[Federal Register Volume 62, Number 44 (Thursday, March 6, 1997)]
[Notices]
[Pages 10297-10299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5524]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22534; 812-9450]


Capital Southwest Corporation, et al.; Notice of Application

February 28, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: Capital Southwest Corporation (``CSC'') and Capital 
Southwest Venture Corporation (``CSVC'')

RELEVANT ACT AND EXCHANGE ACT SECTIONS: Order requested under section 
6(c) of the Act for an exemption from sections 18(a), 18(c), 30, and 
61(a) of the Act, under sections 17(d) and 57(a)(4) of the Act and rule 
17d-1 thereunder to permit certain joint transactions, under section 
17(b) of the Act for an exemption from section 17(a) of the Act, and 
under section 57(c) of the Act for an exemption from section 57(a) of 
the Act.

SUMMARY OF APPLICATION: The order would permit CSC and CSVC to engage 
in certain transactions that would otherwise be permitted if CSC and 
CSVC were one company. The order also would permit modified asset 
coverage requirements for CSC and CSVC on a consolidated basis. In 
addition, the order would permit CSC and CSVC to file reports on a 
consolidated basis. The requested order would supersede a prior order.

FILING DATES: The application was filed on January 23, 1995, and 
amended on October 25, 1995, August 22, 1996, and February 27, 1997.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on March 25, 1997, 
and should be accompanied by proof of service on applicants, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street N.W., Washington, D.C. 20549. 
Applicants, 12900 Preston Road, Suite 700, Dallas, Texas 75230.

FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Senior Counsel, at 
(202) 942-0572, or Mercer E. Bullard, Branch Chief, at (202) 942-0564 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. CSC is a business development company (``BDC''), as defined 
under section 2(a)(48) of the Act,\1\ organized under the laws of 
Texas. CSVC, a wholly-owned subsidiary of CSC, is a Nevada corporation 
and is registered under the Act as a closed-end management investment 
company. CSVC is also licensed by the Small Business Administration 
(``SBA'') as a small business investment company (``SBIC'') under the 
Small Business Investment Act of 1958. CSC's principal business is to 
make, directly and through CSVC, loans and equity-type investments in 
small businesses.
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    \1\ Section 2(a)(48) generally defines a BDC to be any closed-
end investment company that operates for the purpose of making 
investments in securities described in sections 55(a)(1) through 
55(a)(3) of the Investment Company Act and makes available 
significant managerial assistance with respect of the issuers of 
such securities. Such issuers are small, nascent companies whose 
securities typically are illiquid.
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    2. Applicants request an order to permit CSC and CSVC to engage in 
certain transactions that would otherwise be permitted if CSC and CSVC 
were one company. The order also would permit modified asset coverage 
requirements for CSC and CSVC on a consolidated basis. In addition, the 
order would permit CSC and CSVC to file reports on a consolidated 
basis. The requested order would supersede a prior order obtained by 
CSC, which, among other things, permits CSC and CSVC to engage in 
certain joint transactions.\2\
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    \2\ Investment Company Act Release Nos. 5640 (Mar. 25, 1969) 
(notice) and 5827 (Sept. 30, 1969) (order).
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Applicants' Legal Analysis

A. Section 18

    1. Section 18(a) of the Act prohibits a registered closed-end 
investment company from issuing any class or senior security unless the 
company complies with the asset coverage requirements set forth in 
section 18. ``Asset coverage'' is defined in section 19(h) to mean the 
ratio which the value of the total assets of an issuer, less all

[[Page 10298]]

liabilities not represented by senior securities, bears to the 
aggregate amount of senior securities of such issuer. Under section 
18(a), senior securities of closed-end investment companies 
representing indebtedness must have an asset coverage of 300% 
immediately after their issuance and senior securities of such 
companies representing stock must have an asset coverage of 200%. 
Section 18(k) provides for modified asset coverage requirements for 
SBICs. Section 61 makes section 18, with certain modifications, 
applicable to a BDC.
    2. CSC and CSVC are subject to the requirements of section 18(a) 
(as modified by section 61 with respect to CSC). Applicants request 
relief from section 18(a) to the extent necessary to provide that 
senior securities issued by CSVC that are excluded from CSVC's 
individual asset coverage ratio by section 18(k) will be excluded from 
CSC's consolidated asset coverage ratio.
    3. Applicants believe that CSC may be required to comply with 
applicable as set coverage requirements on a consolidated basis with 
CSVC. Applicants state that this would mean that CSC would treat as its 
own any liabilities of CSVC (with intercompany receivables and 
liabilities eliminated), including liabilities of CSVC with respect to 
senior securities as to which CSVC is exempt from the provisions of 
section 18(a) by virtue of section 18(k). Applicants state that section 
18(k) is intended to benefit SBICs by permitting them to issue a 
greater amount of senior securities representing indebtedness than is 
otherwise permitted under section 18(a). Applicants further state that 
if senior securities representing indebtedness issued and sold by CSVC 
are treated as CSC's for purposes of section 18(a), then the 
consolidated entity (CSC and CSVC) would lose the benefits of section 
18(k) to which CSVC is entitled as a SBIC.

B. Sections 17(a) and 57(a)

    1. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between registered investment companies and certain 
affiliated persons of that company. Paragraphs (1), (2), and (3) of 
section 57(a) impose substantially the same prohibitions between BDCs 
and certain of their affiliates as described in sections 57(b) of the 
Act.
    2. Section 2(a)(3) of the Act defines an affiliated person of an 
investment company to include any person directly or indirectly 
controlling, or under common control with, such investment company. 
Applicants state that CSC is an affiliated person of CSVC, and 
therefore subject to section 17(a) with respect to transactions between 
it and CSVC, because CSC owns one hundred percent of CSVC's voting 
stock. Section 57(b)(2) of the Act describes certain persons to which 
section 57(a) applies. Such persons includes a person directly or 
indirectly controlling, controlled by, or under common control with a 
BDC. Applicants state that they share a common board of directors and 
are under common control of persons serving as officers and directors 
of both CSC and CSVC. Accordingly, applicants state that CSVC is 
``controlled by'' CSC for purposes of section 57(b)(2).
    3. Applicants believe that, under sections 17(a) and 57(a), the 
acquisition by CSC of the capital stock of CSVC in exchange for part of 
CSC's investment portfolio may be considered as (a) a sale of a 
security of an investment company (CSVC's capital stock) to a BDC 
(CSC); (b) a sale of a security (part of CSC's investment portfolio) to 
an investment company; (c) a purchase from an investment company of a 
security by an affiliate; and (d) a purchase from a BDC of a security 
by an affiliate. Likewise, loan transactions between CSC and CSVC may 
be deemed to be purchases and sales of securities representing 
indebtedness by an affiliate of a BDC or an affiliate of an investment 
company, as applicable. In addition, applicants contend that there may 
be circumstances when it is in the interest of CSC and its shareholders 
that CSVC invest in securities of an issuer that may be deemed to be an 
affiliate of CSC or that CSC invest in securities of an issuer that may 
be deemed to be an affiliate of CSVC, as in the case of a portfolio 
company deemed to be affiliated with either CSC or CSVC as a result of 
its ownership of five percent or more of the portfolio company's 
outstanding voting securities.
    4. Applicants request an order from the provisions of sections 
17(a) and 57(a) (1), (2), and (3) to exempt (a) any transaction solely 
between CSC and CSVC with respect to the purchase or sale of securities 
or other property or the borrowing of any money or other property 
including the guarantee by CSC of CSVC's debts and (b) any transaction 
involving CSC and/or CSVC and portfolio affiliates of either or both of 
CSC and/or CSVC, but only to the extent that any such transaction would 
not be prohibited if CSVC (and all of its asset and liabilities) were 
deemed to be part of CSC, and not a separate company.

C. Sections 17(d) and 57(a)(4) and Rule 17d-1

    1. Section 17(d) and rule 17d-1 make it unlawful for an affiliated 
person of a registered investment company or any affiliated person of 
such person, acting as principal, to participate in or effect any 
transaction in connection with any joint enterprise or arrangement in 
which any such registered company or a company controlled by it is 
participant, unless an order permitting such transaction has been 
granted by the SEC. Section 57(a)(4) imposes substantially the same 
prohibitions on joint transactions involving BDCs and certain of their 
affiliates as described in section 57(b). Section 57(i) provides that 
the rules and transactions subject to section 57(a)(4) in the absence 
of rules under that section. No rules with respect to joint 
transactions have been adopted under section 57(a)(4) and, therefore, 
the standards set forth under rule 17d-1 govern the requested order.
    2. As noted above, CSC and CSVC are affiliated persons of each 
other. Applicants state that there may be circumstances when it is in 
the interest of CSC and its shareholders that CSC and CSVC invest in 
securities of the same issuer, either simultaneously or sequentially, 
in the same or different securities of such issue, and to deal with 
their investments separately or jointly. Accordingly, applicants 
request an order under sections 57(a)(4) rule 17d-1 to permit CSC or 
CSVC to invest in any portfolio company in which the other is or 
proposes to be an investor, but only to the extent that such 
transaction would not be prohibited if CSVC were deemed to be part of 
CSC and not a separate company.

D. Reporting Requirements

    1. Sections 30 (a) and (d) of the Act and rules 30a-1, 30b-1, and 
30d-1 thereunder require that certain information be filed with the SEC 
and be transmitted to shareholders on an annual or semi-annual basis. 
As a registered investment company, CSVC must file the reports required 
by the SEC under section 30. Section 13(a) of the Securities Exchange 
Act of 1934 requires any issuer of a security subject to section 12 
thereof, such as CSC, to file such documents and information as the SEC 
may require to keep such issuer's registration current and such annual 
or other periodic reports as the SEC may prescribe.
    2. Applicants state that the filing of separate reports and 
financial statements of CSVC with respect to its individual operations, 
in addition to such filings by CSC with respect to the consolidated 
operations of CSC and CSVC, is unduly burdensome and is not necessary 
to protect the investing public. Accordingly, applicants request an 
order granting relief to CSVC from

[[Page 10299]]

section 30 and rules 30a-1, 30b1-1, and 30-d to the extent necessary to 
permit CSC to file consolidated reports to the SEC and CSC's 
shareholders as provided in condition number four below.

E. Standards for Relief

    1. Section 6(c) of the Act permits the SEC to exempt any person or 
transaction from any provision of the Act, if such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
of the Act. Applicants state that the operation of CSC as a BDC with a 
wholly-owned SBIC subsidiary is intended to permit CSC to expand the 
scope of its operations beyond that which would be permitted to it as 
an SBIC. Applicants further state that the requested exemptions would 
permit CSC and CSVC to operate effectively as one company even though 
they will be divided into two legal entities. Accordingly, applicants 
believe that the requested relief meets the section 6(c) standards.
    2. Section 17(b) of the Act permits the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that (a) the 
terms of the proposed transaction, including the consideration to be 
paid or received, are reasonable and fair and do not involve 
overreaching on the part of any person concerned; (b) the proposed 
transaction is consistent with the policy of each registered investment 
company concerned; and (c) the proposed transaction is consistent with 
the general purposes of the Act. Section 57(c) permits the SEC to 
exempt a proposed transaction from sections 57(a)(1), (2), and (3) 
using substantially the same standard imposed by section 17(b). 
Applicants believe that the requested relief from sections 17(a) and 
57(a) meets these standards.
    3. In passing upon applications filed pursuant to rule 17d-1, the 
SEC considers whether the participation of the registered investment 
company in a joint enterprise or arrangement is consistent with the 
provisions, policies and purposes of the Act and the extent to which 
such participation is on a basis different from or less advantageous 
than that of other participants. Applicants believe that the requested 
authorization under sections 57(a)(4) and rule 17d-1 is appropriate.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be conditioned upon the following:
    1. CSC will at all times own and hold, beneficially and of record, 
all of the outstanding capital stock of CSVC.
    2. CSVC will have fundamental investment policies not inconsistent 
with those of CSC as set forth in CSC's registration statement; CSVC 
will not engage in any action described in section 13(a) of the Act, 
unless such action shall have been authorized by CSC after approval of 
such action by a vote of a majority (as defined in the Act) of the 
outstanding voting securities of CSC.
    3. No person shall serve or act as investment adviser to CSVC 
unless the directors and shareholders of CSC shall have taken the 
action with respect thereto also required to be taken by the directors 
and sole shareholder of CSVC.
    4. CSC shall (a) file with the SEC, on behalf of itself and CSVC, 
all information and reports required to be filed with the SEC under the 
Securities Exchange Act of 1934 and other applicable federal securities 
laws, including information and financial statements prepared solely on 
a consolidated basis as to CSC and CSVC, such reports to be in 
satisfaction of any separate reporting obligations of CSVC, and (b) 
provide to its shareholders such information and reports required to be 
disseminated to CSC's shareholders, including information and financial 
statements prepared solely on a consolidated basis as to CSC and CSVC, 
such reports to be in satisfaction of any separate reporting 
obligations of CSVC. Notwithstanding anything in this condition, CSC 
will not be relieved of any of its reporting obligations, including, 
but not limited to, any consolidating statement setting forth the 
individual statements of CSVC required by rule 6-03(c) of Regulation S-
X.
    5. CSC and CSVC may file on a consolidated basis pursuant to 
condition (4) above only so long as the amount of CSC's total 
consolidated assets invested in assets other than (a) securities issued 
by CSVC or (b) securities similar to those in which CSVC invests, does 
not exceed 10%.
    6. No person shall serve as a director of CSVC unless elected as a 
director of CSC at its most recent annual meeting, as contemplated by 
section 16(a) of the Act. Vacancies on CSC's board of directors will be 
filled in the manner provided for in section 16(a). Notwithstanding the 
foregoing, the board of directors of CSVC will be elected by CSC as the 
sole shareholder of CSVC, and such board will be composed of the same 
persons that serve as directors of CSC.
    7. CSC will not itself issue, and CSC will not cause or permit CSVC 
to issue, any senior security or sell any senior security of which CSC 
or CSVC is the issuer, unless immediately after the issuance or sale of 
any such senior securities, CSC and CSVC on a consolidated basis, and 
CSC individually, shall have the asset coverage that would be required 
by section 18(a) if CSC and CSVC had each elected to become a BDC 
pursuant to section 54 of the Act (except that, in determining whether 
CSC and CSVC, on a consolidated basis, have the asset coverage required 
by section 18(a), any borrowings by CSVC pursuant to section 18(k) of 
the Act shall not be considered senior securities and, for purposes of 
the definition of asset coverage in section 18(h), shall not be treated 
as indebtedness not represented by senior securities).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5524 Filed 3-5-97; 8:45 am]
BILLING CODE 8010-01-M