to board approval.
Closed-end funds are notpermitted to borrow throughinterfund lending.

A CEF must previously haveobtained an IFL order fromthe SEC or it must agree toadhere to the conditions ofan order granted to anotherfund in the 12 months
preceding March 23, 2020.

Required to makeloans exceeding
25% of current net
assets.

Prompt notice to the SEC
June 30, 2020
staff at IMEmergencyRelief@sec.gov
stating the fund’s intention to
rely on the temporary relief
and identifying the existingorder it will follow.

If the CEF’s net asset value
declines more than 10% fromthe CEF’s net asset value asof the effective date of its
registration statement, the
CEF must suspend theoffering of its shares until
the prospectus is amended.
The guidance confirms that a
CEF may amend its
prospectus through a
supplement to satisfy thisundertaking. The CEF may
resume offering its shares
upon filing a prospectus
supplement pursuant to Rule497 under the Securities Act.

The FAQ includes certain
Not required to rely
specific items that CEFs
on the guidance.
should consider disclosing in
the prospectus supplement(see Notice Requirements).

Satisfying Item 34.1
of Form N-2 2

Applicable Conditions Board Approval(other than approvalor notice)
The sale of shares to an
Not required.
investor cannot be an initialpurchase of shares. A relying
fund must deliver its
prospectus to investors assoon as practicable, and nolater than 45 days after thedate originally required.

Notice Requirements

ReliefExtends Until

Prompt notice to the SEC
staff at IMEmergencyRelief@sec.gov.

June 30, 2020

A CEF must post notice on its
website.

Such time asdelays inmeetings are notdue to COVID-19.

For a CEF that had previously
been able to rely on an
existing IFL order, disclose on
its public website that it isrelying on an SEC exemptive
order that modifies the termsof its existing IFL order.
One business day’s priornotice to the CEF’s Disclosure
Review and Accounting Office
staff reviewer isrecommended in advance offiling the prospectus
supplement.

Such time as
marketconditions thatcaused the NAV
decline are notdue to COVID-19.

SEC Staff suggests theprospectus supplement
should include disclosure
regarding, among otheritems, a statement that the
CEF’s offering has beensuspended as of a certain
date; the date on which the
CEF will restart its offering;and the extent, in dollars andby percentage amount, thatthe net asset value has fallenfrom the effective date of the
CEF’s registration statement.

2 See Division of Investment Management Coronavirus (COVID-19) Response FAQs, Question III.5, https://www.sec.gov/investment/covid-19-response-faq.

3

Closed-End Funds (“CEFs”)
Relief Granted(and link to STB
alert)
Reducing CashDistribution
Requirements

Application

A CEF that relies on the safe
harbor for distributions
under Revenue Procedure
2017-45 may temporarily
reduce the aggregate amountof cash included in
distributions to shareholders
to 10% (down from 20%).

Applicable Conditions Board Approval(other than approvalor notice)
Only applicable to CEFs that
qualify as publicly offered
RICs. A publicly offered RIC
is a RIC the shares of which
are continuously offeredpursuant to a public
offering, regularly traded onan established securities
market, or held by, or heldby (or for) no fewer than
500 persons at all times
during the taxable year.

Not required to relyon the relief, but
required to set
dividends anddistributions.

Notice Requirements

Not required.

ReliefExtends Until
December 31,
2020

The other conditions for thesafe harbor set forth in
Revenue Procedure 2017-45
still apply.

4

Business Development Companies (“BDCs”)
Relief Granted(and link to STB
alert)

Application

Applicable Conditions(other than approvalor notice)

Board Approval

Adjusted Asset
Coverage Ratio

A BDC can adjust thecalculation of its asset
coverage ratio for purposesof issuing senior securities.

A BDC will face limitations
on new investments;
restrictions on the ability of
the BDC and its affiliates toreceive transaction fees orother remuneration; and the
BDC must be able to meetthe standard asset coverage
ratio at the end of the
exemption period.

Required.

Flexibility for
Follow-On
Investments

A BDC with an existingco-investment exemptive
order may participate in afollow-on investment withaffiliated private funds that
do not currently hold aninterest in the issuer.

Transactions with affiliatedregistered funds may only becompleted if the affiliatedregistered fund also
participated in the initialinvestment.

Required fornegotiatedtransactions.

Suspending
Requirements of Inperson Board
Meetings

An in-person board meeting
is not required for the boardof a BDC to enter into, renew
or materially amend
investment advisory
contracts, underwriting anddistribution agreements andRule 12b-1 plans, and selectits independent public
accountant.

Reliance on the relief isnecessary or appropriate due
to circumstances related tocurrent potential effects of
COVID-19 (some boards
have been approving a
resolution to this effect at
the non-in-person meeting).

Required.

Disregarding Prior
Notice Timing
Requirements forRule 23c-2 Filings

A BDC may call or redeem
securities by filing Form N23C-2 on a date that is closer
in time to the call or
redemption than therequired 30 days prior tocalling or redeeming
securities.

A BDC must ensure that thefiling of the notice on an
abbreviated time frame ispermitted under relevant
state law and the fund’s
governing documents, andensure that the noticeotherwise complies with
Rule 23c-2.

Not required.

Form N-23C-2 must be filed
prior to: any call or
redemption of existing
securities; thecommencement of any
offering of replacement
securities; and providing
notice to the existing
shareholders whose
securities are being called orredeemed.

Notice Requirements

ReliefExtends Until

A BDC must make an
December 31,
election by filing on Form
2020
The board must also 8-K prior to issuing or sellingobtain certifications covered senior securities.
from the investment
adviser as well asadvice from an“independent
evaluator” regardingwhether the terms
and conditions ofany senior security
issuance in relianceon the relief are fairand reasonable.
None.

December 31,
2020

None.

August 15, 2020

The board must
approve theproposed follow-on
Any transaction in relianceinvestment afteron this relief must otherwise considering thebe effected in accordance
opportunity on bothwith the terms andon a stand-alone
conditions of the BDC’s
basis and in relation
existing co-investment
to the total
exemptive order.
economic exposure
to the issuer.

The board must
ratify the actions
taken pursuant to
the exemptive relief
at its next in-person
meeting.

Prompt notice to SEC staff at August 15, 2020
IMEmergencyRelief@sec.gov
stating intent to rely on theorder.

5

Business Development Companies (“BDCs”)
Relief Granted(and link to STB
alert)

Applicable Conditions(other than approvalor notice)

Board Approval

Notice Requirements

ReliefExtends Until

Delaying or
Changing the
Location of
Shareholder
Meetings

A BDC may change the date, Any changes must also
time or location of its
comply with applicable stateshareholder meeting without law requirements.
mailing additional soliciting
materials or amending its
proxy materials.

Not required to relyon the relief (butrequired to set orchange meeting
details).

A BDC must issue a press
release and file theannouncement as definitive
additional soliciting material
on EDGAR and take allreasonable steps necessary to
inform other intermediaries
in the proxy process of suchchange.

Such time asdelays inmeetings are notdue to COVID-19.

Satisfying Item 34.1
of Form N-2 3

If the BDC’s net asset value
declines more than 10% fromthe BDC’s net asset value asof the effective date of its
registration statement, theBDC must suspend theoffering of its shares until theprospectus is amended. The
guidance confirms that a
BDC may amend its
prospectus through a
supplement to satisfy thisundertaking. The BDC may
resume offering its shares
upon filing a prospectus
supplement pursuant to Rule497 under the Securities Act.

The FAQ includes certain
Not required to rely
specific items that BDCs
on the guidance.
should consider disclosing in
the prospectus supplement(see Notice Requirements).

One business day’s priornotice to the BDC’s
Disclosure Review andAccounting Office staff
reviewer is recommended inadvance of filing theprospectus supplement.

Such time as
marketconditions thatcaused the NAV
decline are notdue to COVID-19.

A BDC that relies on the safe
harbor for distributions
under Revenue Procedure
2017-45 may temporarily
reduce the aggregate amountof cash included in
distributions to shareholders
to 10% (down from 20%).

Only applicable to BDCs that
qualify as publicly offered
RICs. A publicly offered RIC
is a RIC the shares of which
are continuously offeredpursuant to a public
offering, regularly traded onan established securities
market, or held by (or for)no fewer than 500 persons
at all times during thetaxable year. Certain private
BDCs will not qualify.

Reducing CashDistribution
Requirements

Application

SEC Staff suggests theprospectus supplement
should include disclosure
regarding, among otheritems, a statement that the
BDC’s offering has beensuspended as of a certain
date; the date on which the
BDC will restart its offering;and the extent, in dollars andby percentage amount, thatthe net asset value has fallenfrom the effective date of the
BDC’s registration statement.
Not required to relyon the relief, but
required to set
dividends anddistributions.

Not required.

December 31,
2020

The other conditions for thesafe harbor set forth in
Revenue Procedure 2017-45
still apply.

3 See Division of Investment Management Coronavirus (COVID-19) Response FAQs, Question III.5, https://www.sec.gov/investment/covid-19-response-faq.

6

Open-End Funds
Relief Granted(and link to STB
alert)

Application

Applicable Conditions(other than approval or Board Approval
notice)Notice Requirements

ReliefExtends
Until

Suspending
requirements of Inperson Board
Meetings

An in-person board meeting
is not required for the boardof a relying fund to enter into,
renew or materially amend
investment advisory
contracts, underwriting anddistribution agreements andRule 12b-1 plans, and selectits independent public
accountant.

Reliance on the relief isnecessary or appropriate due
to circumstances related tocurrent potential effects of
COVID-19 (some boards
have been approving a
resolution to this effect at the
non-in-person meeting).

Required.

Filing Deadlines
extended for Form
N-CEN, Form
N-PORT and Annual
and Semi-Annual
Reports

A relying fund may delay
filing its Form N-CEN and
Form N-PORT filings andannual and semi-annual
reports past the deadlines
required by Section 30(e) andRule 30e-1 thereunder.

A relying fund must file theapplicable reports as soon aspracticable, and must do sono later than 45 days after
the original due date.

Not required.

Delayed Delivery ofFund Prospectuses
for Subsequent
Purchases

A relying fund is permitted todelay delivery of its
prospectus to investors.

The sale of shares to an
investor cannot be an initialpurchase of shares. A relying
fund must deliver its
prospectus to investors assoon as practicable, and nolater than 45 days after thedate originally required.

Delaying or
Changing the
Location of
Shareholder
Meetings

A relying fund may change
Any changes must also
the date, time or location ofcomply with applicable state
its shareholder meetinglaw requirements.
without mailing additional
soliciting materials oramending its proxy materials.

Not required to relyon the relief (butrequired to set orchange meeting
details).

A relying fund must issue apress release and file theannouncement as definitive
additional soliciting material
on EDGAR or, if the meetingis held in connection with abusiness combination
described in a registration
statement on Form N-14, theannouncement should be
filed as a prospectus
supplement under 1933 Act
Rule 497, and take allreasonable steps necessary to
inform other intermediaries
in the proxy process of suchchange.

Secured Borrowings
from Affiliates

A relying fund may borrow on None.
a secured basis from its
investment adviser or otheraffiliated entities. Provides an
exemption from Sections
17(a), 12(d)(3) and 18(f)(1),
but not Rule 17d-1.

Board must
determine that theloan is in the bestinterests of therelying fund andwill be used tosatisfy shareholder
redemptions.

Prompt notice to the SEC
June 30, 2020
staff by email at IMEmergencyRelief@sec.gov
stating the fund’s intention to
rely on the temporary relief.

None.

August 15, 2020

Prompt disclosure on therelying fund’s website andnotice to SEC staff at IMEmergencyRelief@sec.gov
stating intent to rely on therelief.

June 30, 2020

A relying fund’sboard must ratify
the actions taken
pursuant to the
exemptive relief at
its next in-person
meeting.

With respect to Form N-CEN
and Form N-PORT, the form
eventually filed must include
a statement of the filer stating
it relied on the relief and thereason it was unable to filesuch report on a timely basis.
Not required.

Prompt notice to the SEC
staff by email at IMEmergencyRelief@sec.gov.

June 30, 2020

A relying fund must post
notice on its website.

Such time asdelays inmeetings are
not due to
COVID-19.

7

Open-End Funds
Relief Granted(and link to STB
alert)
Modifications toInterfund Lending

Application
A relying fund may makeloans through an existing
interfund lending (“IFL”)
facility in an aggregate
amount that does not exceed
25% of its current net assets
at the time of the loan
notwithstanding any lower
limitation in an existing IFLorder (typically 15% of current
net asset value).
A relying fund may borrow ormake loans through thefacility for any term (up to
and including the date this
temporary relief is rescinded),notwithstanding any
conditions normally limiting
the term of such loans.

Deviation from
Registration
Statement Policies

Applicable Conditions(other than approval or Board Approval
notice)A relying fund must
previously have obtained an
IFL order from the SEC or it
must agree to adhere to theconditions of one granted toanother fund in the 12months preceding March 23,
2020.

Board approvalrequired to extend
the maximum termof an interfund
loan.

The term of any IFL made inreliance on the relief may notextend beyond the expirationof the temporary relief.

A relying fund may enter into None.
lending or borrowing
transactions that deviate fromany relevant policy recited in
its registration statement
without prior shareholder
approval.

Notice Requirements

ReliefExtends
Until

Prompt notice to the SEC
June 30, 2020
staff by email at IMEmergencyRelief@sec.gov
stating the fund’s intention to
rely on the temporary relief
and, if the fund does not havean IFL order, identifying theexisting order it will adhereto.
For a fund that had
previously been able to relyon an existing IFL order,
disclose on its public websitethat it is relying on an SEC
exemptive order thatmodifies the terms of its
existing IFL order.

Required.

Prompt notice to the SEC
June 30, 2020
staff by email at IMEmergencyRelief@sec.gov
stating the fund’s intention to
rely on the temporary relief.
Must notify shareholders ofthe deviation by filing aprospectus supplement andincludes a statement on theapplicable fund’s public
website.

Permitting
Additional AffiliatedTransactions toProvide Liquidity

A relying fund’s affiliates thatare not registered investmentcompanies may purchase debt
securities held by the relying
fund notwithstanding the
restrictions of Section 17(a).

The debt securities must be
Not required.
sold at fair market value incash-settled transactions. If
the relying fund’s affiliate
later sells the purchased
security for a higher pricethan paid to the relying fund,the affiliate must pay therelying fund the difference.

Reducing CashDistribution
Requirements

A relying fund that relies on
the safe harbor for
distributions under Revenue
Procedure 2017-45 may
temporarily reduce theaggregate amount of cash
included in distributions toshareholders to 10% (downfrom 20%).

Only applicable to relying
funds that qualify as publicly
offered RICs. A publicly
offered RIC is a RIC theshares of which arecontinuously offeredpursuant to a public offering,
regularly traded on an
established securities
market, or held by fewer than
500 persons at all times
during the taxable year.

Prompt notice to the SEC
staff by email at IMEmergencyRelief@sec.gov
and publicly posted on therelying fund’s website stating
the name of the affiliate, thesecurities sold and thequantity and purchase price.

Not required to rely Not required.
on the relief, but
required to set
dividends anddistributions.

Notice from the
SEC staff thatthe relief iswithdrawn.

December 31,
2020

The other conditions for thesafe harbor set forth in
Revenue Procedure 2017-45
still apply.

8

The SEC Proposes a New Rule
Regarding Fair Valuation
Practices for Regulated Funds
On April 21, 2020, the Securities and Exchange
Commission published a long-awaited and highly
anticipated rule proposal that, if adopted, would
clarify valuation practices and the role of the boardof directors in fair valuations of the investments
held by a registered investment company or businessdevelopment company (a “Regulated Fund”). The
text of the new proposed rule—Rule 2a-5 under theInvestment Company Act of 1940 (the “1940 Act”)—issummarized below. Comments to the proposal are
due July 21, 2020.
Our Initial Views of the Proposal
The proposal appears to address quite a few concernsthat have been raised by the industry regarding
uncertainties with respect to valuation oversight.
The Regulated Fund industry has long soughtclarification on several matters related to valuation,and in particular the appropriate role of the board
in the fair valuation process. Indeed, several priorDirectors of the SEC’s Division of Investment
Management have promised such clarification,
especially in light of high-profile SEC enforcement
actions regarding valuation that have, in someinstances, involved findings against independent
board members.
In general, we believe boards of Registered Funds
will welcome the proposal. It reflects the SEC’s
acknowledgement of the practical reality of the rolesof the adviser and board in setting valuations, as wellas an appreciation by the SEC that the adviser may
ultimately be better positioned to make valuation
determinations than the board.

“

It reflects the SEC’s acknowledgement of
the practical reality of the roles of the adviser
and board in setting valuations, as well as anappreciation by the SEC that the adviser may
ultimately be better positioned to make valuation
determinations than the board.

for second-guessing than if the SEC only issued
guidance, which inherently is less specific.
Notwithstanding the many positive attributes of the
SEC’s proposal, we anticipate that boards, advisersand other interested parties will wish to commenton the proposal in an effort to enhance the final
product. In particular, the proposed rule’s provisions
regarding when market quotations are not “readily
available” for purposes of valuations require close
attention (see summary below).
We will be analyzing the proposal in depth andstand ready to assist in assessing topics that may beappropriate for comment.
Background and Overview of the Proposal
Section 2(a)(41)1 defines the term “value” as it isused throughout the 1940 Act and requires that a
Regulated Fund value its portfolio investments using
the market value of its portfolio securities whenmarket quotations for those securities are “readily
available.” When a market quotation for a portfolio
security is not readily available, the Regulated
Fund must use the fair value of that security,
as determined in good faith by the Regulated
Fund’s board.
Proposed Rule 2a-5, if adopted as proposed, would
impose specific required functions for determining
fair value in good faith in accordance with themandate of Section 2(a)(41). The proposed rule would
also allow a Regulated Fund’s board to delegate
the determination of an investment’s fair value tothe Regulated Fund’s adviser, sub-adviser, or somecombination thereof, while the board would retain
only certain oversight responsibilities.
Below, we summarize key components of the
proposed rule.
The Board May Delegate Fair Value Determinations
to One or More Investment Advisers• Proposed Rule 2a-5 would expressly permit aRegulated Fund’s board of directors to delegate
the fair value determination relating to any or
all investments to the Regulated Fund’s primary
investment adviser, one or more sub-adviser,or any combination thereof. This would remove
the significant uncertainty that exists today
about the extent to which a board may delegate
fair value determinations to an adviser. Because
the 1940 Act, by its terms, gives the power todetermine valuation solely to the board, theextent to which an adviser or sub-adviser could”

We note in particular that the proposal calls for a
formal new rule, as compared to SEC guidance. A
rule should provide comfort to boards that theirdecision to delegate valuation responsibilities
to an adviser (within the conditions establishedunder a final rule) will present less potential

1.

Unless otherwise indicated, all section and rule references herein are tosections of, and rules under, the 1940 Act.
9

make a fair value determination has always
been in doubt, although in practice such entities
routinely make such fair value determinations
pursuant to board-adopted policies andprocedures.
• For example, the proposal permits the boardof a Regulated Fund with a primary adviser
and one or more sub-advisers to delegate thedetermination of fair value for all the fund’sinvestments to the primary adviser. In thealternative, the board could delegate that
responsibility to each sub-adviser for the portionof the Regulated Fund’s portfolio that the subadviser manages.
• If the board of a Regulated Fund opts todelegate to an adviser, the adviser would become
the party required to carry out the required
functions described in proposed Rule 2a-5
(and summarized below). In addition to thoserequired functions, the following requirements
are imposed in the case of delegation toan adviser:◦◦ The board must continue to oversee
valuation processes.
‑	 Proposed Rule 2a-5 does not specify
precisely what a Regulated Fund’s board
must do to satisfy this requirement.
Consistent with its fiduciary duties andother obligations under the 1940 Act, we
expect that it will likely seek to identify
potential conflicts of interest, monitor
such conflicts, and take steps necessary
to ensure the appropriateness of theadviser’s fair value processes.
◦◦ The adviser must report to the board.
‑	 Proposed Rule 2a-5 requires that theadviser, at least quarterly, provide
the board a written assessment of
the adequacy and effectiveness of theadviser’s process for determining thefair value of the assigned portfolio ofinvestments.
‑	 The proposed rule also requires that theadviser promptly report to the board inwriting on matters associated with theadviser’s valuation process that materiallyaffect, or could have materially affected,
the fair value of the assigned portfolio ofinvestments, including material changes
in the Regulated Fund’s valuation risks.

‑	 The amount and timing of reportingprescribed by proposed Rule 2a-5 will
likely be a focus of many comments. The
prompt notification requirement, which
requires written notification to the board
within three business days of certainchanges or events, in particular, seems
likely to be controversial.
◦◦ The adviser must clearly assign duties
among its personnel.
‑	 If the board assigns the fair value
determination requirements for one
or more investments to an adviser, theproposed rule requires the adviser tospecify to the board the titles of thepersons responsible for determining thefair value of the assigned investments,
including by specifying the particularfunctions for which the persons identified
are responsible.
◦◦ The adviser must keep additional records
relevant to the delegation.
‑	 Under the proposed rule, in addition to
the records that would need to be kept
as part of a good faith determination offair value generally, an adviser must also
keep records related to the fair value
determinations assigned to the adviser fora period of at least five years after the endof the fiscal year in which those records
were provided to the board.
Required Functions for Determining Fair Value inGood Faith• Proposed Rule 2a-5 requires the performanceof certain functions to comply with the mandateof determining fair value in good faith. These
functions must be performed by either theboard, or if the board has elected to delegate,
the Regulated Fund’s adviser or advisers. These
functions include:◦◦ Periodically assessing and managing
material risks associated with fair value
determinations, including material
conflicts of interest.
‑	 Other than material conflicts of interest,
the proposed rule does not identify the
specific valuation risks that must be
assessed under this requirement. Each
Regulated Fund’s risks would depend10

on the facts and circumstances of its
particular investments.
‑	 The proposed rule also does not include
a specific frequency for the required
periodic re-assessment of a Regulated
Fund’s valuation risks. Each Regulated
Fund’s board or adviser would be
responsible for determining theappropriate interval.
◦◦ Selecting, applying and testing fair value
methodologies, including specifying the
key inputs and assumptions specific to each
asset class and which methodologies should
apply to new types of investments.
‑	 The proposed rule does not specify
the tests to be performed and thefrequency with which such tests shouldbe performed. Each Regulated Fund’sboard or adviser would be responsiblefor determining the appropriate tests andtesting intervals.
◦◦ Overseeing and evaluating any pricing
services used, including establishingcriteria for initiating price challenges.
‑	 The rule proposal includes criteria thatthe board or adviser should consider
when evaluating a pricing service,including such factors as qualifications,experience and history of the pricing
service; the valuation methods ortechniques, inputs and assumptions; andthe pricing service’s potential conflictsof interest.
‑	 This element of the rule proposal has thepotential to change current practice and,
therefore, may draw pushback. Currently,
as is acknowledged by the proposing
release, many Regulated Funds rely on
the expertise and proprietary know-how
of pricing services when determining
fair value of investments. As with hiring
any service provider, Regulated Funds
currently perform diligence to ensure
they are hiring competent third parties.
The proposed rule, however, appears
to require a level of diligence that
goes beyond typical service provider
diligence, and contemplates an in-depth
examination of the techniques, formulas
and inputs pricing services use. If adopted
as proposed, this element could callfor much more extensive and frequent

investigation of pricing services than iscommon practice today.
◦◦ Adopting and implementing written
policies and procedures addressing fairvalue determinations and instituting
certain recordkeeping requirements.
‑	 Under the proposed rule, where the board
determines the fair value of investments,
the board-approved fair value policies
and procedures would be adopted andimplemented by the fund. Where theboard assigns fair value determinations,the fair value policies and procedures
would be adopted and implemented by
the adviser, subject to board approval andoversight under Rule 38a-1.
‑	 While existing Regulated Funds and theiradvisers will likely already have policies
and procedures in place that address
fair value determinations, they would
need to update their existing policies andprocedures to account for the specificrequirements of proposed Rule 2a-5.
‑	 Proposed Rule 2a-5 also requires thatall Regulated Funds retain appropriate
documentation to support fair value
determinations, including information
regarding the specific methodologies
applied and the assumptions andinputs considered when making fairvalue determinations, as well as any
necessary or appropriate adjustments inmethodologies, for at least five years fromthe time the determination was made.
Readily Available Market Quotations• A Regulated Fund’s investments must be fairvalued where market quotations are not “readily
available.” Proposed Rule 2a-5 treats a market
quotation as “readily available” only whenthat quotation is a quoted price (unadjusted)in active markets for identical investmentsthat the Regulated Fund can access at themeasurement date.
• The proposal also provides that a market
quotation is not readily available if suchquotation is unreliable. A quote would
be considered unreliable under proposed
Rule 2a-5(c) in circumstances where it would
require adjustment or require consideration of
additional inputs in determining the value of the
security under the generally accepted accounting
principles of the United States.
11• The proposal here has the potential to change
the standard for assessing whether a security
does not have a readily available quotation andtherefore must be fair valued. As such, this
aspect of the proposal requires close attention
and likely warrants commenters’ feedback.
Rescission of Prior Commission Releases andReview of Relevant Staff Guidance• The SEC also proposes to rescind a number ofstaff letters and other SEC and staff guidance
addressing fund valuation matters covered by
the proposal. The existing guidance, some ofwhich is problematic today, would no longer beapplicable if the SEC adopts Rule 2a-5.

and suggests potential revisions for the SEC staff toconsider prior to adopting a final rule.
Background
Section 18 of the 1940 Act limits a Regulated Fund’sability to obtain leverage or incur obligations topersons other than its common shareholders throughthe issuance of senior securities.2 Section 18 itself
does not answer the question of how it applies toderivatives and other types of instruments that may
be characterized as providing portfolio leverage. The
answer to this question has significant implications
for how much structural leverage a fund may utilize.

• The SEC proposes to rescind two SEC releases
if Rule 2a-5 is adopted: Accounting Series
Release 113 and Accounting Series Release 118,
which provide Commission guidance on, among
other things, how to determine fair value forrestricted securities.

SEC Positioned to Adopt Rule
Governing Regulated Funds’
Use of Derivatives
and Other Transactions
The SEC re-proposed Rule 18f-4 under the 1940
Act last year.1 The proposal provides a conditional
exemption from the asset coverage requirements
under Sections 18 and 61 of the 1940 Act forregistered funds and business development
companies (collectively, “Regulated Funds”) whenentering into derivatives, short sale borrowings,
unfunded commitments and reverse repurchaseagreements or similar financing transactions.
The comment period for the proposal expired lastmonth. Commenters generally viewed the frameworkof the rule as an improvement over the SEC’s priorproposal, but certain modifications are necessary.
We expect the SEC to adopt a final rule before theend of the year.
This Alert provides background on the current
regulation of these transactions under the 1940 Act
and an overview of how that would change under the
proposed rule. This article then examines potential
issues with the proposed rule in its current form
1.

At the same time it re-proposed Rule 18f-4, it also proposed new rules
under the Securities Exchange Act of 1934 and the Investment Advisers
Act of 1940 that govern sales practices for leveraged/inverse ETFs andsimilar investment vehicles.

Regulated Funds use derivatives, reverse repurchaseagreements and similar instruments in relianceon highly fragmented guidance from the SEC
and its staff that has evolved over many decades.
In the SEC’s Release 10666,3 issued in 1979, theCommission issued a general statement of policy
concluding that reverse repurchase agreements andsimilar arrangements meet the “functional meaning”
of the term “evidence of indebtedness” for purposesof Section 18 of the 1940 Act. The Commission statedthat a Regulated Fund’s use of reverse repurchaseagreements and similar arrangements will not be
subject to the asset coverage requirements in Section
18 if the Regulated Fund “covers” its obligation
under the reverse repurchase agreement or similararrangement by segregating and maintaining liquid
assets equal to the Regulated Fund’s obligation under
the arrangement.
The SEC staff, after Release 10666 was issued, sought
to clarify the application of Section 18 to instruments
other than reverse repurchase agreements. The
staff, for example, extended the policy statementin Release 10666 to futures, forwards, written
2.

Section 61 of the 1940 Act modifies the asset coverage requirements
under Section 18 that apply to BDCs. The general principles discussed inthis article apply equally to the asset coverage requirements that apply
to a BDC under Sections 18 and 61.

3.

See Investment Company Act Release No. 10666 (Apr. 27, 1979).

12

options and similar derivative instruments. The staff
subsequently issued a no-action letter that many
interpret as allowing Regulated Funds the ability to“cover” their obligations under derivatives, reverse
repurchase agreements and similar transactions withcash or other highly liquid instrument.41
Over the years, advisers to Regulated Funds havetaken various interpretations of the permitted useof derivatives and similar instruments under thisguidance when operating Regulated Funds anddeveloping new registered products. Without a clear
set of rules to reference, somewhat predictably, theRegulated Funds industry became more governed bylore than law with respect to the use of derivatives,short sales, unfunded commitments, reverse
repurchase agreements and similar instruments.

comprehensive and more sophisticated approachto codifying how Regulated Funds may utilize
derivatives and similar instruments in compliancewith the 1940 Act, although certain modifications,
including to the VaR test calculations, are necessary
to mitigate the risk of market disruption. Most
significantly, the re-proposed rule would eliminate
the current asset segregation requirement for the useof derivatives by Regulated Funds and would rescindand replace prior staff guidance on this topic. We
summarize the highlights of the proposed rule below.

“

Without a clear set of rules to reference,
somewhat predictably, the Regulated Funds
industry became more governed by lore thanlaw with respect to the use of derivatives, shortsales, unfunded commitments, reverse repurchaseagreements and similar instruments.

”

Recognizing this reality, over the last decade, theSEC has taken steps to codify its position on how
Regulated Funds may use derivatives and other
instruments. The process kicked off with an ABATask Force Report in 2010 and the subsequentissuance of an SEC concept release seeking
input from the industry and other interested
commentators in 2011. In 2015, the SEC, by
proposing Rule 18f-4, made a first attempt at a rule
to codify the regulation of the use of derivatives andsimilar instruments by Regulated Funds. To say theleast, this proposal was highly controversial and, if
it had been adopted, would have resulted in adverse
impacts to certain Regulated Funds, in particular
those with a fixed income investment strategy. Thisis because the proposal included a blunt notional cap
on a Regulated Fund’s use of derivatives that would
have forced certain funds to limit their use of lessvolatile derivatives for risk mitigation, hedging andinvestment purposes. The 2015 proposed rule also
would have treated unfunded commitments in thesame manner as reverse repurchase agreements,
without accounting for the differences in their use byRegulated Funds.
The SEC’s more recent re-proposal of Rule 18f-4
implements lessons learned from the response to
the 2015 proposal. The re-proposal provides a more
4.
1.

Overview of Proposed Rule 18f-4
In lieu of complying with the asset coverage
requirements under Sections 18 and 61, as applicable,
the proposed rule includes a number of conditions
that a Regulated Fund must comply with to rely on
the exemption in Rule 18f-4 when it uses derivatives,short sale borrowings, unfunded commitments,
reverse repurchase agreements and similar
financing transactions.
• Derivatives Risk Management Program.
The proposed rule requires that a Regulated
Fund (other than a limited derivatives user)that enters into derivatives transactions adopt
and implement a written derivatives risk
management program designed to manage
the risks that arise when entering into suchtransactions. The program will be administeredby a derivatives risk manager (“DRM”), which
may be a committee or an individual, and must
be approved by the fund’s board of directors. If
an individual, the DRM cannot be a portfolio
manager and, if a committee, a majority of thecommittee cannot be comprised of portfolio
management. The derivatives risk management
program should be tailored to the particular
types of derivatives that the Regulated Fundroutinely uses and their related risks, and must
address the following elements:

See Merrill Lynch Asset Management, L.P., SEC No-Action Letter (July2, 1996).
13

1. Risk identification and assessment;
2. Risk guidelines that provide for quantitativeand measurable criteria;
3. Stress testing to evaluate potential losses to
a Regulated Fund’s portfolio under stressconditions;4. Backtesting of the value at risk (“VaR”)
calculation model that the Regulated Funduses each business day;
5. Internal reporting and escalation of certain
derivative matters to the fund’s portfolio
management and board of directors; and6. A periodic review of the program,at least annually, to evaluate theprogram’s effectiveness.

• Proposed VaR-Based Limit. The proposed
rule generally requires that a Regulated Fund(other than a limited derivatives user) thatengages in derivatives transactions comply witha VaR-based limit on fund leverage risk. VaR
is an estimate of an instrument’s or portfolio’s
potential losses over a given period of time andat a specific confidence level.
Under the proposed rule, a fund’s portfolio VaRwill not be permitted to exceed 150% of the VaRof a designated reference index specific to that
fund, as selected by the DRM (the “Relative VaR
Test”). The designated reference index must be
unleveraged and reflect the markets or asset
classes in which the fund invests. If the DRM
is unable to identify an appropriate designatedreference index, the fund must use an absolute
VaR test in which the VaR of the fund’s portfolio
cannot exceed 15% of the value of the fund’s
net assets (the “Absolute VaR Test”). The VaRmodel that a fund uses must take into account all
significant and identifiable market risk factors
associated with its investments. The Relative
VaR Test or the Absolute VaR Test must be
conducted at a consistent time at least once eachbusiness day, take into account and incorporate
all significant and identifiable market risk factors
associated with a Regulated Fund’s investments,
use a 99% confidence level and a time horizon of
20 trading days and be based on at least three
years of historical data.
• Limited Derivative Users. The proposed ruleprovides an exception from the derivatives
risk management program and VaR test
requirements for certain Regulated Funds,

known as “limited derivatives users.” This
exception is available if a fund adopts andimplements procedures reasonably designed to
manage the fund’s derivative risk and the fundeither (1) limits its derivatives exposure to 10% of
its net assets (with adjustments solely to convert
the notional amount of interest rate derivatives
into 10-year bond equivalents and to delta adjust
the notional amounts of options contracts)or (2) uses derivatives solely to hedge certain
currency risks.
• Reverse Repurchase Agreements. Reverse
repurchase agreements and similar financing
transactions will be treated separately fromderivatives transactions under the proposed rule,as the SEC believes that such transactions haveeconomic effects similar to secured borrowings.
Under the proposed rule, a fund may engage
in reverse repurchase agreements or similar
financing transactions if the fund includes theaggregate amount of indebtedness associatedwith such transactions when calculating its asset
coverage ratio under Section 18 of the 1940 Act.
• Unfunded Commitments. The SEC believes that
unfunded commitments are distinguishable
from derivatives transactions. Therefore, under
the proposed rule, a Regulated Fund may enter
into unfunded commitment agreements if it
reasonably believes, at the time it enters intosuch agreement, that it will have sufficient cash
and cash equivalents to meet its obligations
with respect to all of its unfunded commitment
agreements as they come due. The Regulated
Fund must document the basis for this belief,
and the proposed rule includes certain specificfactors that the fund must take into account.
• Board Oversight and Reporting. The proposed
rule requires a fund’s board to approve thedesignation of the fund’s DRM. The board
must take into account the manager’s relevant
experience regarding the management ofderivatives risk. At least annually, the DRM must
provide regular written reports to the board
regarding the program’s implementation andeffectiveness and the results of any stress testing.
The board is also responsible for ensuring thefund’s compliance with the proposed rule.
The proposed rule would replace the asset coverage
requirements that currently apply to Regulated
Funds under Release 10666 and related staff
guidance. Importantly, the proposed rule would not
impose notional limits on a Regulated Fund’s useof derivatives, a significant improvement over theprior proposal.

14

“The proposed rule would replace the asset
coverage requirements that currently apply to
Regulated Funds under Release 10666 and related
staff guidance.

”

Key Issues We Hope the SEC Will Reconsider
We generally support the SEC’s adoption of the
proposed rule, but some aspects of the proposal
warrant further consideration and revision.
The DRM should be able to choose which VaR test tocomply with regardless of its ability to identify anappropriate “designated reference index”.
We believe the DRM should be permitted to choose
the more appropriate VaR test for each Regulated
Fund. Under the proposed rule, a DRM must either
identify an appropriate designated reference index
when conducting the daily VaR test or, if a designatedreference index is unavailable, the DRM must ensurethat the fund complies with an Absolute VaR Test.
Requiring a Regulated Fund to use a Relative
VaR Test unless the DRM is “unable to identify”
a designated reference index would create an
ambiguous standard that could be applied arbitrarily.
Neither the proposing release nor the proposed rule
clearly defines what “unavailable” means in thecontext of identifying a designated reference index.
This lack of a definition would put the DRM in adifficult position of needing to determine the point at
which an appropriate reference index is (or becomes)
unavailable for use and could lead to potential
second guessing of the DRM’s decision. Moreover,the definition of “designated reference index” in the
proposed rule is overly broad. The proposed rulestates that a designated reference index must either
be an appropriate broad-based securities market
index or an “additional index” within the meaning ofForm N-1A. For funds that seek absolute return, an
additional index may exist that reflects markets orasset classes in which the fund invests, but such anindex may not be an appropriate index for the funddue to differences in volatility, asset class weightings,
short exposures and/or capacity constraints, among
other factors. A DRM should be permitted to selectthe VaR test that is most appropriate for a fund’sinvestment objective, policies and risks.
Permitting a DRM to choose which VaR test tocomply with for each Regulated Fund under the
DRM’s supervision would allow a global asset
manager to more closely align risk testing acrossits product line. As a practical matter, many
asset managers operate global businesses thatmust comply with various regulatory regimes.

In the European Union, the Committee ofEuropean Securities Regulators Guidelines on
Risk Measurement and the Calculation of Global
Exposure and Counterparty Risk for UCITS
govern the risk measurement and the calculationof global exposure and counterparty risk for public
investment companies offered in Europe (the “UCITS
Guidelines”). The UCITS Guidelines recognize thatthe effectiveness of a VaR test depends on various
factors, such as a fund’s investment objective, which
the fund’s adviser is best positioned to determine.
The UCITS Guidelines make the UCITS responsiblefor deciding which VaR approach is the mostappropriate methodology given the risk profile andinvestment strategy of the UCITS. The UCITS must
be able to demonstrate that the VaR approach itutilizes is appropriate and must fully document its
underlying assumptions. If the SEC were to adopt
a similar approach, it would allow global asset
managers to streamline their risk management
programs and more closely tailor their VaR tests to
the risks and objectives of each Regulated Fund.
The SEC should consider the experience of these
global fund managers in adopting and finalizing this
proposed rule.

The proposed leverage limits should be increased
to a 200% relative VaR limit and a 20% absolute
VaR limit.
We agree with the many commenters who strongly
support increasing the proposed Relative VaR Test
to a 200% limit and the proposed Absolute VaR Test
to a 20% limit. These limits would be in line with the
UCITS Guidelines, which global asset managers haveoperated under for many years, including during thecurrent COVID-19 crisis. Such an approach would
allow global asset managers to streamline their risk
management programs in a manner that has proveneffective during the current market crisis. Moreover,
the rule should allow a DRM to choose a 95%
VaR confidence level in order to obtain additional
observations to produce a more robust and stablemeasure of risk, the results of which could then15

be rescaled to a 99% confidence level equivalent.
This would further align the rule with the UCITS
Guidelines under which global asset managers
currently operate. Certain commenters provided data
supporting the conclusion that, without these andother enhancements to the VaR tests, a potentiallylarge number of funds that were not otherwise
stressed would have had to substantially alter theirinvestment strategies during the COVID-19 crisis inorder to comply with the rule. We urge the SEC tomodify the final rule to address these concerns.

when including currency derivatives and, therefore,
these Regulated Funds will not qualify as limited
derivative users under the rule as proposed.
The proposed rule would force many Regulated
Funds who have very limited use of derivative
outside of currency hedging to adopt derivatives risk
management programs and conduct VaR tests thatare burdensome and not necessary when comparedto the volatility of their portfolios, which are
generally comprised of loans and bonds.
This should not be the case. The goal of the limited
derivatives user exception should be to exclude
Regulated Funds whose use of derivatives does
not raise the concerns that Section 18 is meant toaddress. We urge the Commission to combine theseparate parts of the proposed limited derivatives
user exception into one test in the final rule, and toallow a DRM to risk adjust the notional amounts ofderivatives when calculating the percentage of net
assets test.
Reverse repurchase agreements are not analogous
to bank borrowings and should not be subject to the
300% asset coverage requirement.

The “limited derivatives user” definition in the
proposed rule should be revised to modify the 10%
derivatives exposure limit.
We support the exception in the proposed rulethat excludes “limited derivatives users” from therequirements to adopt a risk management programand implement VaR-based testing, but it should
be revised to make currency hedging derivatives
a global exception rather than a standalone one.
Under the proposed rule, limited derivatives users
must fall into one of two categories: those that limit
their overall use of derivatives to 10% of their net
assets with certain limited adjustments or those that
exclusively use derivatives for currency hedging. We
believe, however, that the two alternatives should becollapsed into one set of criteria; in other words, therule should permit a Regulated Fund to qualify asa limited derivatives user if its derivatives exposure
does not exceed 10% of net assets, excluding any
currency hedges.
This is a particular concern for alternative credit
managers managing Regulated Funds that provide
capital to small and mid-size businesses. Many ofthese Regulated Funds will use interest rate swaps
and credit default swaps to hedge exposures in theirportfolios, along with currency derivatives to hedge
any non-U.S. investments. These Regulated Funds
do, in fact, use derivatives for limited purposes, but
it is quite possible the cumulative notional amountof derivatives used will exceed 10% of net assets

We do not agree with the proposed rule’s treatmentof reverse repurchase agreements as the functional
equivalent of bank borrowings. The Commission
and the staff have maintained a long-standing
policy that they will not object to Regulated Funds
engaging in reverse repurchase agreements withoutcomplying with the asset coverage and otherrequirements of Section 18, provided that suchinvestment companies segregate assets, or otherwise“cover” their obligations under the instruments.
The framework set forth in Release 10666 has beenfunctioning appropriately for more than 40 years
and should continue to be applied to these types ofarrangements.

“

We do not agree with the proposed rule’s
treatment of reverse repurchase agreements as
the functional equivalent of bank borrowings.

”

Bank borrowings and reverse repurchase agreements
are two unique transactions that do not warrant
the same type of treatment under Section 18 of the1940 Act. A key distinction between the two is that
one creates an unequivocal monetary liability while
the other only creates a future contractual liability
that might not actually result in a financial liability.
A bank borrowing involves an extension of credit
to a fund, creating a financial liability that the fundmust repay by a certain date. Reverse repurchaseagreements and similar financing transactions create16

a potential liability to pay a fixed sum of money ata future date, but because the underlying securities
to be repurchased may have appreciated in thetime since the parties entered into the repurchaseagreement, reacquiring the securities may well beaccretive to the fund. A Regulated Fund has theability to adequately address the potential, but not
the certainty, of future liability by setting aside andmarking to market liquid assets that cover the fund’s
exposure to the potential liability. The guidance in
Release 10666 reached the correct conclusion andshould continue to be applied to reverse repurchaseagreements and similar arrangements.
If, however, the SEC determines that it must repeal
the guidance under Release 10666, then reverse
repurchase agreements and similar financing
transactions would be better treated in the samemanner as derivatives under the proposed rule. As
the SEC acknowledges in the proposing release, any
portfolio leveraging effects of reverse repurchaseagreements or similar financing transactions forRegulated Funds subject to the VaR test would be
included and restricted in the VaR-based limit,
which covers all of a fund’s investments. Thereis no reason why the Section 18 limitations onsenior securities need to apply directly to reverse
repurchase agreements when funds that utilize themextensively would become subject to a VaR-based
limit on fund leverage risk. Any portfolio leveraging
effect of reverse repurchase agreements or similartransactions would be included and restricted
through the VaR-based limit, which estimates afund’s risk of loss after taking into account all of thefund’s investments.
Next Steps
The proposed rule is a positive step in providing
a clearer, modern regulatory framework for how
Regulated Funds use derivatives and similararrangements. Nonetheless, there are componentsof the proposed rule that we believe the SEC should
reconsider. If these concerns are addressed ina final rule, the new regulatory regime will be awelcome improvement to the regulation of theuse of derivatives, unfunded commitments andreverse repurchase agreements or similar financing
transactions by Regulated Funds.

17

M&A Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

1251 Capital Group, a financial
services holding company.

Ziegler Capital Management,
an asset management firm withapproximately $10.5 billion total
adjusted AUM (approximately$1.9 billion of fixed income assets are
excluded from the deal).

Acquisition of majority stake with 1251’s
management becoming Ziegler shareholders
with representatives becoming part ofZiegler’s board of directors.

Advisor Group, Inc., a network of
independent financial advisers with
$271 billion in client assets.

Landenburg Thalmann
Financial Services Inc., a publiclytraded diversified financial services
company.

Acquisition through cash merger.
The total value of the transaction isapproximately $1.3 billion.

Aksia LLC, investment advisory firmthat advises on more than $85 billion ofclient alternative allocations including
more than $8.5 billion AUM.

TorreyCove Capital Partners
LLC, an investment advisory firmwith more than $75 billion in assets
under advisement.

Acquisition.
(Terms not disclosed)

Ares Management Corporation,an alternative asset manager withapproximately $149 billion in AUM.

Crestline Denali Capital L.P.,
an asset management company withapproximately $2.6 billion in AUM.

Acquisition through which a subsidiary ofAres will acquire a managing interest of
Crestline in an all cash transaction.

(Further terms not disclosed)(Further terms not disclosed)
ArrowMark Partners, a registeredinvestment adviser with approximately$18.9 billion AUM.

StoneCastle Asset Management,
the external investment adviser
to StoneCastle Financial Corp., aregistered, non-diversified, closedend investment company.

Acquisition of the platform and assets.
(Terms not disclosed)

Blucora, Inc., a wealth management
firm with approximately $67 billion in
total client assets.

HK Financial Services,a registered investment adviser.

Acquisition through a stock purchase with apurchase price of $160 million.

Bluespring Wealth Partners,
a wholly-owned subsidiary of Kestra
Financial a financial services platform
with approximately $24.5 billion AUM.

Vector Wealth Management,a management firm withapproximately $1.1 billion AUM.

Acquisition.

Captrust Financial Advisors,a registered investment adviser withapproximately $368 billion in AUM.

Welch Hornsby, Inc., a fee-only
investment adviser with approximately$5.5 billion in AUM.

Acquisition.
(Terms not disclosed)

Creative Planning, Inc., a wealthmanagement firm with approximately$45 billion AUM.

Hogan Financial Management
LLC, a registered investment adviser
with approximately $300 million AUM.

Acquisition.
(Terms not disclosed)

Dyal Capital Partners, a private
equity fund with approximately$21.5 billion in AUM; a divisionof Neuberger Berman that has
approximately $339 billion in AUM.

Owl Rock Capital Group,
an alternative asset manager withapproximately $14.6 billion.

Acquisition of passive, non-voting minority
stake.
(Terms not disclosed)(Further terms not disclosed)(Terms not disclosed)18

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Fiduciary Trust Company
International, a wealth management
firm and wholly-owned subsidiary ofFranklin Resources, Inc. with more than
$75 billion in assets under management
and administration.

Athena Capital Advisers, LLC,
a registered investment adviser withapproximately $6 billion in AUM.

Acquisition through merger.
(Terms not disclosed)

Fiduciary Trust Company
International, a wealth management
firm and wholly-owned subsidiary ofFranklin Resources, Inc. with more than
$75 billion in assets under management
and administration.

The Pennsylvania Trust
Company, a wealth management
firm with more than $4.7 billion
in assets under management andadministration.

Acquisition.
(Terms not disclosed)First Eagle Investment
Management, LLC, an investment
management firm with approximately$99 billion AUM.

THL Credit Advisors LLC, analternative investment manager withapproximately $16.8 billion AUM.

Acquisition.
(Terms not disclosed)

Franklin Resources, Inc., a global
investment manager with approximately$688 billion AUM.

Legg Mason, Inc., an investment
management firm with approximately$806 billion in AUM.

Acquisition through an all-cash transaction.
Franklin will pay $50 per share of common
stock for a total consideration of $4.5 billion
that will be funded from the company’s
existing balance sheet cash, and will assume
approximately $2 billion of Legg Mason’s
outstanding debt. Legg Mason affiliate
EnTrust Global will repurchase its business.

FS Investments, an asset manager
with more than $24 billion in AUM.

Chiron Investment Management,
an investment management firm withapproximately $1.8 billion in assets.

Acquisition.
(Terms not disclosed)

Goldman Sachs BDC, Inc. (“GSBD”),
a specialty finance company that has
elected to be regulated as a BDC.

Goldman Sachs Middle Market
Lending Corp. (“MMLC”), a
specialty finance company that has
elected to be regulated as a BDC.

Merger of affiliated BDCs.

Hub International Limited, a global
insurance broker managing more than
$38 billion in assets and services.

Perennial Pension and Wealth, an
independent financial services company.

Acquisition.
(Terms not disclosed)

Kudu Investment Management,
LLC, a registered investment adviser
with investment partners that collectively
manage more than $50 billion.

Creation Investments CapitalManagement, LLC, an investment
management that manages
approximately $707 million in private
funds.

Acquisition of minority interest.
(Terms not disclosed)

Kudu Investment Management,
LLC, a registered investment adviser
with investment partners that collectively
manage more than $50 billion andPacific Current Group Limited, an asset
management firm.

Pennybacker Capital Management,
LLC, an alternative investment manager
with more than $1.9 billion in AUM.

Acquisition of minority interest.
(Terms not disclosed)

19

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Lovell Minnick Partners, a private
equity firm with approximately$3.3 billion of committed capital.

Pathstone, a registered investment
adviser with more than $15 billion in
AUM.

Acquisition of interest.
(Terms not disclosed)

North Square Investments LLC,
an investment firm with more than
$10 billion in AUM.

C.S. McKee, L.P., an investment
management firm with more than
$8 billion in AUM.

Acquisition.
(Terms not disclosed)

Oak Hill Capital Partners, a private
equity firm managing funds withapproximately $15 billion of initial capitalcommitments and co-investments since
inception.

Mercer Global Advisors Inc.,a registered investment adviser andfinancial planning firm with more than
$16.5 billion in AUM.

Acquisition from current private equity owners
Genstar Capital LLC and Lovell Minnick
Partners.
(Terms not disclosed)

Resolute Investment Managers,
Inc., a diversified, multi-affiliate
asset management platform withapproximately $75.1 billion in AUM.

National Investment Services,a fixed income and equity strategies
manager with approximately$8.6 billion in AUM.

Acquisition of majority interest.
(Terms not disclosed)

Sanctuary Wealth, a global wealthmanagement firm with approximately$9 billion AUM through this acquisition.

Northview Asset Management
LLC, a registered investment adviser.

Acquisition.
(Terms not disclosed)

Sandy Spring Bancorp, parent
company of Sandy Spring Bank, which
upon completion of the acquisition will
have approximately $4.5 billion AUM.

Rembert Pendleton Jackson, an
investment and financial advisory firmwith more than $1.3 billion in AUM.

Acquisition.
(Terms not disclosed)

Savant Capital Management, a feeonly wealth management firm with morethan $6 billion AUM.

Huber Financial Advisors,a registered investment adviser withmore than $1.6 billion in total assets.

Acquisition through merger.
(Terms not disclosed)

The Charles Schwab Corporation,a financial services provider withapproximately $4.05 trillion in client
assets.

TD Ameritrade, a financial services
firm with approximately $1.3 trillion in
assets.

Acquisition through a $26 billion all-stocktransaction. TD Ameritrade stockholders will
receive a 17% premium over the 30-day volume
weighted average price exchange ratio as ofNovember 20, 2019, with each TD Ameritradestockholder receiving 1.0837 Charles Schwab
shares for each TD Ameritrade share.

Wealth Enhancement Group,a wealth management firm with almost$15.1 billion in client brokerage andadvisory assets.

BPU Investment Management,a financial advisory and investment
firm with approximately $990 million
in AUM.

Acquisition.
(Terms not disclosed)20

4th Quarter 2019 and 1st Quarter 2020
Closed-End Fund Public Offerings
AllianzGI Artificial Intelligence & Technology Opportunities Fund
Structure:

Diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Fund’s investment objective is to provide total return through a combination of current income,current gains and long-term capital appreciation. The Fund will seek to achieve its investment
objective by investing across the capital structure in companies across a broad range of industries andtechnologies positioned to benefit from the evolution and disruptive power of artificial intelligenceand other new technologies. The Fund will seek to achieve its investment objective by investing in
a combination of convertible securities, equity securities, and debt and other income-producing
instruments. Through a combination of these asset classes and strategies, the Fund attempts tosimultaneously capture equity market exposure and current income utilizing a disciplined, fundamental,
bottom-up research process combined with traditional credit analysis. The Fund attempts to reduce therisk of capital loss through, among other things, independent credit analysis focused on downgrade anddefault risks and the implementation of a clearly defined sell discipline strategy. The Fund will normally
not invest more than 20% of its managed assets in income producing securities (such limit does not
apply to convertible securities).

Investment Adviser:

AllianzGI U.S.

Lead Underwriters:

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

BlackRock Health Sciences Trust II
Structure:

Non-diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Trust’s investment objectives are to provide total return and income through a combination ofcurrent income, current gains and long-term capital appreciation. Under normal market conditions,
the Trust will invest at least 80% of its total assets in equity securities of companies principally engaged
in the health sciences group of industries and equity derivatives with exposure to the health sciencesgroup of industries. As part of its investment strategy, the Trust intends to employ a strategy of writing(selling) covered call options on a portion of the common stocks in its portfolio, writing (selling) othercall and put options on individual common stocks, and, to a lesser extent, writing (selling) call and put
options on indices of securities and sectors of securities. This options writing strategy is intended togenerate current gains from options premiums and to enhance the Trust’s risk-adjusted returns. The
Trust may invest up to 20% of its total assets in other investments, including equity securities issued bycompanies that are not principally engaged in the health sciences group of industries and debt securities
issued by any issuer, including non-investment grade debt securities.

Investment Adviser:

BlackRock Advisors, LLC

Lead Underwriters:

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

21

4th Quarter 2019 and 1st Quarter 2020
Closed-End Fund Public Offerings (continued)
Calamos Long/Short Equity & Dynamic Income Trust
Structure:

Diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Fund will invest, under normal circumstances, at least 80% of its managed assets in a globally
diversified portfolio comprised of equity securities which are defined to include common stock,
preferred stock, convertible securities and exchange-traded funds (the “Equity Sleeve”), as well as
long and short equity positions managed pursuant to a long/short equity strategy (the “Long/Short
Component”). The Long/Short Component will comprise at least 50% of the Fund’s managed assets witha focus on absolute returns in a risk-managed format. The Fund may invest up to 20% of its managed
assets opportunistically in globally diversified income-producing securities including high-yield andinvestment grade corporate securities, leveraged loans, distressed debt securities, securitized products,
U.S. Treasuries and sovereign debt issued by foreign governments (the “Fixed Income Sleeve”). Under
current market conditions, it is anticipated that the Fund will initially invest 80% of its managed assets
in equities, of which 60% will be invested in the Long/Short Component and 20% of its managed assets
in the Fixed Income Sleeve.

Investment Adviser:Calamos Advisors LLC

Lead Underwriters:

UBS Securities LLC, Morgan Stanley & Co. LLC, Wells Fargo Securities, LLC andRBC Capital Markets, LLC

DoubleLine Yield Opportunities Fund
Structure:

Non-diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Fund’s investment objective is to seek a high level of total return, with an emphasis on current
income. Under normal market conditions, the Fund will seek to achieve its investment objective by
investing in a portfolio of investments selected for its potential to provide a high level of total return,with an emphasis on current income. The Fund may invest in debt securities and other incomeproducing investments of issuers anywhere in the world, including in emerging markets, and may invest
in investments of any credit quality. The Fund expects initially, and may thereafter continue, to invest
substantially in debt instruments of below investment grade quality (including debt securities commonlyreferred to as “high yield” securities or “junk bonds”) and unrated instruments. The Fund may invest
in securities of any or no maturity or negative duration, and there are no limits on the duration of theFund’s portfolio. The Fund’s investment adviser allocates the Fund’s assets among sectors of the debt
market, and among investments within those sectors, in an attempt to construct a portfolio providing
the potential for a high level of total return, with an emphasis on current income, consistent with what
the adviser considers an appropriate level of risk in light of market conditions prevailing at the time.

Investment Adviser:

DoubleLine Capital LP

Lead Underwriters:

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

22

4th Quarter 2019 and 1st Quarter 2020
Closed-End Fund Public Offerings (continued)
RiverNorth Flexible Municipal Income Fund, Inc.
Structure:

Diversified, closed-end management investment company.

Investment
Objectives/Policies:

The Fund’s primary investment objective is current income exempt from regular U.S. federal income
taxes (but which may be includable in taxable income for purposes of the Federal alternative minimumtax). 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 Fund will seek to allocate its assets among two principal
investment strategies. The Tactical Municipal Closed-End Fund Strategy (allocated 25-65% of managed
assets) will seek to (i) generate returns through investments in closed-end funds, exchange-tradedfunds and other investment companies that invest least 80% of their net assets in Municipal Bonds, and(ii) derive value from the discount and premium spreads associated with closed-end funds that invest
at least 80% of their net assets in Municipal Bonds. The Municipal Bond Income Strategy (allocated35-75% of managed assets) seeks to capitalize on inefficiencies in the tax-exempt and tax-advantaged
securities markets through investments in Municipal Bonds. Under normal market conditions, the Fund
may not directly invest more than 25% of the managed assets allocated to this strategy in Municipal
Bonds in any one industry or in any one state of origin, and the Fund may not directly invest more than
5% of the Managed Assets allocated to this strategy in the Municipal Bonds of any one issuer. The Fundmay invest up to 30% of the managed assets allocated to this strategy in Municipal Bonds that pay
interest that may be includable in taxable income for purposes of the Federal alternative minimum tax.
The Fund will generally invest in Municipal Bonds that have a maturity of five years or longer at the timeof purchase.

Investment Adviser:RiverNorth Capital Management, LLC

Sub-Adviser:

McKay Shields LLC

Lead Underwriters:

UBS Securities, LLC, Wells Fargo Securities, LLC, RBC Capital Markets, LLC and Stifel, Nicolaus &Company, Incorporated

23

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 and

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

Steven Grigoriou
Counsel+1-202-636-5592
steven.grigoriou@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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25