September 24, 2015

VIA ELECTRONIC MAIL TO: E-ORI@DOL.GOV; E-OED@DOL.GOV

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration 

(Attention: D-11712)

U.S. Department of Labor

122 C Street, NW

Suite 400

Washington, DC 20001

Re: Regulatory Definition of the Term “Fiduciary” (RIN 1210-AB32); 

Proposed Best Interest Contract Exemption (ZRIN: 1210-ZA25)

Ladies and Gentlemen:

Thank you for the opportunity to testify on August 13, 2015 on behalf of Franklin Square 

Holdings, L.P. (“Franklin Square”) concerning the proposed regulation regarding conflicts of 

interest in retirement investment advice (the “Proposed Regulation”) and the above-referenced 

Proposed Best Interest Contract Exemption (the “Proposed Exemption”). As discussed in my 

testimony and in our written comment, Franklin Square shares the Department of Labor’s (the 

“Department”) goal of protecting plans, participants, beneficiaries, and IRA owners and applauds 

the care and thoughtfulness that went into the development of the Proposed Regulation and 

Proposed Exemption. In support of this goal and the Department’s efforts, we requested that the 

Department expand the definition of “Asset” covered by the Proposed Exemption to include nontraded business development companies (“BDCs”) with narrowly tailored language that would 

otherwise leave the Proposed Exemption intact. 

I offer this letter as a follow up to questions that were asked at the hearing. Those questions 

related to the kinds of investors who invest in non-traded BDCs, protections presently enjoyed 

by investors in non-traded BDCs, and additional protections that could be afforded to investors 

in non-traded BDCs. In response to those questions, this letter provides the following:

1. A summary of our request, which is simply to replace the phrase “registered investment 

companies” with the phrase “investment companies regulated pursuant to the Investment 

Company Act of 1940” in the Proposed Exemption’s definition of “Asset.” This change 

would add non-traded BDCs to the list of “Assets” covered by the Proposed Exemption

but would not include investment products that are not regulated under the Investment 

Company Act of 1940, as amended (the “1940 Act”), such as non-traded real estate 

investment trusts (“REITs”), master limited partnerships (“MLPs”), public and private oil 

and gas funds, and equipment leasing funds.
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September 24, 2015

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2. An overview of the regulatory regime applicable to non-traded BDCs, focusing on the 

protections that would be afforded to investors in non-traded BDCs by the Proposed 

Exemption and the 1940 Act if the Department adopts our request.

3. An explanation of additional protections that Franklin Square provides the investors in its 

non-traded BDCs that could be added to the Proposed Exemption to ensure investors 

have access only to those non-traded BDCs that offer best-in-class protections.

I. Summary of Franklin Square’s Request

As explained more fully in my testimony and in our written comment, we have proposed 

replacing the phrase “registered investment companies” with the phrase “investment companies 

regulated pursuant to the Investment Company Act of 1940” in Section VIII(c) of the Proposed 

Exemption as follows:

(c) An “Asset,” for purposes of this exemption, includes only the following investment 

products: Bank deposits, certificates of deposit (CDs), shares or interests in registered 

investment companiesinvestment companies regulated pursuant to the Investment 

Company Act of 1940, bank collective funds, insurance company separate accounts, 

exchange-traded REITs, exchange-traded funds, corporate bonds offered pursuant to a 

registration statement under the Securities Act of 1933, agency debt securities as defined 

in FINRA Rule 6710(l) or its successor, U.S. Treasury securities as defined in FINRA 

Rule 6710(p) or its successor, insurance and annuity contracts, guaranteed investment 

contracts, and equity securities within the meaning of 17 CFR 230.405 that are exchangetraded securities within the meaning of 17 CFR 242.600. . . .

This change would add non-traded BDCs to the list of “Assets” covered by the Proposed 

Exemption because non-traded BDCs are regulated under the 1940 Act – like registered 

investment companies. It would not capture other kinds of investments that sometimes are 

perceived to be similar to non-traded BDCs but are not regulated under the 1940 Act – such as

non-traded REITs, MLPs, public and private oil and gas funds, and equipment leasing funds.

The change would not remove from the definition of “Asset” any investment opportunity already 

included nor impact the Proposed Exemption in any other way. 

II. Franklin Square’s Proposal Includes Heightened Investor Protections

As discussed in our comment letter and at the hearing, non-traded BDCs are subject to an 

extensive regulatory regime that protects investors. We respectfully submit that these 

protections, combined with ERISA’s fiduciary rules and the requirements of the Proposed 

Exemption, would provide ample protection for investors:

1. Franklin Square’s Proposal is consistent with the framework of the Proposed 

Exemption. The premise of the Proposed Exemption is that a recommendation to invest in a 

non-traded BDC would be subject to ERISA’s fiduciary standard. Under the current proposal, 
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September 24, 2015

Page 3

this means that an adviser, relying on the Proposed Exemption, would have to make an informed 

decision that an investment in a non-traded BDC is in the “best interest” of his or her client, in 

light of the client’s investment objectives, risk tolerance, financial circumstances, and needs. 

The fiduciary standard would prohibit an adviser from recommending an investment in a 

non-traded BDC when it is inappropriate under the circumstances. For example, an adviser may 

conclude that an investment in a non-traded BDC is advisable for a client with a longer-term 

investment horizon who is seeking to diversify his or her portfolio with an investment that is less 

correlated to the public equity markets, or for a client who is retired and wants to protect his or 

her principal while generating above average current income. By contrast, a non-traded BDC 

investment might not be advisable for a client who has a short-term investment horizon, has no 

need for capital protection or current income, or has immediate or significant liquidity needs. 

We simply request that the decision regarding whether to recommend an investment in a 

non-traded BDC be left to the adviser in the exercise of his or her fiduciary judgment and 

pursuant to the other terms of the Best Interest Contract.

2. Existing federal legal protections provide a broad array of safeguards for nontraded BDC investors. Non-traded BDCs currently are subject to an extensive regulatory 

regime that protects investors by imposing, inter alia, robust disclosure and transparency 

requirements, valuation requirements, and duties of care. As detailed in our written comment

letter, non-traded BDCs are regulated by at least as many, if not more, regulators and regulatory 

regimes as all of the investments already included in the definition of “Asset.” The attached

chart summarizes these protections afforded by federal and state laws and regulations.

3. State legal protections establish minimum eligibility thresholds for investing in 

non-traded BDCs. Regulations in all 50 states impose preconditions for investing in non-traded 

BDCs. Although state rules vary, all states maintain at least the following minimum 

requirements:

 Investors must have a minimum annual gross income of $70,000 and a minimum net 

worth (excluding home, home furnishings and automobiles) of $70,000; or

 Investors must have a minimum net worth (excluding home, home furnishings and 

automobiles) of $250,000.

1

Additionally, many states routinely increase these minimum eligibility thresholds for investing in 

non-traded BDCs.

********

In sum, we have requested only to include non-traded BDCs on the list of investment 

choices that fiduciary advisers may recommend under the Proposed Exemption. We are not 

requesting exemptions from the fiduciary standard or any other ERISA requirement. To the 

 

1 NASAA Omnibus Guideline III.B.
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contrary, any recommendation to invest in a non-traded BDC would be subject to ERISA’s 

fiduciary standard – which requires careful analysis of the investor’s needs and interests. In light 

of the existing regulatory regime and ERISA’s fiduciary standard, we believe it is appropriate to 

include non-traded BDCs on the list of “Assets” covered by the Proposed Exemption.

III. Franklin Square’s Best Practices Offer Further Investor Protections

In addition to the substantial protections offered under current law, Franklin Square’s 

best practices afford the following heightened investor protections:

1. Enhanced Valuation and Transparency. The 1940 Act requires that a non-traded 

BDC value 100% of its assets annually, in a process overseen by the non-traded BDC’s board of 

directors, the majority of whom are independent. The industry standard is to value 25% of a 

fund’s assets every quarter – which results in valuing 100% of the assets every year. Franklin 

Square goes two steps further. First, while not required under the law, each of Franklin Square’s 

non-traded BDCs use independent third-party pricing and valuation services to determine fair 

value, which is then considered and approved by the non-traded BDCs’ independent boards. 

Second, the independent boards value 100% of the assets in each of Franklin Square’s nontraded BDCs every quarter.

Franklin Square BDCs constantly monitor their portfolio holdings to ensure compliance 

with the 1940 Act prohibition against selling shares at a price below net asset value (“NAV”) per 

share. Franklin Square’s third-party pricing and valuation services provide each BDC’s board 

with a daily and weekly estimated NAV per share, and have the ability to conduct an intraquarter valuation in the event of a material change in the value of one of the BDC’s investments. 

The valuation of each investment held in a Franklin Square BDC’s portfolio is communicated to 

investors and the market at least quarterly on a schedule of investments included in mandatory 

SEC filings.

2. No Over-Distribution. Franklin Square’s non-traded BDCs make distributions to 

shareholders only from net investment income, proceeds from the sale of assets, and dividends

and other distributions from portfolio companies. Franklin Square’s non-traded BDCs do not 

pay distributions to shareholders from offering proceeds or borrowings. Moreover, Franklin 

Square has agreed to reimburse its non-traded BDCs for expenses in sufficient amounts to ensure 

that no portion of any distributions to shareholders are paid from offering proceeds or 

borrowings. This presents a stark contrast between Franklin Square’s non-traded BDCs and 

most other non-traded investment vehicles in the marketplace, such as non-traded REITs. Again, 

this Franklin Square practice is not required by law but is something we do in our effort to offer 

best-in-class protections to our investors. 

3. Fair Value Redemptions. Franklin Square’s non-traded BDCs offer a measure of 

liquidity to their shareholders by offering to repurchase a number of shares each calendar year 

equal to 10% of the weighted average number of shares outstanding in the prior calendar year, at 

a rate of 2.5% per quarter. For Franklin Square’s non-traded BDCs that are offering shares to 
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September 24, 2015

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new investors, the repurchase price is the price of shares offered to the public, net of any sales 

commissions or dealer manager fees that were charged to the investor. For Franklin Square’s 

non-traded BDCs that have closed to new investors, the repurchase price is the price at which 

shares are issued under the funds’ distribution reinvestment plans. Importantly, limiting liquidity 

in some way significantly contributes to a non-traded BDCs’ lower correlation to trading

markets. This is a key differentiating feature of non-traded BDCs that makes them attractive to

diversification-seeking investors.

4. Sponsor Investment. Franklin Square and its affiliates believe in Franklin Square’s 

funds and collectively have invested approximately $148 million across all of its funds as of 

August, 2015. This level of sponsor commitment far exceeds the industry standard. For 

example, non-traded REIT sponsors typically invest only $200,000 in a new REIT as an initial 

investment, which amounts to just 0.01% of a $2 billion offering. Our level of voluntary sponsor 

investment shows Franklin Square is committed to the long-term success of its funds and, most 

importantly, aligns its interests with those of its investors.

********

Franklin Square appreciates the opportunity to provide this letter in response to the 

Department’s questions. Please feel free to contact me at 215-220-4525 with any questions about 

this submission.

Sincerely,

Michael F. Gerber

Executive Vice President

Franklin Square Holdings, L.P.
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Public Filings BDCs1 must register 

their securities under 

the Securities Act of 

1933, as amended 

(the “Securities 

Act”), which 

requires extensive 

disclosures 

regarding, among 

other things, the 

BDC, the securities 

offered, the BDC’s

investment 

objectives and 

strategies, risk 

factors and financial 

condition.

BDCs are

required to register a 

class of securities 

under the Securities

Act of 1934, as 

amended (the 

“Exchange Act”),

and, as such, are 

required to file

periodic and other 

reports with the 

Securities and 

Exchange 

Commission (the 

“SEC”), including 

proxy statements and 

Forms 10-Q, 10-K

and 8-K.

BDCs are regulated 

under the Investment 

Company Act of 

1940, as amended 

(the “1940 Act”)

and, as such, are 

required to file 

certain additional 

reports with the 

SEC, including 

fidelity bond filings.

Non-traded BDCs 

must register their 

securities offerings 

under the securities 

acts of each state in 

which they intend to 

offer securities for 

sale.2 

Valuation and 

Pricing

The Exchange Act 

requires that the 

valuation of a BDC’s

portfolio holdings be

The 1940 Act 

requires BDCs’ 

independent boards 

of directors to

As part of their best 

practices, each of 

Franklin Square’s 

BDCs has its 

 

1 Except as otherwise provided, references to “BDCs” in this chart include both traded and non-traded business development companies.

2 A majority of states have adopted or modeled their securities acts on either the Uniform Securities Act of 1956, as amended, or the Uniform Securities Act of 2002, as 

amended. The Uniform Securities Act grants state securities regulators merit review authority, while the federal securities laws grant the SEC only disclosure review 

authority. Under the SEC’s disclosure review regime, the SEC is only empowered to assess the adequacy of an issuer’s disclosure. In contrast, under the merit review 

regime that applies to non-traded BDCs – but not other qualified “Assets” – state securities regulators are empowered to consider not only disclosure, but also the underlying 

merits of the terms of a securities offering, the rights and obligations of a particular security and even aspects of the issuer’s organizational structure. For example, the 

Uniform Securities Act grants state regulators broad authority to deny, suspend, or revoke a securities offering if it finds that “the offering is being made on terms that are 

unfair, unjust or inequitable.”
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Valuation and 

Pricing (continued)

publicly disclosed to 

investors and the 

market at least 

quarterly on SEC 

Forms 10-Q and 10-

K, significantly 

enhancing the 

transparency of 

BDCs. 

determine the fair 

value of the BDCs’

portfolio holdings at 

least quarterly and to 

revise the BDCs net 

asset value and share 

price to ensure that 

shares are not sold at 

a price below net 

asset value. In doing 

so, BDCs’ share 

prices fluctuate to 

take into account the 

current market value 

of their underlying 

assets. 

portfolio valuations 

conducted by 

independent thirdparties, approved by 

the valuation 

committee and then 

approved by the full

independent board. 

While many BDCs 

value 25% of their 

assets each quarter,

each of Franklin 

Square’s BDCs

values 100% of its

assets each quarter. 

REITs and other 

direct participation 

programs (“DPPs”)

are not required to 

perform or disclose 

portfolio valuations 

at all while offering 

securities to new 

investors and for a 

period of time 

thereafter.
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Limitations on 

Distributions

The 1940 Act 

permits BDC 

distributions to be 

paid from offering

proceeds or 

borrowings, so long 

as investors are

informed of the 

sources of the BDC’s 

distributions.

Because the 1940 

Act does not apply to 

REITs, REIT 

distributions can be 

paid from investor 

proceeds or 

borrowings without 

notice to investors.

As part of their best 

practices, Franklin 

Square’s BDCs do

not engage in overdistribution and 

Franklin Square has 

committed that the 

funds it sponsors will 

not pay distributions 

from offering

proceeds or 

borrowings.

REITs routinely 

over-distribute (i.e., 

pay distributions to 

investors from 

investor proceeds 

and/or borrowings).

Limitations on 

Affiliated

Transactions

The 1940 Act 

contains substantial 

restrictions on a 

BDCs ability to 

engage in 

transactions with its

affiliates, which 

include its officers, 

directors and their

The NASAA 

Omnibus Guidelines 

provide another layer 

of restrictions on 

non-traded BDCs’ 

ability to engage in 

affiliated

transactions. 
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Limitations on 

Affiliated

Transactions 

(continued)

respective affiliates. 

These restrictions 

include prohibitions 

on co-investment 

with entities 

affiliated with the 

BDC’s investment

adviser or subadviser, unless price 

is the only negotiated 

term. Additional 

limitations are 

applicable to 

investment advisers 

and sub-advisers to 

BDCs under the 

Investment Advisers 

Act of 1940, as 

amended (the 

“Advisers Act”).

REITs are only 

limited in their 

ability to engage in 

affiliated 

transactions by the 

more permissive 

NASAA REIT 

Guidelines.

Investment 

Diversification

The 1940 Act 

requires BDCs to 

invest at least 70% 

of their total assets in 

“eligible portfolio 

companies,” which 

generally means U.S. 

private operating 

companies, public 

non-traded U.S. 

In addition to being 

able to provide 

investors with a 

more diversified 

portfolio, each of 

Franklin Square’s 

BDCs utilizes a 

conservative 

approach to 

investing. Franklin 
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Investment 

Diversification 

(continued)

operating companies

and publicly-traded 

operating companies 

with less than $250 

million in market 

capitalization. 

Within this general 

requirement, there 

are limited other 

restrictions on the 

types of investments 

BDCs may make, 

meaning that BDCs

generally may invest 

across all industry 

sectors and at all 

levels of a portfolio 

company’s capital 

structure. 

Additionally, the 

Internal Revenue 

Code of 1986, as 

amended (the 

“Code”), requires 

entities electing to be 

treated as regulated 

investment 

companies, such as

most BDCs, to 

maintain minimum 

diversification

Square’s BDCs 

primarily make 

senior secured loans 

to U.S. middle 

market companies. 

Senior secured loans 

(first and second lien 

loans) sit at the top 

of a portfolio 

company’s capital 

structure and are 

secured by assets of 

the company. This 

means that in the 

event of bankruptcy 

or liquidation of the 

portfolio company, 

Franklin Square’s

BDCs are repaid 

before junior

creditors and equity 

holders of the 

portfolio company. 

Investing primarily 

in senior secured 

loans reduces the 

exposure of Franklin 

Square’s BDC 

investors to credit 

risk.
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Investment 

Diversification 

(continued)

standards within 

their portfolios. 

On the other hand, 

the Code requires 

REITs to hold a 

minimum of 75% of 

their assets in 

“qualifying real 

estate investments,”

such as real property, 

mortgages secured 

by real property and 

real estate related 

securities. As a 

result, BDCs are able 

to assemble highly 

diversified portfolios 

while REITs and 

other DPPs, such as 

equipment leasing 

programs, oil & gas 

drilling programs

and master limited 

partnerships, are not.
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Independence3 The 1940 Act 

requires that at least 

a majority of a 

BDC’s board of 

directors be 

comprised of persons 

who are independent 

(i.e., not “interested 

persons,” as defined 

in Section 2(a)(19) 

of the 1940 Act). 

The 1940 Act also 

requires that any 

investment adviser, 

principal underwriter 

and independent 

registered public 

accounting firm of a 

BDC be selected, 

and reapproved on 

an annual basis, by a 

majority of the 

independent 

members of the 

BDC’s board of 

directors.

As indicated above, 

as part of their best 

practices, each of 

Franklin Square’s 

BDCs has its 

portfolio valuations 

conducted by 

independent thirdparties, approved by 

the valuation 

committee and then 

approved by the full

independent board. 

 

3 BDCs are also subject to the independence requirements of the Sarbanes-Oxley Act of 2002, including requirements that all BDCs have an audit committee comprised 

exclusively of independent directors, and that the audit committee (1) appoints the BDC’s independent registered public accounting firm, (2) reviews and approves the 

BDC’s financial statements and (3) monitors and assesses the BDC’s internal control over financial reporting.
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Duties of Care Like external 

advisers to registered 

investment 

companies, external 

advisers to BDCs 

must register with 

the SEC under the 

Advisers Act, which 

imposes a statutory 

fiduciary duty on 

BDC advisers to act 

in the best interest of 

the BDC and, by 

extension, its 

shareholders –

including retirement 

plan investors.

REIT Advisers 

generally are not 

subject to the 

Advisers Act.

Non-traded BDCs 

are subject to the 

NASAA Omnibus 

Guidelines, which 

impose a fiduciary 

duty on non-traded 

BDC directors, 

sponsors and 

advisers to act in the 

best interest of the 

BDC and its 

shareholders –

including retirement 

plan investors. The 

NASAA Omnibus

Guidelines, among 

other things, also set 

caps on certain fees 

and expenses, 

prohibit certain 

conflicts of interest 

and ensure 

shareholder voting 

rights.

Minimum 

Eligibility 

Thresholds

Regulations in all 50 

states impose preconditions for 

investing in nontraded BDCs in the 

form of minimum 
Investor Protections for BDCs

Requirement Securities Act of 

1933

Securities Exchange 

Act of 1934

Investment 

Company Act of 

1940

State “Blue Sky” 

Laws

Franklin Square

Best Practices

Minimum 

Eligibility 

Thresholds

(continued)

eligibility thresholds. 

To be eligible to 

invest in a nontraded BDC, an 

investor generally 

must have a 

minimum annual 

gross income of 

$70,000 and a 

minimum net worth

(excluding home, 

home furnishings 

and automobiles) of 

$70,000; or a 

minimum net worth

(excluding home, 

home furnishings 

and automobiles) of 

$250,000. State 

regulators often

increase these 

minimum thresholds.

Many states also 

limit investor 

portfolio allocations 

to non-traded BDCs.