Registered Funds Alert

May 2019

Table of Contents
After Nearly 50 Years, Fulcrum Fees
Still Fall Flat

2

A critical look at fulcrum fee models and asuggestion for a different approach.
Click here for more

Securities Offering Reform for
6
Business Development Companies
and Closed-End Investment Companies
Analysis of the recent rule proposal and a
few suggestions for improvement.
Click here for more

Novel Co-Investment Application10
Filed—A New Approach to Resolving
an Old Problem
Our thoughts on a new application format
for fund complexes seeking co-investment
relief from the SEC.
Click here for more

Notable Transactions: Q1 201915

A list of notable transactions that occurredin the first quarter 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: the problem with fulcrum fees and a
proposed potential alternative; a rule proposal that would
modify the registration, communications and offering rules
for BDCs and registered closed-end investment companies;
and a recent development in co-investment exemptive relief
application process.

Simpson Thacher & Bartlett LLPAfter Nearly 50 Years,
Fulcrum Fees Still Fall Flat
As active equity managers continue to lose retailinflows to passive investment vehicles, one approachsome active managers have taken is to differentiatethemselves on fees. Fulcrum fees, which adjust theadviser’s compensation up or down based on thefund’s performance, have been resurrected fromnear extinction and are now being heralded by someindustry leaders and publications as the solution toactive management’s passive problem. We disagree.
The fundamental nature of fulcrum fees ensurethat they will not work as a viable means to combat
the erosion of market share driven by the increasein popularity of passive funds. Although in theory
fulcrum fees better align the interests of active
managers with the shareholders of funds they advise,in practice the implementation of a fulcrum fee isquite complex, and the logistical restraints involved
ultimately do not allow the flexibility actively
managed funds really need to compete with passively
managed funds on cost. Moreover, the regulatory
design of fulcrum fees in effect requires thatinvestors be overcharged for mediocre performance.
We believe the industry would be better servedby pivoting its attention towards advocating forCongress to allow advisers to registered investmentcompanies the option to charge performance fees
similar to those charged by private funds (referredto herein as “traditional performance fees”). There
would of course need to be limitations on whattypes of performance fees advisers could charge
and mechanisms to prevent reckless management,
but decades of negotiations between advisers andsophisticated institutional investors in the private
fund space have done an excellent job of providing
guiderails for what those restrictions shouldlook like if the concept of performance fees were
imported to retail funds. A properly constructedtraditional performance fee does not incentivize
asset managers to take inappropriate risks, fairly
compensates advisers for outperformance, and does
not overcompensate for underperformance; all ofwhich aligns the interests of retail investors with theinterests of their advisers.

“

We believe the industry would be better servedby pivoting its attention towards advocating forCongress to allow advisers to registered investmentcompanies the option to charge performance fees
similar to those charged by private funds.

”

In this Alert, we discuss why we believe theindustry should move on from fulcrum fees asa potential savior and should instead focus on
persuading Congress that it is time to revisit
the ban on performance fees for registeredinvestment companies.

The Active Versus Passive Problem
As it stands today, retail investors pay considerably
more to invest in actively managed funds thanpassively managed funds, particularly with respect
to equity funds, and that gap is due in large partto management fees charged by the advisers to thefunds. The management fee pays for the adviser’s
cost of employing the portfolio managers who makethe investment decisions. For active strategies,
these management fees typically range from 0.5%
to 2%, depending on the fund’s strategy. For passive
strategies, the management fees are far lower andtypically range from 0.05% (or less!) to 0.25%.
Many investors would be happy to pay more foractive management if it translated into better
performance, but that often is not the case, especiallyfor equity funds. Instead, while nearly all actively
managed funds cost more than index funds, asmaller portion exceed their benchmarks. The
reality is that it is difficult for investors to selectfund managers that can reliably beat their peers
and the index. And even when an investor makes
the right selection and finds an active fund thatbeats the index, data shows that the manager’s outperformance is unlikely to persist long-term.
And so the question is, how can actively managed
funds bring their base costs down to compete with
low-cost passive strategies when the fund does
not beat its benchmark, but fairly compensate
the adviser when the active strategy outperforms
the benchmark? Many industry observers andparticipants are looking to fulcrum fees to answer
that question.
This focus stems from the fact that fulcrum fees
are, at present, the only type of performance-based2fees that advisers may charge to most types ofregistered investment companies. Section 205(a)(1) of the Advisers Act generally prohibits registeredinvestment advisers from charging a fee based on ashare of capital gains on, or capital appreciation of,
the assets of a registered investment company.1 Thesetypes of compensation arrangements, referred toas performance fees, were prohibited to discourageadvisers from taking “unnecessary risks” with client
funds in order to increase advisory fees.2
Accordingly, the overwhelming majority of retailfunds charge a “flat” management fee that is
calculated as a percentage of the fund’s average net
assets and does not vary with performance.
However, in 1970 Congress created an exception
to the performance fee prohibition, known as the“fulcrum fee.” Under that exception, advisers may
adjust their management fee based on performanceso long as they do so symmetrically—meaning thefee moves up or down based on outperformanceor underperformance relative to a benchmark
index over a specified period. Congress felt that thesymmetry of the fulcrum fee was appropriate forregistered investment companies because it “would
insulate investment company shareholders fromarrangements that give investment managers a direct
pecuniary interest in pursuing high risk investment
policies.”3
Nearly 50 years later, in the face of mounting fee
pressure, some commentators are saying active
strategies can be saved by setting fulcrum fees thatstart at a lower base rate than peer funds with flat
management fees, but with the potential to earn thesame or more as comparable active fund managers solong as they consistently outperform the benchmark.
In this way, retail investors may be convinced thatthey are “paying for outperformance” and will be
more tolerant of the comparatively high costs ofactively managed funds.
There are numerous problems with this refrain.
For one, there are serious and complex logisticaldifficulties in operating funds with fulcrum fee
structures that make them unpalatable for advisersand potentially even detrimental to shareholders.
1. Advisers of registered funds and business development companies owned
solely by “qualified clients” (as defined in Rule 205-3(d)(1) under theAdvisers Act) are exempt from the prohibition on charging performancefees on capital gains or capital appreciation. Additionally, businessdevelopment companies are exempt from the prohibition if as certain
requirements set out in Section 205(b)(3) of the Advisers Act are met,
including that the incentive fee on realized capital gains, computed netof all realized capital losses and unrealized capital depreciation, does notexceed 20%.
2. H.R. Rep. No. 2639, 76th Cong., 3d Sess. 29 (1940).
3. H.R. Rep. No. 1382, 91st Cong., 2d Sess. 41 (1970); S. Rep. No. 184, 91st
Cong., 1st Sess. 45 (1969).

These are highly technical considerations that havebeen pointed out in numerous prior critiques offulcrum fees and are beyond the scope of this article,
but suffice it to say there are good reasons why there
have been very few fulcrum fee funds historically.
The bigger problem we see with the fulcrum fee assavior argument, is the fact that the symmetricalnature of a fulcrum fee model creates an inherent
structural flaw that does not benefit shareholders.
Why Fulcrum Fees Fall Flat
To illustrate why many observers believe that
fulcrum fees are the solution, consider a scenario
where an adviser wants to create a new product thatcompetes with other active products that typicallyhave 1.25% flat management fees, and is willing toaccept that it should only receive that 1.25% when it
outperforms benchmarks by 5%.4 Under the fulcrum
model, the adviser might set a fulcrum fee rate of
1%, and a performance adjustment schedule withtwo breakpoints, reaching a maximum or minimum
adjustment of 0.5% when the fund exceeds thebenchmark by 10%. The expected management fee
compensation would be as described in the chart
below:
Relative Performance Fulcrum Fee Performanceof the Fund to its		
Adjustment
Benchmark Index			≥ +10%+5% to +10%
-5% to +5%-5% to -10%
≥ -10%

1.00%
1.00%
1.00%
1.00%
1.00%

+0.50%+0.25%
0.00%-0.25%-0.50%

Total
Management
Fee

1.5%
1.25%
1.00%
0.75%
0.50%

Many have argued this scenario is a clear victory forshareholders and that this is how fulcrum fees willsave active strategies, but this seems shortsighted.
Yes, when compared to another active strategy
with a flat 1.25% management fee, the hypotheticalfulcrum fee model might well present a good value
for investors. But offering a fee structure that isincrementally more shareholder friendly relative
to other active funds does not address the active
managers’ real problem – index funds.
By and large, active strategies are losing out topassive strategies, and they are losing on cost. An
investor that is already in the mindset and positionof choosing between an actively managed fund or an
index fund is focused on the relative expense of thefulcrum fee product compared to an index fund, not
4. The figures used in this and other examples are selected in large part forthe computational ease of the hypotheticals. These precise figures may
not necessarily represent commercially realistic scenarios, but we believe
they do still illustrate the greater structural concern with fulcrum fees.
3

its cost compared to other active products. Under the
hypothetical fulcrum fee model, a fund would stillbe paying a 0.75% management fee for performancethat is 5% below the benchmark. That is, of course,
more appealing than the prospect of paying a flat
1.25% for similar underperformance under a flat
management fee structure. But from the perspectiveof an investor who is deciding between an actively
managed fund and an index fund, paying 0.75% for
performance that is 5% below the benchmark is still
an abysmal prospect compared to paying far less for
an index fund that by definition seeks to track the
performance of its benchmark.

for the manager trying to be as shareholder-friendly
as possible with a fulcrum fee still getting paid 62.5
basis points for performance that is 4.9% below thebenchmark.
Relative Performance Fulcrum Fee Performanceof the Fund to its		
Adjustment
Benchmark Index			≥ +5%-5% to +5%≥ -5%0.625%
0.625%
0.625%+0.625%0.00%-0.625%

Total
Management
Fee

1.25%
0.625%
0.00%

Traditional Performance Fees Would Lead to Better
Options for Retail Investors

This outcome—where active managers are still
relatively highly compensated for mediocre, or evenpoor, performance—is the both the key concern
driving investors towards passive options and an
inevitable result of the forced symmetry of fulcrum
fees. Because the performance adjustment cannot
increase more than it decreases,5 even if an adviser
wanted to be as aggressive as possible under afulcrum fee model, the lowest possible fulcrum fee
they could set would be halfway between 0% and thetargeted fee for outperformance.6 This is extremely
problematic given that actively managed funds today
often have management fees that are multiple times
higher than those of index funds, and the problem
is only being exacerbated as index funds continue
to drive their management fees towards zero. So
long as active funds are structurally saddled with a
200% maximum spread between baseline fees andoutperformance fees, they will be prevented fromtruly competing with passive funds on cost if theywant to earn a realistic fee for outperformance.
Put simply, the Congressional design of fulcrum
fees requires retail shareholders to overpay for bad
performance in a foolish effort to incentive managers
properly. The chart below shows the fee structure
5. While there is guidance that suggests a fulcrum fee can be asymmetrical,
it can only be asymmetrical such that the fee decreases faster than it
increases. This would not resolve the problem, which is that advisers
must set relatively high base management fees in order to realize theappropriate upside fees for outperformance.
6. Theoretically negative management fees would be permitted under therule, but would likely be commercially impractical.

Traditional performance fees would solve thisfundamental problem with fulcrum fees by
disconnecting the adviser’s base compensationfrom its incentive to outperform the index, thereby
allowing advisers to offer products that put the riskof failing to beat benchmarks on the adviser. Unlike
fulcrum fees, traditional performance fees, such as
those used by most private funds, are separate fromthe fund’s base management fee. Under that model, afund has a fixed base management fee, and then add
an additional performance fee that it can earn for
exceptional performance.
Decades of industry practice involving negotiations
between sophisticated institutional investors andinvestment advisers have developed a set of features
for modulating traditional performance fees that
could be imported into the retail context and used
to ensure retail investors are not exploited. Two
features in particular, “hurdles” and “clawbacks,”
are common devices in performance fee structuresthat manage the adviser’s risk tolerance while still
incentivizing the adviser to meet a performance goal.
When a hurdle applies, no performance fee is paid
unless the fund beats a specified performancethreshold for the specific period. Many have hurdles
that are based on a three year, twelve quarter,
lookback period. This essentially means that that
if the fund fails to meet its target at any point in
the past three years, the fund will have to make up
for that underperformance before the adviser canresume earning a performance fees. The potential foran adviser digging themselves into a hole that they
will have to contend with for twelve quarters strongly
disincentivizes unnecessarily risky strategies.
In the same vein, a clawback serves to protect afund’s investors from the possibility of either thefund not achieving its targeted return levels due
to poor performance or the adviser earning morethan is permitted. Essentially, if at the end of a4

set period, the fund has not earned enough or theadviser has earned too much, the adviser may berequired to pay part of its past compensation backinto the fund. Though they accomplish it throughdifferent means, both hurdles and clawbacks achieve
the same functional result as fulcrum fees, in thatshareholders are not overcharged for mediocre longterm performance.
Utilizing these features, a traditional performancefee model could allow an adviser to offer an actively
managed fund with considerably more variance
between base compensation and total compensation
than is currently permitted by the fulcrum fee
model. Considering the same scenario as above
where an adviser is seeking to earn 1.25% of net
assets if it beats a benchmark by 5%, if traditional
performance fees were allowed, an adviser could
offer a product with a base management fee of
0.25%, which is competitive with index funds, butthat also has a 1% performance fee with a hurdle of
5% over the benchmark, measured quarterly witha twelve quarter lookback period. If the fund only
meets the benchmark, the adviser would only receive
its base management fee, which would put investors
in a position that is competitive with purely passive
strategies. If the fund meets its performance target,
the adviser would receive its 1% performance fee,and investors would be happy to pay it. If the fundunderperforms the benchmark, the adviser’s ability
to earn performance fees in the future is reduced
proportionately, thereby incorporating the samedisincentive for risky strategies as fulcrum fees.
Relative Performance
Base
Performance Fee
Totalof the Fund to its
Management (subject to a 5.00% Management
Benchmark Index
Feeoutperformance hurdle)
Fee

≥10%
5% to 10%
-5% to 5%-5% to -10%
≥ -10%

0.25%
0.25%
0.25%
0.25%
0.25%

+1.00%+1.00%
0.00%
0.00%
0.00%

1.25%
1.25%
0.25%
0.25%
0.25%

The structural constraints on fulcrum fee models
that make them inviable as solution to the passive
problem are most apparent when fulcrum fee models
are compared side-by-side with a fund using a
traditional performance fee model.
In the more practical 1% fulcrum fee example, thepotential to pay significantly more than an index
fund for underperformance makes the fulcrum
fee product almost as unattractive as regular flat
management fee active funds. The improvement
is marginal, and unlikely to sway the types ofinvestors who are currently fleeing from actively

Relative
Total
Performance ofManagement
the Fund to its
Fee
Benchmark Index(1.00%

Total
Management
Fee

Total
ManagementFee(0.625%(1.00% Traditional		
Fulcrum Fee)
Fulcrum Fee)
Performance Fee				with 5.00%
				Outper-formance				 Hurdle)≥10%
5% to 10%
-5% to 5%-5% to -10%
≥ -10%

1.5%
1.25%
1.00%
0.75%
0.50%

1.25%
1.25%
0.625%
0.00%
0.00%

1.25%
1.25%
0.25%
0.25%
0.25%

managed options. In the more aggressive 0.625%
fulcrum fee example, the value proposition is better,but the potential cost for performance in line withthe benchmark is likely still considerably more
expensive than investing in a typical index option.
Moreover, from a sheer practicality standpoint, it isunlikely that an adviser would consider it a soundbusiness proposition to have the potential to earn 0%
management fees for an actively managed product.
Given that fulcrum fee products cannot effectively
be structured to sway the types of investors thatare actually leaving active management, and thatthey are likely to be less attractive commercial
propositions than traditional retail funds withflat management fees, it is unsurprising that
fulcrum fee funds remain rare, despite the recent
uptick in their offering. A product that utilized a
traditional performance fee, on the other hand,
could effectively be structured to provide parity
with a passive strategy when performance issimilar, and compensate the adviser fairly forexceeding the benchmark, all without compromising
investor protection.7
Conclusion
Fulcrum fees are interesting in theory, but a 50-year
old solution is not the answer to a very modern
problem. The shift towards passive strategies isdriven, in large part, by the digital age making it
relatively easy to track the market. As it stands
today, professional fund managers, in the aggregate,
control most of the money in the markets. Thus, it isunsurprising that index funds that track the overall
movement of a market consistently do their task well.
But what happens if active managers are driven outof the market by their inability to effectively competewith passive strategies on price? Eventually, theindex becomes more and more a reflection of a few,
7. It may well be that for such a product to be commercially viable, theperformance fee charged would have to exceed what would be charged
by an active fund with a flat management fee structure. We do notbelieve this would materially change the analysis regarding the various
approaches, as that flexibility still would not be available under thefulcrum fee model.
5concentrated movers and a mob of followers, and its
utility as an investment tool drops dramatically. Highnet worth individuals and institutional clients will
always be able to afford quality active management,
but retail investors could be left out in the cold.
Ensuring the long-term viability of numerous anddiverse active management options for the retailmarket is essential to protecting retail investors andtheir retirement savings.
The industry would be better served by focusing its
energies on finding ways to convince Congress torevisit the ban on performance fees for registeredinvestment companies. As Commissioner Peirce
argued last fall, “allowing funds to experiment withperformance fees may . . . facilitate the continued
availability of actively managed funds.” If active
managers are forced out of the retail space because
they cannot compete effectively on cost, retailinvestors will be the ones most harmed. Moreover,
the restrictions on performance fee structures are
already hurting retail investors for the reasons
we have described above. Congress acting toallow advisers to charge some form of traditional
performance fees would provide retail investors theflexibility to choose products that are responsive
to their actual concerns, and will allow a criticalindustry to adjust to life in modern times.

Securities Offering Reform
for Business Development
Companies and Closed-End
Investment Companies
In a welcome development, the SEC recently
proposed rules that would modify the registration,communications and offering rules for BDCs
and registered closed-end investment companies(“CEFs”) to more closely align such processes
with those that apply to operating companies. The
SEC was obligated to propose rules in this area
pursuant to The Small Business Credit Availability
Act (the “BDC Legislation”) and the Economic
Growth, Regulatory Relief, and Consumer Protection
Act (the “CEF Legislation”), passed by Congress inMarch and May 2018, respectively.
The proposed rules introduce five main reforms thatwould benefit BDCs and CEFs:• Registration Process. The proposal would
streamline the registration process to allow
eligible BDCs and CEFs to use a short-form
registration statement on Form N-2 to sell
securities “off the shelf” more quickly andefficiently in response to market opportunities.
A key benefit in this context is the ability toforward-incorporate information in future filings
by reference.
• Well-Known Seasoned Issuer Status. The
proposal would allow BDCs and CEFs with atleast $700 million in public float to qualify as
well-known seasoned issuers (“WKSIs”) under
the Securities Act of 1933 (the “SecuritiesAct”). WKSIs enjoy automatic effectiveness ofregistration statements and amendments, among
other benefits.
• Final Prospectus Delivery Reforms. The
proposal would remove the requirement that
BDCs and CEFs deliver a final prospectus withor prior to each sale when a final prospectus isalready filed with the SEC.
• Communications Reforms. The proposal
would allow BDCs and CEFs to rely on specificexemptions for communicating with investors
without violating “gun-jumping” prohibitions,putting them on the same footing as operatingcompanies.
• Public Reporting Parity. For funds that use
a short-form registration statement, there is a
proposed requirement to provide information
regarding fees, expenses, premiums/discounts
and outstanding senior securities in annual
reports (which can be incorporated by reference
into a previously filed registration statement).
CEFs would be required to make Form 8-K filings
for material developments under the Securities
and Exchange Act of 1934 (the “Exchange Act”).
Additionally, the proposal includes new Form
8-K requirements relating to material changes
to investment objectives or policies and material
write-downs of significant investments.

In this Alert, we summarize the above aspects of the
proposal, and propose that the SEC should revise
and clarify certain aspects of the proposal relating
to the new public reporting requirements for BDCs
and CEFs.
Registration Process
The proposal would provide BDCs and CEFs parity
with operating companies by permitting eligible
BDCs and CEFs to file a short-form registration
statement on Form N-2 that will function like a
6

“shelf” Form S-3 registration statement for operatingcompanies. Short-form registration statements
incorporate relevant information from periodic
filings by the issuer and can be used for multiple
future offerings of one or more types of securities.
Once the SEC declares a shelf registration statement
effective (or if it automatically becomes effective
as for WKSIs) the issuer can use a prospectus to
supplement the shelf for a specific offering. Suchprospectus would include specific information
about the offering that was omitted in the shelf. SEC
review of the prospectus for a specific offering is
not required, so once an issuer has an effective shelfregistration statement it can quickly conduct anoffering “off the shelf” without needing to navigate
an SEC review process. Future periodic reports
filed by the issuer are automatically incorporated
by reference into the registration statement, so
the issuer does not need to separately update theregistration statement to include updated financial
statements or other items already disclosed in its
periodic reports prior to conducting an offering.

companies, would perpetuate unnecessary updates
for BDCs and CEFs that conduct continuous
offerings pursuant to Rule 415 under the Securities
Act and provide liquidity through periodic tender
offers. Currently, these tender offer funds are notpermitted to forward incorporate, which necessitates
their updating their registration statements andundergoing SEC disclosure review at least annuallyin order to incorporate the fund’s annual financial
statements, even if no other material updates arebeing made. This process adds expenses to tender
offer funds, but does not provide meaningful benefit
to investors as the requirement to update theregistration statement is triggered by incorporating
financial statements that are already available toinvestors in the tender offer fund’s annual report.
The SEC should consider allowing tender offer funds(and interval funds) to use forward incorporation byreference to streamline the offering process for theseproducts or, as an alternative, allow tender offer
funds the ability to use Rule 486 (which is currently
only available to interval funds) to make immaterial
updates to their registration statement without
requiring SEC disclosure review.
Well-Known Seasoned Issuer Status
In addition, the proposal would amend the WKSI
definition under Rule 405 to include qualifying BDCs
and CEFs, and BDCs and CEFs that qualify as WKSIs
would be able to file an automatic shelf registration
statement and register an unspecified amountof securities.

A BDC or CEF would be eligible to file a short-form
registration statement if it meets the registrant
requirements (i.e., timely filed all reports and othermaterials required under the Exchange Act during
the prior year) and transaction requirements (i.e.,
at least $75 million of public float) of Form S-3.
Registered CEFs also must be registered under the1940 Act for at least one year immediately preceding
the filing of the registration statement and havetimely filed all reports required to be filed under
Section 30 of the 1940 Act (e.g., Forms N-PORT and
N-CSR). We note that the public float requirement
effectively excludes unlisted BDCs and CEFs,
including interval funds and tender offer funds, from
eligibility to file a short-form registration statement.
Improving the Proposal for Registration
Requirements
The proposal’s exclusion of unlisted CEFs and BDCs,
while consistent with the treatment of operating

To qualify as a WKSI, a BDC or CEF must have atleast $700 million in public float and be eligible
to file a short-form registration statement, whichmeans that the BDC or CEF must have: (i) been
subject to the requirements of Exchange Act Sections
12 or 15(d) or 1940 Act Section 30 for at least one
year and (ii) timely filed all reports required tobe filed during the past year (other than certain
current reports on Form 8-K). As with short-form
registration statement eligibility, the public float
requirement effectively excludes unlisted BDCs
and CEFs, including interval funds, from eligibility
to qualify as a WKSI. A BDC or CEF would also be
ineligible to qualify as a WKSI if it (or a subsidiary)is the subject of a judicial or administrative decree ororder arising out of a governmental action involving
violations of the anti-fraud provisions of the federal
securities laws.
Qualifying as a WKSI would come with a few key
benefits. A WKSI can file a registration statement oramendment that becomes effective automatically,
which would give the fund flexibility to takeadvantage of market windows, structure terms of7

securities on a real-time basis or change the planof distribution in response to market conditions. A
WKSI also can pay filing fees at any time in advanceof a shelf takedown or pay at the time of eachtakedown.
Final Prospectus Delivery Reforms
Currently, BDCs and CEFs (or broker-dealers in a
BDC or CEF offering) are required to deliver to each
investor in a registered offering a statutory “final
prospectus.” BDCs and CEFs are not permitted torely on the rules that allow issuers to satisfy the
final prospectus delivery obligations when a final
prospectus is or will be filed with the SEC withincertain time frames.
Under the proposal, the prospectus delivery rules
available to operating companies would be amended
to remove the exclusion for BDCs and CEFs. As aresult, BDCs and CEFs (or broker-dealers in a BDC
or CEF offering) would no longer be required todeliver a final prospectus with or prior to each sale
if the final prospectus is filed with the SEC and the
securities are delivered with a notice to that effect.
Communications Reforms
The proposal would give BDCs and CEFs increased
flexibility in their communications with investors
and potential investors. Under the proposal, BDCs
and CEFs would be eligible to rely on certain
rules previously only available to operatingcompanies, including:• Rule 134, which permits issuers to publish
factual information about the issuer or theoffering, including “tombstone ads” (limited
factual information about an offering);• Rule 168, which permits issuers to publish or
disseminate regularly released factual businessinformation and forward-looking information
at any time, including around the time of aregistered offering;• Rule 164 and 433, which permits the use of
a “free writing prospectus” after a registration
statement is filed—a written communication
deemed to be an offer to sell a security that
does not qualify as a statutory prospectus or
preliminary prospectus (e.g., term sheets); and• Rule 163, which permits WKSIs to engage at
any time in oral and written communications,
including use of a free writing prospectus at any
time (before or after a registration statement
is filed).

The proposal would also amend the rules applicable
to broker-dealer research reports to include
a reference to registration statements filed on
Form N-2 to expand coverage to BDCs and CEFs.
Operating companies that file a registration
statement on Form S-3 may rely on Rule 138,
which permits a broker-dealer participating in a
distribution to publish research about the issuer’s
other securities. For example, a broker-dealer
participating in a distribution of an issuer’s common
stock could publish research about the issuer’s fixedincome securities pursuant to Rule 138. Although
Rule 138 does not specifically exclude BDCs and
CEFs from coverage, it does include references toForm S-3 but not Form N-2.
Public Reporting Parity
The proposal would amend certain rules and forms
to tailor the disclosure and regulatory framework for
BDCs and CEFs in light of the proposed amendments
to the offering rules applicable to them.
Periodic Reporting Requirements
Forward Incorporation
A BDC or CEF filing a short-form registration
statement on Form N-2 would forward incorporate
all periodic reports into its registration statement.
As a result, periodic reports would make up a
substantial portion of a fund’s registration statement.
The proposal would require BDCs and CEFs using
short-form registration statements to include in theirannual reports: fee and expense tables; premiums
and discounts; and outstanding senior securities.
Annual Reports
The proposal would also amend Form N-2 to requirea registered CEF to include narrative disclosure
about factors that materially affected the fund’s
performance during the most recently completed
fiscal year (referred to as “management’s discussionof fund performance,” or “MDFP”) in its annual
report. This would apply to all CEFs, even those notusing short-form registration statements. Although
the SEC has required mutual funds and ETFs toinclude MDFP disclosure and BDCs (like operatingcompanies) to include a narrative discussion of
the financial statements of the company (referred
to as “management discussion and analysis,” or“MD&A”), Form N-2 does not include an MDFPor MD&A requirement for registered CEFs. The
SEC believes that registered CEF investors would
benefit from MDFP disclosure in a registered CEF’s
annual report because such disclosure would aid
investors in assessing the fund’s performance overthe prior year (MDFP disclosure requirements are8more appropriately tailored to the financial reportingof registered investment companies than MD&A
requirements).
Further, the proposal would require BDCs to include
their financial highlights in their registration
statements and annual reports. Registered CEFs
are required to include financial highlights intheir registration statements and in annual
reports; however, while BDCs include their full
financial statements in their prospectuses, they are
currently permitted to omit the financial highlights
summarizing these financial statements (althoughmany BDCs already include financial highlights
in the footnotes to their financial statements). The
SEC believes BDC investors would benefit fromthis disclosure given the importance of financial
highlights information.
Lastly, the proposal would require BDCs and CEFs
filing a short-form registration statement to disclosein their annual reports any outstanding SEC staff
comments that remain unresolved and that thefund believes are material. This new requirement
may create an issue for funds that are part of alarger complex, where a comment given to one
fund arguably may apply to other funds. We believe
the SEC should clarify in the adopting release (orthe final rule) that the requirement only applies tocomments directly received by a given fund.
Current Reporting Requirements
Form 8-K requires BDCs to disclose specific eventsand information on a current basis in the samemanner as operating companies. In contrast,
registered CEFs generally are not required to report
information on Form 8-K, although some do sovoluntarily. The proposal would require registered
CEFs (even those that do not use short-form
registration statements) to provide current disclosure
on Form 8-K.
The proposal would also amend Form 8-K to add two
new reporting items for BDCs and CEFs:• Item 10.01: material changes to investment
objectives or policies; and• Item 10.02: material write-downs in fair valueof significant investments (an investment would
be considered significant if a BDC’s or CEF’s
investment in a portfolio company exceeds 10% of
its total assets).

Failure to file timely reports on Form 8-K under
new Items 10.01 and 10.02 would not disqualify
a BDC or CEF from eligibility to file a short-form
registration statement.
Improving the Proposal’s Current Reporting
Requirements
Although we applaud the SEC’s effort to improvecurrent reporting of important information by BDCs
and CEFs to investors and the market, we believe
the requirement to disclose a material write-downin fair value of a significant investment should not
be imposed on BDCs and CEFs. The SEC likens therequirement to an existing requirement in Form
8-K applicable to operating companies to report amaterial impairment to an asset (such as goodwill,accounts receivable or a long-term asset). Unlike
operating companies, the purpose of BDCs and CEFs
is to invest in securities, which inherently change
in value. While a material change in a balance sheet
asset of an operating company may be an unusual
event, a material change in the value of a security is
not an unusual event.

“… we believe the requirement to disclose amaterial write-down in fair value of a significant
investment should not be imposed on BDCs and
CEFs.

”

While the SEC’s proposal would only apply tosignificant assets (i.e., those that make up atleast 10% of the BDC’s or CEF’s total assets), a
requirement to disclose a material change in only one
asset does not seem consistent with what is relevant
to an investor. Ultimately investors are affected bya change in the overall net asset value (“NAV”) per
share of a BDC or CEF. Information about the valueof a single asset is not as useful to an investor as
stating the NAV per share of a BDC or CEF.
Additionally, as a practical matter, BDCs and CEFs
value their securities when they strike their NAV.
Some BDCs and CEFs only strike NAV monthly orquarterly. These BDCs and CEFs would not typicallyassess the value of a significant asset outside of their
typical NAV valuation process. Therefore, the BDC
or CEF would confirm the amount of the material
write-down of a significant asset simultaneously withconfirming the BDC’s or CEF’s overall NAV. Because
the overall NAV is the more important measure to an
investor and will be available at the same time, therequirement to report a material write-down of anindividual asset (even a significant asset) does notmeaningfully assist investors.
9

Novel Co-Investment
Application Filed—A New
Approach to Resolving an
Old Problem
Investors, investment advisers, and the SEC alike are
all focused on increasing retail access to investment
strategies historically limited to wealthy individuals
and institutional investors. Allowing registeredfunds to co-invest alongside private funds is a key
prerequisite to products that allows retail investors
access to such investment strategies, but a registeredfund’s ability to co-invest is restricted by the 1940
Act. For co-investment opportunities that involve
negotiation of terms other than price (“Negotiated
Co-Investments”), the SEC historically has
required that funds and their advisers apply for an
exemptive order and agree to more than a dozen
conditions that restrict how the funds and advisers
behave with respect to identifying, entering into,
allocating and approving Negotiated Co-Investments.
These conditions, along with pages and pages ofnarrative description about how the adviser andfunds will operate, form what becomes each set of
applicants’ application for what we will refer to as“standard relief.”

We have argued in previous Alerts that the systemfor obtaining standard relief is outdated and in
desperate need of a ground-up overhaul. A recent
co-investment application filed by FS Global Credit
Opportunities Fund, et al. (the “FS Application”),
if granted by the SEC in a form similar to theapplication (which has been amended once as of thedate of this Alert’s publication), would go a long way
towards reforming the most significant issues withthe standard relief. In particular, the FS Application
envisions a broad, principles-based approach toco-investment relief rather than a detailed andcustomized application unique to the applicant’sbusiness. We believe this would be a tremendous
step forward, and encourage the SEC and its staff toconsider the FS Application seriously. However, theFS Application leaves certain issues unaddressed. In
this Alert, we take a look at how the FS Application
would change the status quo conceptually, what
benefits it provides practically, and finally offer
our thoughts on certain elements that we think are
missing from the application but are necessary for it
to provide a comprehensive solution.
The Old Problem and the New Approach
Applications for standard relief require an
unnecessary amount of detail, which has led toa situation where innovation has been plodding,unpredictable and uneven. What works for one
adviser and one strategy may not work for anotheradviser or another strategy. Under the standard
relief, the detailed descriptions, representations
and conditions required from each set of applicantsmean that if an applicant wants to innovate in amaterial way, their application needs to be different
from precedent. As each adviser approaches
the application process with a slightly different
desired outcome in mind, these deviations happen
frequently. While the SEC will occasionally accept asignificant customization proposed by an applicant,those major requests (and even relatively minor
requests) are often rejected. Even when changes
are accepted, they usually add considerable timeto the SEC’s review process, resulting in a timelinethat is inconsistent with the capital formation
timing goals of the applicant. As a result, an
exemptive relief process that was initially designed
to encourage innovation arguably is now having the
opposite effect.
Investment advisers preparing to launch new
products effectively have a choice between filingan application for standard relief that is in every
material respect in line with what previous
applicants have successfully requested—a process
which still takes months to complete—or they can
submit an application that modifies precedent toreflect their intended strategy and contend with thepossibility that the SEC may reject their application
months or even years after it was initially filed. Far
too often, the result is simply that advisers will giveup on fledgling products that involve co-investments
between retail funds and private funds once they
understand that they will need to obtain bespoke
exemptive relief from the SEC to innovate in thisparticular space.
We believe that the SEC can more than adequately
protect investors while promoting innovation thatbrings retail investors into private/institutional
strategies by ending the historical dependence on
lengthy, detailed descriptions and representations10

in co-investment applications that detail howeach applicant fund complex and its advisers will
operate. The staff of the SEC’s Division of Investment
Management recommended in 1992 that SEC rules
be amended to permit certain joint transactions inwhich a registered fund may participate on the sameterms as its affiliates. In place of a revised rule, we
believe a new baseline application that is similar to
the FS Application will better match the spirit of the
1992 recommendation and allow advisers to innovatemuch more freely than under the standard relief.

“

We believe that the SEC can more thanadequately protect investors while promoting
innovation that brings retail investors into
private/institutional strategies by ending thehistorical dependence on lengthy, detailed
descriptions and representations in co-investment
applications that detail how each applicant fundcomplex and its advisers will operate.

”

The FS Application asks the SEC to grant exemptive
relief that would allow registered funds to engage
in Negotiated Co-Investments based on “fair andequitable principles” rather than requiring theregistered fund’s board to review and approve
co-investments. In other words, the application
rests on principles that dictate what is and is
not permitted, rather than relying on specificrepresentations about what exactly the fundcomplex and adviser will do to comply with thoseprinciples. The conditions in the FS Application,
which are considerably fewer in number than thosein the standard relief, have been reworked almost
entirely to reflect this broader and more principlesbased approach. These changes should makecompliance with co-investment orders more easily
administrable. They also have the additional effect offurthering the SEC Staff’s laudable goal of lessening
unnecessary administrative burdens on fund boards.
Significant Practical Benefits of the FS Application
The FS Application streamlines the current approachto co-investment relief with its principles-based
conditions and focus on an adviser’s fiduciary duties.
We highlight certain of the significant practicalbenefits of this change below.
Lack of Detailed Representations Regarding CoInvestment Program
Unlike standard relief, the FS Application does
not have a section in the body of the application

describing the mechanics of the co-investment
program and the allocation principles. The FS
Application lacks a description of allocation
methodology, described in standard relief as“available capital” or “order size,” which havehistorically been used as a framework to allocate
participation in Negotiated Co-Investments between
registered funds and affiliated funds. Instead, theFS Application requires only that an investment
adviser develop policies to allocate Negotiated
Co-Investments “fairly and equitably” among
participating funds, which is a standard equivalent toan adviser’s existing obligations under the Advisers
Act and the 1940 Act.
The sections outlining mechanics and allocation
methodology, which typically range from five toten pages, make up a substantial portion of mostapplications for standard relief and contain material
representations that the SEC often includes when it
publishes a notice of its intent to grant an applicationfor exemptive relief. The streamlined nature of the
FS Application, if approved by the Staff and the SEC,
will likely lead to a more generic, “one-size-fits-all”
order than the current particularized orders
associated with the standard relief. This will not
only have the effect of a more efficient process forseeking relief, but will also allow evolution of a firm’s
co-investment program over time to rest on morebasic fiduciary principals, rather than compliancewith potentially outdated representations.
Sharing Co-Investment Opportunities
The FS Application does not include a requirement
to compel sharing of Negotiated Co-Investments
among affiliated funds. Under standard relief, if
an investment adviser considers an Negotiated
Co-Investment opportunity for a private fund thatis part of the co-investment program, it must also
consider that same opportunity for every registeredfund (under older exemptive orders) or every
registered fund for which the opportunity satisfies
certain “board-established criteria” (a feature ofmore recent orders). This requirement was designed
to ensure that registered funds could not be excluded
from any “good deals,” and that registered funds
are not only brought in to co-invest on “bad deals.”
Rather, the registered funds and private funds areforced by this condition to have equal access to anadviser’s entire pipeline of opportunities.
The FS Application does not require that anadviser will offer its registered funds access to allof the Negotiated Co-Investments (or all of suchopportunities that fall within the board-establishedcriteria) it considers for the affiliated funds; instead,the FS Application only requires (i) that an adviser
11implement policies to ensure that opportunities
to participate in Negotiated Co-Investments areallocated in a manner that is fair and equitableto every registered fund and (ii) that the adviser
negotiating the transaction considers the interestsof any participating registered fund. Thus, the FS
Application relies on the adviser’s pre-existing
fiduciary duties to manage conflicts and allocation
determinations. This avoids the need to offer,consider and report opportunities that are notappropriate for a registered fund but nonethelessmay have been captured by the expansive languagethat is present in standard relief.

Role of the Regulated Fund Board
The conditions of the FS Application also requireconsiderably fewer specific board actions andoverall involvement in Negotiated Co-Investments
than under the standard relief, consistent with theapproach we recommended in our October 2018
Alert and recent SEC initiatives. The standard
relief requires prior approval of every Negotiated
Co-Investment by the boards of each registered fundparticipating in the transaction. The FS Application,on the other hand, contemplates that a participating
registered fund’s board would not be required toapprove most Negotiated Co-Investments. The FS
Application provides instead that registered funds
may participate in Negotiated Co-Investments solong as the registered fund’s board has (i) reviewed
the co-investment policies of the participants in theinvestment and determine that the registered fundwould not be disadvantaged and (ii) approve theadviser’s policies and procedures, which must be
designed to ensure compliance with the requested
order.
In addition to a notable reduction in deal-by-deal
information presented to the boards of registeredfunds, other reporting obligations are also curtailed
in the FS Application. Under the standard relief, asummary review of all Negotiated Co-Investments
considered for the registered fund is required to bepresented to the board quarterly. Instead of receiving

specifics about all co-investment transactions offeredto the registered fund (both those it passed on andthose it participated in) on a quarterly basis, as is thecase under the standard relief, the FS Application
contemplates that each registered fund’s board
would receive an annual report of the registeredfund’s participation in Negotiated Co-Investmentsfrom the fund’s chief compliance officer along withinformation regarding any material changes to howaffiliated funds and advisers have decided what
opportunities to allocate to the registered fund.
Proprietary Accounts
The FS application changes the limitations on who
may participate in a Negotiated Co-Investment
so that advisers and control affiliates of advisers
acting in a principal capacity may participate.
Under the standard relief, proprietary accounts
are only permitted to participate in Negotiated
Co-Investments on an overflow basis—meaningthat they can only buy portions of an opportunitythat client funds do not want. The FS Application
contemplates that the same general principles
governing allocations between client funds would
also apply to allocations involving proprietaryaccounts. This change essentially allows proprietaryaccounts to have pari passu allocations withregistered funds and other client accounts. So longas the allocation determination is performed in amanner that is fair and equitable to participating
registered funds, the FS Application does notplace any further limitations on the involvement ofproprietary accounts. This change avoids the needfor an adviser to make unnecessary determinations
regarding what constitutes overflow, and will
permit firms with capital markets affiliates toprovide registered funds with access to investment
opportunities that might otherwise not have been
available given the practical way in which firms
compete for opportunities to originate loans.
Inclusion of BDC Joint Ventures
The FS application specifically contemplates thatjoint ventures formed by BDCs may participate in
Negotiated Co-Investments. Under the standard
relief, it is not clear that joint ventures may
participate in Negotiated Co-Investments because
they are neither registered funds, wholly owned
subsidiaries of registered funds, private funds
advised by the adviser or proprietary accounts,
which are the only categories of participants that
may explicitly join a Negotiated Co-Investment. The
FS Application removes that ambiguity by explicitly
defining joint ventures as permissible participants
to Negotiated Co-Investments made under the
exemptive relief. This should have a positive effect12

for fund returns, since it would increase the access ofjoint venture subsidiaries to the high-quality loans inwhich a sponsor has the highest conviction (and thus
desires to place into several accounts at once).
Follow-Ons Treated as Co-Investments
The FS Application does not draw a distinction
between follow-on investments and any other typeof Negotiated Co-Investments, which eliminates
many of the restrictions currently associatedwith follow-on investments under the standard
relief. Currently, if the proposed participants to a
Negotiated Co-Investment have any pre-existing
investments in the issuer, another Negotiated
Co-Investment in that same issuer is only permitted
if the pre-existing investments were either:(i) obtained pursuant to the standard relief or(ii) (a) acquired prior to the fund complex relying
on the standard relief, (b) in a transactionin which the only term negotiated was price,and (c) acquired either (1) in reliance on
MassMutual8 or (2) in a transaction occurring
at least 90 days apart and without coordination
between the funds.

Moreover, and perhaps more problematically, it is
not possible for a fund to participate in a follow-ontransaction if it was not involved in the original
Negotiated Co-Investment. This effectively prevents
newly established funds from participating infollow-on transactions alongside older funds. These
restrictions are largely eliminated under the FS
Application, and instead the board of participating
registered funds must determine that the transaction
is in the best interest of the registered funds and that
it would not involve overreaching by the registeredfund. This change will benefit firms that havelaunched new funds since an initial investment.
Pre-Existing Investments
The FS Application eliminates the outrightprohibition on Negotiated Co-Investments in issuers
in which an affiliated fund holds a pre-existing
investment. Under the standard relief, Negotiated
Co-Investments in an issuer in which an affiliate
currently holds a position are not permitted(unless such investment is considered a follow-on
investment, discussed above).
8. Transactions referred to as “MassMutual” transactions are those where
all of the affiliated parties participate on the same terms and there are noterms negotiated other than price, a reference to the seminal no-action
letter on this topic.

Instead of prohibiting Negotiated Co-Investments
in issuers in which an affiliate holds a position, theFS Application contemplates that such Negotiated
Co-Investments may proceed if the boards of any
participating registered funds determine that thetransaction is in the best interest of their respective
registered fund and that it would not involve
overreaching. This practical innovation will allow
large, multi-strategy firms to manage different
strategies more effectively, without need to worry
about unrelated and immaterial investments in theissuer by other funds pursuing different strategies.
Unresolved Issues in the FS Application
While the FS Application is a very positive step
toward a principles-based approach to co-investing
for registered funds, it leaves a few key issues
unaddressed.
Multiple Classes of Securities
As drafted, the FS application would retain
the standard relief condition that Negotiated
Co-Investments only involve the same class of
securities for all participants, to be acquired at thesame time, for the same price and with the same
conversion, financial reporting and registrationrights, and with substantially the same other terms(provided that settlement dates may differ up toten business days, consistent with current orders).
This general condition is designed to ensure thatco-investing funds have the same incentives and that
their interests are aligned. While that is in keepingwith the spirit of the SEC’s prior statements on theissue, the inclusion of a specific requirement that
all of the participants invest in the same class of
security remains potentially problematic.
In many Negotiated Co-Investments, the participants
are investing in multiple tranches of debt, a subset ofwhich may not be a permitted investment for certain
funds. For example, a Negotiated Co-Investment
involving a term loan may also involve a revolving
loan facility or an equity kicker. Six funds may wantto co-invest in the term loan, but perhaps only five of
those six want to acquire the revolver or equity kicker
because the sixth fund’s strategy prevents it fromacquiring revolvers or because the fund is potentiallyrestricted from acquiring equity securities. Or thesixth fund may be a regulated fund that does notwant a revolver due to the unfunded nature of thecommitment or an equity kicker due to the target
level of current income it seeks to achieve. Underboth the standard relief and the FS Application, if
the sixth fund participates but does not take therevolver or equity kicker, none of the other five
funds can acquire the revolver or equity kicker
13

(which likely would result in a borrower going withdifferent lenders, as revolvers and, to a lesser degree,
equity kickers, are a key part of many financing
arrangements). Alternatively, the registered fundcould be excluded from the transaction entirely,
and the other five funds could invest pursuant to
the limitations of their organizational documents
without issue. None of these outcome serves any true
investor protection rationale, and we believe a newdefault template should address this type of scenario
more gracefully than an outright ban. We believea narrow exception for revolvers or equity kickers
would be appropriate, or a broader exception withgreater board oversight.
Equity Investments
In some cases, often without intent (i.e., because ofrestructurings), a fund (together with its affiliates)
may become the holder of greater than 5% of theequity of a borrower, and the issuer might then beconsidered an affiliate of the fund. Transactions withaffiliates are restricted by the 1940 Act. A subsequent
follow-on investment would be permitted if an issuer
were an affiliate of only registered funds (under Rule17a-6), but the participation of private funds in the
Negotiated Co-Investment would potentially prohibit
the follow-on investment as there is otherwise no
applicable 1940 Act exemption. We believe any new
form of co-investment relief should address theseaffiliation concerns for equity investments so thatinvestments in equity and debt are treated in thesame manner, or the SEC Staff should separately
confirm that Rule 17a-6 may be applied to situations
where a portfolio company is an affiliate of bothregistered funds and private funds that are affiliatedwith the registered fund.

Next Steps
As of the date of this alert, no one else has filed an
application that follows the template laid out by the
FS Application. But if the form of the application
does not address other outstanding issues thatadvisers have with the proposed relief in the
FS Application, it is entirely possible that otherapplicants may consider filing a modified form of
the FS Application to address their concerns directlywith the SEC Staff. If that were to happen, it may
slow the SEC’s review process considerably. Thechanges contemplated by the FS Application also
could require a formal SEC vote for approval, which
would add additional time to the process, although
it is also possible that the Staff believes it has
adequate delegated authority in the co-investment
space to approve an order itself. If the FS Application
is granted, we expect a substantial number ofapplicants will seek the same relief immediately
thereafter. In the meantime, however, investment
advisers that need to obtain co-investment relief
on a predictable timeline would be best served byseeking the standard relief, since novel exemptive
relief in this area has in the past taken years toresolve. The SEC’s mission includes a mandate toprotect investors and a mandate to facilitate capitalformation. We believe this form of relief would bea catalyst for capital formation without sacrificing
investor protection, and we strongly urge the SEC
to move forward quickly on this form of relief.
formation without sacrificing investor protection,
and we strongly urge the SEC to move forward
quickly on this form of relief.

14

M&A Transactions
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Atria Wealth Solutions, a wealthmanagement solutions holding
company that serves financial advisors
and institutions and has more than $50
billion in assets under administration

NEXT Financial Group, Inc., an
independent broker-dealer that serves
financial advisors and their clientsand has approximately $13 billion in
assets under administration

Acquisition(terms not disclosed)

Beacon Investment Advisory
Solutions Services, Inc., a wealthmanagement firm with approximately$2.2 billion in assets underadministration

Tirschwell & Loewy, Inc., an
independent RIA with approximately$750 million in AUM

Acquisition(terms not disclosed)

Blackstone Alternative AssetManagement (“BAAM”) Strategic
Capital Group affiliated funds,
BAAM is an alternative asset
management and financial services
firm with approximately $78 billion in
AUM

GI Partners, a private middlemarket alternative asset manager thathas raised more than $17 billion incapital from institutional investors

Acquisition of minority interest(terms not disclosed)

Brookfield Asset Management
Inc., an asset manager with more than$350 billion in AUM

Oaktree Capital Group, LLC, an
investment manager with $120 billion
in AUM as of December 31, 2018

Acquisition through purchase of all
outstanding Class A units for either $49.00
cash or 1.0770 Class A shares of Brookfield
per unit, at the option of the Oaktree ClassA unitholders, for a premium of 12.4% perunit based on the closing price of Brookfield
shares and Oaktree units on March 12,
2019. Unitholders of Oaktree Capital Group
Holdings, L.P. (“OCGH”), which holds all of
Oaktree’s Class B units, will sell 20% of theirunits to Brookfield for the same consideration
as the Class A holders. Upon consummation
Brookfield will hold approximately 62%of the outstanding units of Oaktree and,pursuant to the liquidity schedule, Brookfield
could own 100% of Oaktree as early as 2029.
The transaction also provides for a $225
million termination fee under certain special
circumstances.

Calamos Investments, a global
investment management firm
headquartered in Chicago withapproximately $20 billion in AUM

Timpani Capital Management
LLC, a boutique investment manager
focused on small- and mid-cap
growth investing and with more than$300 million in AUM

Acquisition(terms not disclosed)

Carillon Tower Advisors, Inc., anasset-management firm that serves
institutional clients and had $64.6
billion in assets under management
and advisement as of January 31, 2019

ClariVest Asset Management
LLC, an asset-management company
and hedge fund sponsor that has $7.3
billion in assets under management
and advisement as of January 31, 2019

Acquisition through affiliate that will
increase its existing 45% stake to 100%
(terms not disclosed)

15

M&A Transactions (continued)
Acquiror

Acquired or
Target Company

Type of Transactionand Status

Citizens Financial Group, a bankwith $158.6 billion in assets as of
September 30, 2018

Clarfeld Financial Advisors,
LLC, a wealth management andfinancial advisory firm specializing in
HNW and UHNW clients and having
approximately $6.6 billion in AUM
and $900 million in assets underadministration

Acquisition(terms not disclosed)

Goldman Sachs AssetManagement, an asset manager withmore than $200 billion in assets undermanagement as of September 30, 2018

Aptitude Investment
Management, an investment firm
specializing in hedge fund services
for large institutions that manages
approximately $3.5 billion indiscretionary assets

Acquisition(terms not disclosed)

Kudu Investment Management,
LLC, a registered investment adviserthat specializes in minority equity
investments

Versus Capital Advisors, LLC, areal assets investment manager thatmanages approximately $4 billion forinvestors

Acquisition of minority interest(terms not disclosed)

Medalist Partners, LP, analternative investment manager withapproximately $2.25 billion in AUM

JPM Credit Advisors, aninvestment manager with expertise inmanaging CLOs

Acquisition of majority interest(terms not disclosed)

Mercer Global Advisors Inc., a RIA
with approximately $15 billion in AUM

Arbor Asset Management, LLC,
a wealth management firm with $350
million in AUM

Acquisition(terms not disclosed)

Resolute Investment Managers,
Inc., (“Resolute”) a multi-affiliate
asset management platform with $71.2
billion in AUM as of September 30,
2018

SSI Investment Management,
an institutional investment manager
that specializes in risk-mitigation
strategies for institutional and HNWinvestors and had $1.9 billion in AUM
as of September 30, 2018

Acquisition of a majority interest(terms not disclosed)

Shelton Capital Management, anasset manager with more than $1.85
billion in assets under management asof December 31, 2018

Cedar Ridge Partners, LLC,a private RIA offering alternative
investment products

Acquisition(terms not disclosed)

The Mather Group, a fee-only
wealth management firm that has
more than $7 billion in assets underadvisement

Astraeus Advisers, a multifamily
office with more than $1 billion in
AUM

Acquisition(terms not disclosed)16

1st Quarter 2019
Closed-End Fund Public Offerings
PIMCO Energy and Tactical Credit Opportunities Fund
Structure:

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

Investment
Objectives/Policies:

The Fund’s primary investment objective is to seek total return, with a secondary objective to seek
to provide high current income. The Fund seeks to achieve its investment objectives by focusing on
investments linked to the energy sector and investments linked to the credit sectors. The Fund seeks toachieve its investment objectives by utilizing a flexible multi-sector approach to investing across various
asset classes. Top-down and bottom-up strategies are used to identify multiple sources of value toseek to generate returns. With PIMCO’s macroeconomic analysis as the basis for top-down investment
decisions, the Fund seeks to offer investors an actively-managed portfolio that aims to capitalize on
what PIMCO believes are attractive opportunities across markets and the capital structure. In selecting
investments for the Fund, PIMCO expects to develop an outlook for the energy and credit sectors andthe overall economy, perform fundamental analysis of the credit markets and the underlying businesses
owned and operated by energy companies and use other investment selection techniques. In order tomaintain flexibility and to have the ability to invest in opportunities as they arise, it is not an objectiveof the Fund to focus its investment in any specific geographic sector (although it may, but is not
obliged to, in practice). The proportion of the Fund’s assets committed to investments with particularcharacteristics (such as type of energy product, debt instrument, entity structure or geography) is
expected to vary based on PIMCO’s outlook for the economy as a whole, the energy sector, and the credit
markets. Similarly, although the Fund has the capability to use the types of investments outlined in thispolicy, it is possible that the Fund will not invest in certain instrument types all of the time or at all.
While these analyses are performed daily, material shifts in investment exposures typically take placeover longer periods of time.

Manager:

Pacific Investment Management Company, LLC

Distributor:

American Stock Transfer & Trust Company, LLC

17

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

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

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

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

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

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

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

UNITED STATESEUROPE

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

LondonCityPoint
One Ropemaker Street
London EC2Y 9HUEngland+44-(0)20-7275-6500

São Paulo
Av. Presidente Juscelino
Kubitschek, 1455
São Paulo, SP 04543-011
Brazil+55-11-3546-1000

Houston
600 Travis Street, Suite 5400
Houston, TX 77002+1-713-821-5650
Los Angeles
1999 Avenue of the Stars
Los Angeles, CA 90067+1-310-407-7500
Palo Alto
2475 Hanover Street
Palo Alto, CA 94304+1-650-251-5000
Washington, D.C.
900 G Street, NW
Washington, D.C. 20001+1-202-636-5500

ASIA

Beijing
3901 China World Tower A
1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999
Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600
Tokyo
Ark Hills Sengokuyama Mori Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200

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