Capital Southwest Corporation, 53533-53536 [2022-18760]
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Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
Intramarket Competition
The Exchange does not believe that its
proposal will place any category of
Exchange participants at a competitive
disadvantage. The proposed change to
prorate port fees for the first month of
service will apply uniformly to all
similarly situated equity members and
options participants. All users will
receive the benefit of a proration for the
first month of port connectivity, which
will enable users to save money that
they otherwise would incur under the
Exchange’s current rules that do not
provide for proration. The proposed
language describing the Exchange’s
practice to bill for the remainder of the
month upon cancellation merely
codifies and clarifies an existing
practice of the Exchange.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 11 and paragraph (f) of Rule
19b–4 12 thereunder.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
Intermarket Competition
The Exchange believes that the
proposed change to its port fee schedule
to provide proration for the first month
of port connectivity will not impose a
burden on competition because the
Exchange’s execution services are
completely voluntary and subject to
extensive competition both from the
other live exchanges and from offexchange venues, which include
alternative trading systems that trade
national market system stock. Moreover,
as noted above, other exchanges
currently charge new ports on a
prorated basis for the first month of
service.10 The proposed changes will
help ensure that the Exchange’s billing
practices are commensurate with
competitors.
The proposed change to the
Exchange’s port fee schedule is
reflective of this competition because, as
a threshold issue, the Exchange is a
relatively small market so its ability to
burden intermarket competition is
limited. In this regard, even the largest
U.S. equities exchange by volume only
has 17–18% market share, which in
most markets could hardly be
categorized as having enough market
power to burden competition.
Accordingly, the Exchange does not
believe that the proposed change will
impair the ability of members,
participants, or competing order
execution venues to maintain their
competitive standing in the financial
markets.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2022–049 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2022–049. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
11 15
10 Supra
note 4.
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U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2022–049 and
should be submitted on or before
September 21, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–18767 Filed 8–30–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
34688; 812–15226]
Capital Southwest Corporation
August 25, 2022.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of an application under section
6(c) of the Investment Company Act of
1940 (the ‘‘Act’’) for an exemption from
section 12(d)(3) of the Act.
SUMMARY OF APPLICATION: Applicant
requests an order to permit a business
development company (‘‘BDC’’) to
organize, acquire, and wholly-own a
portfolio company that intends to
operate as an investment adviser
registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers
Act’’).
APPLICANT: Capital Southwest
Corporation (the ‘‘Company’’ or
‘‘Applicant’’).
FILING DATES: The application was filed
on April 30, 2021, and amended on
September 1, 2021, February 28, 2022,
and May 31, 2022.
HEARING OR NOTIFICATION OF HEARING:
An order granting the requested relief
will be issued unless the Commission
orders a hearing. Interested persons may
request a hearing by emailing the
Commission’s Secretary at SecretarysOffice@sec.gov and serving Applicant
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with a copy of the request, by email.
Hearing requests should be received by
the Commission by 5:30 p.m. on
September 19, 2022 and should be
accompanied by proof of service on the
applicant, in the form of an affidavit, or
for lawyers, a certificate of service.
Pursuant to rule 0–5 under the Act,
hearing requests should state the nature
of the writer’s interest, any facts bearing
upon the desirability of a hearing on the
matter, the reason for the request, and
the issues contested. Persons who wish
to be notified of a hearing may request
notification by emailing the
Commission’s Secretary at SecretarysOffice@sec.gov.
ADDRESSES: The Commission:
Secretarys-Office@sec.gov. Applicant:
Michael S. Sarner, Chief Financial
Officer, Secretary and Treasurer, Capital
Southwest Corporation at MSarner@
capitalsouthwest.com.
FOR FURTHER INFORMATION CONTACT:
Kieran G. Brown, Senior Counsel, or
Kaitlin C. Bottock, Branch Chief, at
(202) 551–6825 (Division of Investment
Management, Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: For
Applicants’ representations, legal
analysis, and conditions, please refer to
Applicants’ first amended and restated
application, dated March 17, 2022,
which may be obtained via the
Commission’s website by searching for
the file number at the top of this
document, or for an Applicant using the
Company name search field, on the
SEC’s EDGAR system. The SEC’s
EDGAR system may be searched at
https://www.sec.gov/edgar/searchedgar/
legacy/companysearch.html. You may
also call the SEC’s Public Reference
Room at (202) 551–8090.
Company and Adviser Sub
1. The Company is a Texas
corporation that operates as an
internally managed, non-diversified,
closed-end management investment
company. The Company has elected to
be regulated as a BDC under the Act.
The Company’s investment objective is
to produce attractive risk-adjusted
returns by generating current income
from its debt investments and capital
appreciation from its equity and equity
related investments. The Company’s
investment strategy is to partner with
business owners, management teams
and financial sponsors to provide
flexible financing solutions to fund
growth, changes of control, or other
corporate events.
2. Capital Southwest Asset
Management LLC (‘‘Adviser Sub’’) was
formed as a limited liability company
under the laws of the State of Delaware
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and will be a direct or an indirect
wholly owned portfolio company of the
Company.1 As discussed below, the
Adviser Sub intends to operate as an
investment adviser registered with the
Commission under the Advisers Act.2
The Company expects the Adviser Sub
to receive fees in connection with its
management of one or more privatelyoffered pooled investment vehicles,
registered management investment
companies, BDCs, and/or investment
accounts (collectively, ‘‘Managed
Accounts’’) similar to those received by
comparable investment advisers.
3. The Company is, and the Adviser
Sub will be, directly or indirectly
overseen by the Company’s sevenmember Board of Directors (the
‘‘Board’’), of whom six are not
considered ‘‘interested persons’’ of the
Company within the meaning of section
2(a)(19) of the Act. In its capacity as the
Board of the Advisers Sub’s parent
company, the Board will indirectly
oversee the Adviser Sub.
4. The Company has elected to be
treated for U.S. federal income tax
purposes, and intends to qualify
annually, as a regulated investment
company (‘‘RIC’’) under Subchapter M
of the Internal Revenue Code of 1986, as
amended (the ‘‘Code’’). Applicant states
that as a RIC, the Company generally
will not pay corporate-level federal
income taxes on any net ordinary
income or capital gains that it
distributes to its stockholders as
dividends in accordance with the timing
requirements of the Code. To maintain
its RIC status, the Company must,
among other things, meet specified
source-of-income requirements.
Applicant states that the Company will
satisfy the source-of-income test for
purposes of qualifying as a RIC if it
derives in each taxable year at least 90%
of its gross income from dividends,
interest, payments with respect to
certain securities loans, gains from the
sale of stock or other securities or
currencies, net income from certain
‘‘qualified publicly traded partnerships’’
(as defined in the Code) or other income
derived with respect to its business of
investing in such stock, securities or
currencies (income from such sources,
‘‘Good RIC Income’’).
5. Applicant states that fee income
received in connection with the
provision of services to the Managed
Accounts generally would not constitute
1 Adviser Sub will be a wholly owned portfolio
company of the Company and will also fall within
the definition of ‘‘wholly owned subsidiary’’ for
purposes of section 2(a)(43) of the Act.
2 Adviser Sub has been formed, but it does not
intend to commence operations unless and until the
relief requested in the application has been granted.
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Good RIC Income to the Company if it
earned such income directly. Therefore,
in order for the Company to maintain its
RIC status while receiving the income
from the provision of advisory services
to the Managed Accounts, the Company
believes that it is in the best interests of
the Company and its shareholders for
the Adviser Sub to provide advisory
services to and to receive fees from the
Managed Accounts instead of the
Company providing such services and
receiving such fees directly.
6. Under the Advisers Act, an
investment adviser is generally required
to be registered if it has $100 million or
more of regulatory assets under
management.3 An investment adviser
may also register under the Advisers Act
in compliance with rule 203A–2(c)(1) of
the Advisers Act if it expects to be
eligible to register an as adviser within
120 days of registering. Applicant states
that the Adviser Sub will register as an
investment adviser under the Advisers
Act in compliance with rule 203A–
2(c)(1) of the Advisers Act after the
relief requested in the application is
granted to the Company because the
Adviser Sub expects to have $100
million or more of regulatory assets
under management within 120 days of
such registration.
Applicable Law
1. Section 12(d)(3) makes it unlawful
for any registered investment company,
and any company controlled by a
registered investment company, to
acquire any interest in the business of
a person who is either an investment
adviser of an investment company or an
investment adviser registered under the
Advisers Act, unless (a) such person is
a corporation all the outstanding
securities of which are owned by one or
more registered investment companies;
and (b) such person is primarily
engaged in the business of underwriting
and distributing securities issued by
other persons, selling securities issued
by other persons, selling securities to
customers, or any one or more of such
or related activities, and the gross
income of such person normally is
derived principally from such business
or related activities. Section 60 of the
Act states that section 12 shall apply to
a BDC to the same extent as if it were
3 In addition, an investment adviser to an
investment company registered under the Act or to
a company that has elected to be a BDC with $25
million or more of regulatory assets under
management would also be required to register
under the Advisers Act. Applicants state that the
Adviser Sub also may act as an investment adviser
to an an investment company registered under the
Act or to a company that has elected to be a BDC
with $25 million or more of regulatory assets under
management after the relief requested is granted.
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Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
a registered closed-end investment
company.
2. Section 6(c) of the Act provides that
the Commission may exempt any person
or transaction from any provision of the
Act if and to the extent that 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
and provisions of the Act.
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Applicant’s Legal Analysis
1. Applicant represents that the
Company will own 100% of the equity
interests in the Adviser Sub. However,
Applicant states that it is not expected
that the Adviser Sub would also be a
broker-dealer that is primarily engaged
in the business of underwriting and
distributing securities issued by other
persons. The ownership of the Adviser
Sub, at such point as it becomes
registered as an investment adviser,
could thus cause the Company to be in
violation of the provisions of section
12(d)(3) unless the requested Order is
issued.4 In addition, the Company
expects that after the relief requested in
the application is granted the Adviser
Sub will act as an investment adviser to
investment companies. To the extent it
does so, relief from section 12(d)(3) is
also required because the Adviser Sub
acting as an investment adviser of an
investment company would result in the
Company acquiring a security of an
investment adviser of an investment
company. Therefore, Applicant requests
the Order pursuant to section 6(c) of the
Act granting an exemption from the
provisions of section 12(d)(3) of the Act,
to the extent necessary in order to
permit the Company to organize,
acquire, and wholly own the securities
of the Adviser Sub.
2. Applicant states that section
12(d)(3) was intended to: (a) limit the
risk of a registered investment
company’s exposure to the
entrepreneurial risks, or general
liabilities, that are peculiar to securitiesrelated businesses; and (b) prevent
potential conflicts of interest and
reciprocal practices between investment
companies and securities-related
4 Rule 12d3–1(a) and (b) under the Act each
provides limited relief from the restrictions of
section 12(d)(3) if the acquired company derives 15
percent or less of its gross revenues from securities
related activities (as defined in the rule) or the
acquiring company owns not more than five percent
of the outstanding securities of that class of the
acquired company’s equity securities. The
Company does not believe that it may rely on this
relief with respect to its investment in Adviser Sub,
since the Company expects that a significant
portion of the Adviser Sub’s gross revenues will be
derived from securities related activities and the
Company will own all of the outstanding securities
of the Adviser Sub.
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businesses. Applicant submits that the
Company’s ownership and control of
the Adviser Sub does not present the
concerns against which section 12(d)(3)
was intended to safeguard.
3. Applicant states that much of the
concern regarding entrepreneurial risks
stemmed from the fact that when
section 12(d)(3) was adopted, most
securities-related businesses were
organized as privately held general
partnerships. As a result, an investment
in such a company would expose an
investment company to the unlimited
liabilities of a general partner. Applicant
notes that today’s financial services
industry is subject to a much more
robust body of regulation, which
contributes to a more conservative risk
profile for those companies that
comprise the industry. Moreover,
Applicant states that the risks presented
by the form of organization of a
securities-related business are no longer
as germane as they were at the time of
the adoption of section 12(d)(3) because
many formerly closely-held securitiesrelated businesses have reorganized into
corporate forms that are characterized
by limited liability. Applicant asserts in
particular that the Company’s
shareholders are not exposed to the risk
of unlimited liability associated with an
interest in the Adviser Sub because they
are insulated by a layer of liability
protection between the Adviser Sub and
the Company, as the Adviser Sub is a
separate entity and is structured as a
limited liability company, not a
partnership.
4. Applicant also submits that the
Company will own 100% of the equity
interests in the Adviser Sub and, as a
result, will exercise total control over
the strategic direction of the Adviser
Sub, including the power to control the
policies that affect the Company and to
protect the Company from potential
conflicts of interest and reciprocal
practices. Moreover, as a wholly owned
portfolio company and the sole
shareholder of the Adviser Sub, the
Adviser Sub and the Company will
generally have aligned interests.
5. Applicant states that the Company
will adopt policies and procedures with
respect to the Adviser Sub designed to
ensure that the Company and the
Adviser Sub are both being operated
and managed in the best interests of the
Company’s shareholders and that the
ownership by the Company of the
Adviser Sub is consistent with the
purposes fairly intended by the policy
and provisions of the Act.5 Applicant
5 Applicant represents that the Adviser Sub’s
borrowings, if any, would be used only for its own
legitimate business purposes, and would not be
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53535
states that the Company and the Adviser
Sub will adopt policies and procedures
to address potential conflicts of interest,
including but not limited to policies and
procedures that govern the allocation of
expenses, personal securities trading,
and insider trading and confidentiality
of proprietary information.
6. Applicant notes that the Company
and the Managed Accounts may invest
in the same securities or different
securities of the same issuer to the
extent consistent with applicable law,
regulatory guidance, or any exemptive
order obtained by the Company. The
Company and the Adviser Sub will
implement policies and procedures that
will govern the allocation of investment
opportunities when investment advisory
personnel of the Company and/or
Adviser Sub become aware of
investment opportunities that may be
appropriate for the Company and one or
more Managed Accounts.
7. Applicant states that the
Company’s proposal to enter into the
advisory business through a wholly
owned and controlled portfolio
company will benefit the Company’s
shareholders by: (a) allowing them to
share in the profits from the new
advisory business; (b) allowing that
advisory business to be more marketable
than if the services were provided by
the Company itself; and (c) limiting any
potential liabilities arising from Adviser
Sub’s provision of advisory services. In
addition, the growth in the Company’s
advisory business through the Adviser
Sub will enable the Company to add
advisory personnel that it could not on
its own, such as additional portfolio
managers and investment analysts, who
will be available to provide advisory
services both to the Company and to the
Managed Accounts of the Adviser Sub
and further enhance the experience and
relationships of the Company’s
investment team. Without the growth of
the Company’s advisory business
through the Adviser Sub, the Company
would not have the ability to support
such additional advisory personnel.
Applicant also states that the Adviser
Sub’s organization as a wholly owned
portfolio company of the Company and
registration as an investment adviser
would permit the Adviser Sub to
operate the business of managing the
Managed Accounts as a direct or an
indirect wholly owned taxable portfolio
company of the Company, thereby
protecting the Company’s RIC status.
used directly or indirectly by the Company for its
business purposes unrelated to the Adviser Sub,
and that the Company will adopt procedures to
ensure Board oversight of compliance with this
representation.
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8. Applicant represents that the
Company’s Board, including a majority
of the disinterested directors, found that
the Company organizing, acquiring, and
wholly owning 100% of the equity
interest in the Adviser Sub subsequent
to its registration as an investment
adviser is in the best interests of the
Company and its shareholders.
Applicant agrees that the Board will
review at least annually the investment
advisory business of the Adviser Sub to
determine whether such business
should be continued and whether the
benefits derived by the Company from
the Adviser Sub’s business warrant the
continued ownership of the Adviser
Sub. Applicant states that shareholders
of the Company will be provided with
notice, in advance of, or concurrent
with, the Adviser Sub’s start of
investment advisory activities.
9. Accordingly, Applicant represents
that the requested relief is both
necessary and appropriate in the public
interest and consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of the Act.
Applicant’s Conditions
Applicant agrees that the Order of the
Commission granting the requested
relief shall be subject to the following
conditions:
1. The determination to enter into the
advisory business through the Adviser
Sub has been made by a vote of at least
a majority of the Board who are not
‘‘interested persons’’ of the Company as
defined in section 2(a)(19).
2. The Company will wholly own and
control the Adviser Sub. The Company
will not have an investment adviser
within the meaning of section 2(a)(20).
Only persons acting in their capacities
as directors, officers or employees of the
Company will provide advisory services
to the Company.
3. In each of its annual reports to
shareholders and in future registration
statements, the Company will discuss
the existence of the Adviser Sub and the
provision by the Adviser Sub of outside
advisory services as well as include an
assessment of whatever risks, if any, are
associated with the existence of the
Adviser Sub and its provision of such
services.
4. The Adviser Sub will not make any
proprietary investment that the
Company would be prohibited from
making directly under the Company’s
investment objectives, policies and
restrictions or under any applicable law.
5. In assessing compliance with the
asset coverage requirements under
section 18 of the Act, the Company will
deem the assets, liabilities, and
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indebtedness of the Adviser Sub as its
own.
6. The Board will review at least
annually the investment advisory
business of the Adviser Sub to
determine whether such business
should be continued and whether the
benefits derived by the Company from
the Adviser Sub’s business warrant the
continued ownership of the Adviser Sub
and, if appropriate, approve (by a vote
of at least a majority of its directors who
are not ‘‘interested persons’’ as defined
in the Act) at least annually such
continuation. In determining whether
the investment advisory business of the
Adviser Sub should be continued and
whether the benefits derived by the
Company from the Adviser Sub’s
business warrant the continued
ownership of the Adviser Sub, the
Board will take into consideration,
among other things, the following: (a)
the compensation of the officers of the
Company and of the Adviser Sub; (b) all
investments by and investment
opportunities considered for the
Company that relate to any investments
by or investment opportunities
considered for a client of the Adviser
Sub; and (c) the allocation of expenses
associated with the provision of
advisory services between the Company
and the Adviser Sub.6
For the Commission, by the Division of
Investment Management, under delegated
authority.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–18760 Filed 8–30–22; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #17579 and #17580;
PENNSYLVANIA Disaster Number PA–
00120]
Administrative Declaration of a
Disaster for the Commonwealth of
Pennsylvania
Small Business Administration.
ACTION: Correction.
AGENCY:
This is a correction to the
Administrative declaration of a disaster
for the Commonwealth of Pennsylvania
dated 08/19/2022.
Incident: Heavy Rain and Flash
Flooding.
Incident Period: 08/05/2022.
DATES: Issued on 08/25/2022.
Physical Loan Application Deadline
Date: 10/18/2022.
Economic Injury (EIDL) Loan
Application Deadline Date: 05/19/2023.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: The notice
of the Administrator’s disaster
declaration for the Commonwealth of
Pennsylvania, dated 08/19/2022, is
hereby corrected to include Butler
County as a contiguous county.
Applications for disaster loans may be
filed at the address listed above or other
locally announced locations.
The following areas have been
determined to be adversely affected by
the disaster:
Primary Counties: Westmoreland
Contiguous Counties:
Pennsylvania: Allegheny, Armstrong,
Butler, Cambria, Fayette, Indiana,
Somerset, Washington.
The Interest Rates are:
Percent
For Physical Damage:
Homeowners with Credit Available Elsewhere ......................
Homeowners without Credit
Available Elsewhere ..............
Businesses with Credit Available Elsewhere ......................
Businesses
without
Credit
Available Elsewhere ..............
Non-Profit Organizations with
Credit Available Elsewhere ...
Non-Profit Organizations without Credit Available Elsewhere .....................................
For Economic Injury:
Businesses & Small Agricultural
Cooperatives without Credit
Available Elsewhere ..............
Non-Profit Organizations without Credit Available Elsewhere .....................................
4.375
2.188
6.080
3.040
1.875
1.875
3.040
1.875
SUMMARY:
6 Such expenses may include: administration and
operating expenses; investment research expenses;
sales and marketing expenses; office space and
general expenses; and direct expenses, including
legal and audit fees, directors’ fees and taxes.
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The number assigned to this disaster
for physical damage is 17579 6 and for
economic injury is 17580 0.
The State which received an EIDL
Declaration # is Pennsylvania.
(Catalog of Federal Domestic Assistance
Number 59008)
Isabella Guzman,
Administrator.
[FR Doc. 2022–18781 Filed 8–30–22; 8:45 am]
BILLING CODE 8026–09–P
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]]>Agencies
[Federal Register Volume 87, Number 168 (Wednesday, August 31, 2022)]
[Notices]
[Pages 53533-53536]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-18760]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 34688; 812-15226]
Capital Southwest Corporation
August 25, 2022.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice.
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Notice of an application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from section
12(d)(3) of the Act.
Summary of Application: Applicant requests an order to permit a
business development company (``BDC'') to organize, acquire, and
wholly-own a portfolio company that intends to operate as an investment
adviser registered under the Investment Advisers Act of 1940 (the
``Advisers Act'').
Applicant: Capital Southwest Corporation (the ``Company'' or
``Applicant'').
Filing Dates: The application was filed on April 30, 2021, and amended
on September 1, 2021, February 28, 2022, and May 31, 2022.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by emailing the Commission's
Secretary at [email protected] and serving Applicant
[[Page 53534]]
with a copy of the request, by email. Hearing requests should be
received by the Commission by 5:30 p.m. on September 19, 2022 and
should be accompanied by proof of service on the applicant, in the form
of an affidavit, or for lawyers, a certificate of service. Pursuant to
rule 0-5 under the Act, hearing requests should state the nature of the
writer's interest, any facts bearing upon the desirability of a hearing
on the matter, the reason for the request, and the issues contested.
Persons who wish to be notified of a hearing may request notification
by emailing the Commission's Secretary at [email protected].
Addresses: The Commission: [email protected]. Applicant:
Michael S. Sarner, Chief Financial Officer, Secretary and Treasurer,
Capital Southwest Corporation at [email protected].
FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Senior Counsel, or
Kaitlin C. Bottock, Branch Chief, at (202) 551-6825 (Division of
Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: For Applicants' representations, legal
analysis, and conditions, please refer to Applicants' first amended and
restated application, dated March 17, 2022, which may be obtained via
the Commission's website by searching for the file number at the top of
this document, or for an Applicant using the Company name search field,
on the SEC's EDGAR system. The SEC's EDGAR system may be searched at
https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html. You
may also call the SEC's Public Reference Room at (202) 551-8090.
Company and Adviser Sub
1. The Company is a Texas corporation that operates as an
internally managed, non-diversified, closed-end management investment
company. The Company has elected to be regulated as a BDC under the
Act. The Company's investment objective is to produce attractive risk-
adjusted returns by generating current income from its debt investments
and capital appreciation from its equity and equity related
investments. The Company's investment strategy is to partner with
business owners, management teams and financial sponsors to provide
flexible financing solutions to fund growth, changes of control, or
other corporate events.
2. Capital Southwest Asset Management LLC (``Adviser Sub'') was
formed as a limited liability company under the laws of the State of
Delaware and will be a direct or an indirect wholly owned portfolio
company of the Company.\1\ As discussed below, the Adviser Sub intends
to operate as an investment adviser registered with the Commission
under the Advisers Act.\2\ The Company expects the Adviser Sub to
receive fees in connection with its management of one or more
privately-offered pooled investment vehicles, registered management
investment companies, BDCs, and/or investment accounts (collectively,
``Managed Accounts'') similar to those received by comparable
investment advisers.
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\1\ Adviser Sub will be a wholly owned portfolio company of the
Company and will also fall within the definition of ``wholly owned
subsidiary'' for purposes of section 2(a)(43) of the Act.
\2\ Adviser Sub has been formed, but it does not intend to
commence operations unless and until the relief requested in the
application has been granted.
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3. The Company is, and the Adviser Sub will be, directly or
indirectly overseen by the Company's seven-member Board of Directors
(the ``Board''), of whom six are not considered ``interested persons''
of the Company within the meaning of section 2(a)(19) of the Act. In
its capacity as the Board of the Advisers Sub's parent company, the
Board will indirectly oversee the Adviser Sub.
4. The Company has elected to be treated for U.S. federal income
tax purposes, and intends to qualify annually, as a regulated
investment company (``RIC'') under Subchapter M of the Internal Revenue
Code of 1986, as amended (the ``Code''). Applicant states that as a
RIC, the Company generally will not pay corporate-level federal income
taxes on any net ordinary income or capital gains that it distributes
to its stockholders as dividends in accordance with the timing
requirements of the Code. To maintain its RIC status, the Company must,
among other things, meet specified source-of-income requirements.
Applicant states that the Company will satisfy the source-of-income
test for purposes of qualifying as a RIC if it derives in each taxable
year at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, gains from the sale
of stock or other securities or currencies, net income from certain
``qualified publicly traded partnerships'' (as defined in the Code) or
other income derived with respect to its business of investing in such
stock, securities or currencies (income from such sources, ``Good RIC
Income'').
5. Applicant states that fee income received in connection with the
provision of services to the Managed Accounts generally would not
constitute Good RIC Income to the Company if it earned such income
directly. Therefore, in order for the Company to maintain its RIC
status while receiving the income from the provision of advisory
services to the Managed Accounts, the Company believes that it is in
the best interests of the Company and its shareholders for the Adviser
Sub to provide advisory services to and to receive fees from the
Managed Accounts instead of the Company providing such services and
receiving such fees directly.
6. Under the Advisers Act, an investment adviser is generally
required to be registered if it has $100 million or more of regulatory
assets under management.\3\ An investment adviser may also register
under the Advisers Act in compliance with rule 203A-2(c)(1) of the
Advisers Act if it expects to be eligible to register an as adviser
within 120 days of registering. Applicant states that the Adviser Sub
will register as an investment adviser under the Advisers Act in
compliance with rule 203A-2(c)(1) of the Advisers Act after the relief
requested in the application is granted to the Company because the
Adviser Sub expects to have $100 million or more of regulatory assets
under management within 120 days of such registration.
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\3\ In addition, an investment adviser to an investment company
registered under the Act or to a company that has elected to be a
BDC with $25 million or more of regulatory assets under management
would also be required to register under the Advisers Act.
Applicants state that the Adviser Sub also may act as an investment
adviser to an an investment company registered under the Act or to a
company that has elected to be a BDC with $25 million or more of
regulatory assets under management after the relief requested is
granted.
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Applicable Law
1. Section 12(d)(3) makes it unlawful for any registered investment
company, and any company controlled by a registered investment company,
to acquire any interest in the business of a person who is either an
investment adviser of an investment company or an investment adviser
registered under the Advisers Act, unless (a) such person is a
corporation all the outstanding securities of which are owned by one or
more registered investment companies; and (b) such person is primarily
engaged in the business of underwriting and distributing securities
issued by other persons, selling securities issued by other persons,
selling securities to customers, or any one or more of such or related
activities, and the gross income of such person normally is derived
principally from such business or related activities. Section 60 of the
Act states that section 12 shall apply to a BDC to the same extent as
if it were
[[Page 53535]]
a registered closed-end investment company.
2. Section 6(c) of the Act provides that the Commission may exempt
any person or transaction from any provision of the Act if and to the
extent that 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 and provisions of the Act.
Applicant's Legal Analysis
1. Applicant represents that the Company will own 100% of the
equity interests in the Adviser Sub. However, Applicant states that it
is not expected that the Adviser Sub would also be a broker-dealer that
is primarily engaged in the business of underwriting and distributing
securities issued by other persons. The ownership of the Adviser Sub,
at such point as it becomes registered as an investment adviser, could
thus cause the Company to be in violation of the provisions of section
12(d)(3) unless the requested Order is issued.\4\ In addition, the
Company expects that after the relief requested in the application is
granted the Adviser Sub will act as an investment adviser to investment
companies. To the extent it does so, relief from section 12(d)(3) is
also required because the Adviser Sub acting as an investment adviser
of an investment company would result in the Company acquiring a
security of an investment adviser of an investment company. Therefore,
Applicant requests the Order pursuant to section 6(c) of the Act
granting an exemption from the provisions of section 12(d)(3) of the
Act, to the extent necessary in order to permit the Company to
organize, acquire, and wholly own the securities of the Adviser Sub.
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\4\ Rule 12d3-1(a) and (b) under the Act each provides limited
relief from the restrictions of section 12(d)(3) if the acquired
company derives 15 percent or less of its gross revenues from
securities related activities (as defined in the rule) or the
acquiring company owns not more than five percent of the outstanding
securities of that class of the acquired company's equity
securities. The Company does not believe that it may rely on this
relief with respect to its investment in Adviser Sub, since the
Company expects that a significant portion of the Adviser Sub's
gross revenues will be derived from securities related activities
and the Company will own all of the outstanding securities of the
Adviser Sub.
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2. Applicant states that section 12(d)(3) was intended to: (a)
limit the risk of a registered investment company's exposure to the
entrepreneurial risks, or general liabilities, that are peculiar to
securities-related businesses; and (b) prevent potential conflicts of
interest and reciprocal practices between investment companies and
securities-related businesses. Applicant submits that the Company's
ownership and control of the Adviser Sub does not present the concerns
against which section 12(d)(3) was intended to safeguard.
3. Applicant states that much of the concern regarding
entrepreneurial risks stemmed from the fact that when section 12(d)(3)
was adopted, most securities-related businesses were organized as
privately held general partnerships. As a result, an investment in such
a company would expose an investment company to the unlimited
liabilities of a general partner. Applicant notes that today's
financial services industry is subject to a much more robust body of
regulation, which contributes to a more conservative risk profile for
those companies that comprise the industry. Moreover, Applicant states
that the risks presented by the form of organization of a securities-
related business are no longer as germane as they were at the time of
the adoption of section 12(d)(3) because many formerly closely-held
securities-related businesses have reorganized into corporate forms
that are characterized by limited liability. Applicant asserts in
particular that the Company's shareholders are not exposed to the risk
of unlimited liability associated with an interest in the Adviser Sub
because they are insulated by a layer of liability protection between
the Adviser Sub and the Company, as the Adviser Sub is a separate
entity and is structured as a limited liability company, not a
partnership.
4. Applicant also submits that the Company will own 100% of the
equity interests in the Adviser Sub and, as a result, will exercise
total control over the strategic direction of the Adviser Sub,
including the power to control the policies that affect the Company and
to protect the Company from potential conflicts of interest and
reciprocal practices. Moreover, as a wholly owned portfolio company and
the sole shareholder of the Adviser Sub, the Adviser Sub and the
Company will generally have aligned interests.
5. Applicant states that the Company will adopt policies and
procedures with respect to the Adviser Sub designed to ensure that the
Company and the Adviser Sub are both being operated and managed in the
best interests of the Company's shareholders and that the ownership by
the Company of the Adviser Sub is consistent with the purposes fairly
intended by the policy and provisions of the Act.\5\ Applicant states
that the Company and the Adviser Sub will adopt policies and procedures
to address potential conflicts of interest, including but not limited
to policies and procedures that govern the allocation of expenses,
personal securities trading, and insider trading and confidentiality of
proprietary information.
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\5\ Applicant represents that the Adviser Sub's borrowings, if
any, would be used only for its own legitimate business purposes,
and would not be used directly or indirectly by the Company for its
business purposes unrelated to the Adviser Sub, and that the Company
will adopt procedures to ensure Board oversight of compliance with
this representation.
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6. Applicant notes that the Company and the Managed Accounts may
invest in the same securities or different securities of the same
issuer to the extent consistent with applicable law, regulatory
guidance, or any exemptive order obtained by the Company. The Company
and the Adviser Sub will implement policies and procedures that will
govern the allocation of investment opportunities when investment
advisory personnel of the Company and/or Adviser Sub become aware of
investment opportunities that may be appropriate for the Company and
one or more Managed Accounts.
7. Applicant states that the Company's proposal to enter into the
advisory business through a wholly owned and controlled portfolio
company will benefit the Company's shareholders by: (a) allowing them
to share in the profits from the new advisory business; (b) allowing
that advisory business to be more marketable than if the services were
provided by the Company itself; and (c) limiting any potential
liabilities arising from Adviser Sub's provision of advisory services.
In addition, the growth in the Company's advisory business through the
Adviser Sub will enable the Company to add advisory personnel that it
could not on its own, such as additional portfolio managers and
investment analysts, who will be available to provide advisory services
both to the Company and to the Managed Accounts of the Adviser Sub and
further enhance the experience and relationships of the Company's
investment team. Without the growth of the Company's advisory business
through the Adviser Sub, the Company would not have the ability to
support such additional advisory personnel. Applicant also states that
the Adviser Sub's organization as a wholly owned portfolio company of
the Company and registration as an investment adviser would permit the
Adviser Sub to operate the business of managing the Managed Accounts as
a direct or an indirect wholly owned taxable portfolio company of the
Company, thereby protecting the Company's RIC status.
[[Page 53536]]
8. Applicant represents that the Company's Board, including a
majority of the disinterested directors, found that the Company
organizing, acquiring, and wholly owning 100% of the equity interest in
the Adviser Sub subsequent to its registration as an investment adviser
is in the best interests of the Company and its shareholders. Applicant
agrees that the Board will review at least annually the investment
advisory business of the Adviser Sub to determine whether such business
should be continued and whether the benefits derived by the Company
from the Adviser Sub's business warrant the continued ownership of the
Adviser Sub. Applicant states that shareholders of the Company will be
provided with notice, in advance of, or concurrent with, the Adviser
Sub's start of investment advisory activities.
9. Accordingly, Applicant represents that the requested relief is
both necessary and appropriate in the public interest and consistent
with the protection of investors and the purposes fairly intended by
the policy and provisions of the Act.
Applicant's Conditions
Applicant agrees that the Order of the Commission granting the
requested relief shall be subject to the following conditions:
1. The determination to enter into the advisory business through
the Adviser Sub has been made by a vote of at least a majority of the
Board who are not ``interested persons'' of the Company as defined in
section 2(a)(19).
2. The Company will wholly own and control the Adviser Sub. The
Company will not have an investment adviser within the meaning of
section 2(a)(20). Only persons acting in their capacities as directors,
officers or employees of the Company will provide advisory services to
the Company.
3. In each of its annual reports to shareholders and in future
registration statements, the Company will discuss the existence of the
Adviser Sub and the provision by the Adviser Sub of outside advisory
services as well as include an assessment of whatever risks, if any,
are associated with the existence of the Adviser Sub and its provision
of such services.
4. The Adviser Sub will not make any proprietary investment that
the Company would be prohibited from making directly under the
Company's investment objectives, policies and restrictions or under any
applicable law.
5. In assessing compliance with the asset coverage requirements
under section 18 of the Act, the Company will deem the assets,
liabilities, and indebtedness of the Adviser Sub as its own.
6. The Board will review at least annually the investment advisory
business of the Adviser Sub to determine whether such business should
be continued and whether the benefits derived by the Company from the
Adviser Sub's business warrant the continued ownership of the Adviser
Sub and, if appropriate, approve (by a vote of at least a majority of
its directors who are not ``interested persons'' as defined in the Act)
at least annually such continuation. In determining whether the
investment advisory business of the Adviser Sub should be continued and
whether the benefits derived by the Company from the Adviser Sub's
business warrant the continued ownership of the Adviser Sub, the Board
will take into consideration, among other things, the following: (a)
the compensation of the officers of the Company and of the Adviser Sub;
(b) all investments by and investment opportunities considered for the
Company that relate to any investments by or investment opportunities
considered for a client of the Adviser Sub; and (c) the allocation of
expenses associated with the provision of advisory services between the
Company and the Adviser Sub.\6\
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\6\ Such expenses may include: administration and operating
expenses; investment research expenses; sales and marketing
expenses; office space and general expenses; and direct expenses,
including legal and audit fees, directors' fees and taxes.
For the Commission, by the Division of Investment Management,
under delegated authority.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18760 Filed 8-30-22; 8:45 am]
BILLING CODE 8011-01-P
