[Federal Register Volume 79, Number 56 (Monday, March 24, 2014)]
[Notices]
[Pages 16066-16071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-06306]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-30984; File No. 812-14016]
HMS Income Fund, Inc., et al.; Notice of Application
March 18, 2014.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under sections 57(a)(4) and
57(i) of the Investment Company Act of 1940 (the ``Act'') and rule 17d-
1 under the Act to permit certain joint transactions otherwise
prohibited by section 57(a)(4) of the Act and rule 17d-1 under the Act.
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Summary of Application: Applicants request an order to permit
business development companies (``BDCs'') to co-invest with one another
in portfolio companies.
Applicants: HMS Income Fund, Inc. (the ``Company''); HMS Adviser LP
(``HMS Adviser''); \1\ Main Street Capital Corporation (``MSCC'' and,
together with the Company, the ``Investing BDCs''); Main Street Capital
Partners, LLC (``Partners''); Main Street Mezzanine Fund, LP (``SBIC
Fund I''); Main Street Capital II, LP (``SBIC Fund II'' and, together
with SBIC Fund I, the ``SBIC Funds''); MSCII Equity Interests, LLC;
Main Street Equity Interests, Inc.; and MSC Adviser I, LLC (``HMS Sub-
Adviser'').
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\1\ The term ``Adviser'' means HMS Adviser, HMS Sub-Adviser (as
defined below), Partners (as defined below), any other investment
adviser to an Investing BDC (as defined below), and, with respect to
MSCC (as defined below), an internally managed business development
company, MSCC.
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Filing Dates: The application was filed on March 22, 2012, and
amended on July 27, 2012, December 28, 2012, June 18, 2013, October 3,
2013, February 24, 2014 and March 17, 2014.
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 writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on April 14, 2014, 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 who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
St. NE., Washington, DC 20549-1090. Applicants: the Company and HMS
Adviser, 2800 Post Oak Boulevard, Suite 5000, Houston, Texas 77056;
MSCC, Partners, the SBIC Funds, MSCII Equity Interests, LLC, Main
Street Equity Interests, Inc., and HMS Sub-Adviser, 1300 Post Oak
Boulevard, Suite 800, Houston, Texas 77056.
FOR FURTHER INFORMATION CONTACT: Mark Zaruba, Senior Counsel, at (202)
551-6878 or Dalia Osman Blass, Assistant Chief Counsel, at (202) 551-
6821 (Chief Counsel's Office, Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the
[[Page 16067]]
Company name box, at http://www.sec.gov/search/search.htm or by calling
(202) 551-8090.
Applicants' Representations:
1. The Company is a closed-end management investment company that
has elected to be regulated as a BDC under the Act.\2\ The Company's
primary investment objective is to generate current income through debt
and equity investments. The Company has a five-member board of
directors (the ``Company Board''), of which a majority are not
``interested persons'' of the Company as defined in section 2(a)(19) of
the Act (for any board of directors, the ``Independent Directors'').
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\2\ Section 2(a)(48) of the Act 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 Act and makes available significant managerial
assistance with respect to the issuers of such securities.
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2. HMS Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 (the ``Advisers Act'') and serves as
the Company's investment adviser. All investment decisions made by HMS
Adviser require the approval of its investment committee.
3. MSCC is a closed-end management investment company that has
elected to be regulated as a BDC under the Act. MSCC is a principal
investment firm that provides long-term debt and equity capital to
lower middle market companies and debt capital to middle market
companies. MSCC has a six-member board of directors (the ``MSCC
Board''),\3\ of which five members are Independent Directors. MSCC is
an internally managed BDC. All of MSCC's and its subsidiaries'
personnel (the ``MSCC Employees''), including all investment
professionals, are employed by Partners.\4\ Partners is a wholly-owned
subsidiary of MSCC.
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\3\ The term ``Investing BDC Board'' means the board of
directors of an Investing BDC (i.e., the Company Board or the MSCC
Board, as applicable).
\4\ The MSCC Employees perform all of the day to day functions
and activities of MSCC and its subsidiaries, including HMS Sub-
Adviser. As such, the same investment professionals who advise MSCC
and its Wholly-Owned Investment Subsidiaries also sub-advise the
Company through HMS Sub-Adviser. The MSCC Employees are supervised
by the MSCC Board, and when they are acting as investment
professionals for HMS Sub-Adviser, they are supervised by HMS Sub-
Adviser consistent with the policies and procedures adopted by HMS
Sub-Adviser in accordance with the Advisers Act. The MSCC Employees
are subject to the policies and procedures of MSCC and HMS Sub-
Adviser, including, with respect to MSCC, those required by rule
38a-1 and section 57(h) of the Act and, with respect to HMS Sub-
Adviser, those required by rule 206(4)-7 of the Advisers Act.
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4. Applicants represent that the SBIC Funds were organized as
limited partnerships under the laws of the state of Delaware and are
each licensed by the Small Business Administration (the ``SBA'') to
operate under the Small Business Investment Act of 1958 (the ``SBA
Act'') as small business investment companies. Applicants state that
the SBIC Funds will not be registered under the Act based on the
exclusion from the definition of investment company contained in
section 3(c)(7) of the Act. Main Street Mezzanine Management, LLC and
Main Street Capital II GP, LLC, each of which is a wholly-owned
subsidiary of MSCC, are the general partners of SBIC Fund I and SBIC
Fund II, respectively. Partners is the manager and investment adviser
of both SBIC Fund I and SBIC Fund II. Applicants represent that each of
the SBIC Funds are Wholly-Owned Investment Subsidiaries \5\ of MSCC
because MSCC directly or indirectly owns 100% of the economic and
voting interests in the SBIC Funds.
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\5\ A ``Wholly-Owned Investment Subsidiary'' is a special
purpose subsidiary formed by an Investing BDC (a) whose sole
business purpose is to hold one or more investments on behalf of the
Investing BDC (or, in the case of certain subsidiaries, maintain a
license under the SBA Act and issue debentures guaranteed by the
SBA); (b) that is wholly-owned by the Investing BDC (with the
Investing BDC at all times, directly or indirectly, holding,
beneficially and of record, 100% of the economic and voting
interests); (c) with respect to which the Investing BDC Board has
the sole authority to make all determinations with respect to the
Wholly-Owned Investment Subsidiary's participation under the
conditions to the application; and (d) that is an entity that would
be an investment company but for section 3(c)(1) or 3(c)(7) of the
Act.
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5. HMS Sub-Adviser is a wholly-owned subsidiary of MSCC. HMS Sub-
Adviser is registered as an investment adviser under the Advisers Act.
Pursuant to the terms of the investment advisory agreement among the
Company, HMS Adviser, MSCC, and HMS Sub-Adviser, HMS Adviser has
engaged HMS Sub-Adviser as the Company's sub-adviser.\6\ Applicants
represent that no employee or representative of MSCC, Partners, or HMS
Sub-Adviser serves or will serve on the investment committee of HMS
Adviser, and HMS Adviser and its investment committee are in all other
respects completely independent of MSCC, Partners, and HMS Sub-Adviser.
Applicants represent that neither HMS Sub-Adviser, Partners nor MSCC
are otherwise affiliated with the Company or HMS Adviser.
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\6\ The agreement does not, however, permit HMS Adviser to
delegate its authority to approve investments on behalf of the
Company. Therefore, as discussed below, HMS Adviser will ultimately
approve all investments made by the Company.
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6. Applicants seek an order (``Order'') to permit the Company, on
one hand, and MSCC, on the other hand, to participate in the same
investment opportunities through a proposed co-investment program where
such participation would otherwise be prohibited under section 57 of
the Act and the rules under the Act (the ``Co-Investment Program'').
For purposes of the application, a ``Co-Investment Transaction'' means
any transaction in which the Company (or a Wholly-Owned Investment
Subsidiary) participated together with MSCC (or a Wholly-Owned
Investment Subsidiary) in reliance on the Order. ``Potential Co-
Investment Transaction'' means any investment opportunity in which the
Company (or a Wholly-Owned Investment Subsidiary) could not participate
together with MSCC (or a Wholly-Owned Investment Subsidiary) without
obtaining and relying on the Order.\7\
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\7\ All existing entities that currently intend to rely on the
Order have been named as applicants and any existing or future
entities that may rely on the Order in the future will comply with
the terms and conditions of the application.
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7. Each Investing BDC may, from time to time, form one or more
Wholly-Owned Investment Subsidiaries. A Wholly-Owned Investment
Subsidiary of an Investing BDC would be prohibited from investing in a
Co-Investment Transaction with the other Investing BDC (or its Wholly-
Owned Investment Subsidiaries) because it would be a company controlled
by the Investing BDC for purposes of section 57(a)(4) and rule 17d-1.
Applicants request that a Wholly-Owned Investment Subsidiary be
permitted to participate in Co-Investment Transactions in lieu of an
Investing BDC and that the Wholly-Owned Investment Subsidiary's
participation in any such transaction be treated, for purposes of the
Order, as though the Investing BDC were participating directly.
Applicants represent that this treatment is justified because a Wholly-
Owned Investment Subsidiary would have no purpose other than serving as
a holding vehicle for the Investing BDC's investments and, therefore,
no conflicts of interest could arise between the Investing BDC and the
Wholly-Owned Investment Subsidiary. The Investing BDC Board would make
all relevant determinations under the conditions with regard to a
Wholly-Owned Investment Subsidiary's participation in a Co-Investment
Transaction, and the Investing BDC Board would be informed of, and take
into consideration, any proposed use of a Wholly-Owned Investment
Subsidiary in the Investing BDC's place. If an Investing BDC proposes
to participate in the same Co-Investment Transaction with any of its
Wholly-Owned
[[Page 16068]]
Investment Subsidiaries, the Investing BDC Board will also be informed
of, and take into consideration, the relative participation of the
Investing BDC and the Wholly-Owned Investment Subsidiary.
8. HMS Sub-Adviser and MSCC will generally originate and
independently analyze the appropriateness of investments by the
Investing BDCs.\8\ Applicants expect that almost all investments that
are appropriate investments for one Investing BDC will be appropriate
for the other Investing BDC, with limited exceptions based on Available
Capital,\9\ diversification, investment size, borrow and sponsor
limitations and other relevant factors.\10\ HMS Adviser serves as the
Company's investment adviser and administrator, and HMS Sub-Adviser
serves as the Company's sub-adviser. In these roles, HMS Adviser is
responsible for the overall management of the Company's activities, and
HMS Sub-Adviser is responsible for the day-to-day management of the
Company's investment portfolio, in each case consistent with their
fiduciary duties. Although HMS Sub-Adviser will identify, determine the
appropriateness of and recommend investments for the Company, the Sub-
Advisory Agreement requires that, prior to any investment by the
Company, HMS Sub-Adviser must present to HMS Adviser each investment
that HMS Sub-Adviser determines is appropriate for, and seeks to
recommend to, the Company, and HMS Adviser has the authority to approve
or reject all investments proposed for the Company by HMS Sub-Adviser.
Through this authority to approve or reject any investment proposed by
HMS Sub-Adviser, HMS Adviser will have ultimate authority with respect
to the Company's investments, subject in each case to the oversight of
the Company Board.
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\8\ While it is currently anticipated that substantially all
origination and evaluation of Potential Co-Investment Transactions
will be conducted by HMS Sub-Adviser, nothing precludes HMS Adviser
from independently identifying and evaluating a Potential Co-
Investment Transaction. In such a case, HMS Adviser will follow the
same process for approval of Co-Investment Transactions that HMS
Sub-Adviser is required to follow under the terms of the
application.
\9\ ``Available Capital'' refers to the liquid assets not held
for permanent investment, including bona fide uncalled capital
commitments that can be called by the settlement date of the Co-
Investment Transaction, cash, amounts that can currently be drawn
down from lines of credit, and marketable securities held for short-
term purposes.
\10\ Neither the Company nor MSCC will be obligated to invest,
or co-invest, when investment opportunities are referred to them.
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9. In selecting investments for the Investing BDCs, the Advisers
will consider only the investment objective, investment policies,
investment position, Available Capital, and other factors relevant to
the respective Investing BDC they advise. For each Potential Co-
Investment Transaction that HMS Sub-Adviser determines is an
appropriate investment for the Company, HMS Sub-Adviser will provide to
HMS Adviser, in advance, information about such transaction, and will
propose an allocation for the Company for such transaction. HMS Adviser
will then evaluate whether the Potential Co-Investment Transaction fits
within the Company's Objectives and Strategies, is appropriate from a
size and risk standpoint based on the Company's Available Capital, is
appropriately structured for co-investment by the Company and has
undergone sufficient due diligence to justify approval by HMS Adviser.
If HMS Adviser independently determines that the Potential Co-
Investment as proposed by HMS Sub-Adviser (including the proposed
allocation between the Company and MSCC) is an appropriate investment
for the Company, HMS Adviser will present the Potential Co-Investment
Transaction to the Eligible Directors of the Company Board for their
approval.
10. For any Potential Co-Investment Transaction, the applicable
Adviser will present the investment opportunity and the proposed
allocation to the directors eligible to vote under section 57(o) of the
Act (``Eligible Directors'') of each Investing BDC prior to any actual
investment by an Investing BDC. A Co- Investment Transaction will be
consummated only upon approval by a required majority of the Eligible
Directors within the meaning of section 57(o) of the Act (``Required
Majority'') \11\ of each Investing BDC.
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\11\ Applicants state that no Independent Director will have a
financial interest in any Co-Investment Transaction or any interest
in any related portfolio company, other than through an interest (if
any) in the securities of the Investing BDC.
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11. With respect to the pro rata dispositions and Follow-On
Investments \12\ provided in conditions 7 and 8, an Investing BDC may
participate in a pro rata disposition or Follow-On Investment without
obtaining prior approval of the Required Majority of the Investing BDC
if, among other things: (i) the proposed participation of each
Investing BDC in such disposition is proportionate to its outstanding
investments in the issuer immediately preceding the disposition or
Follow-On Investment, as the case may be; and (ii) the Investing BDC
Board has approved the Investing BDC's participation in pro rata
dispositions and Follow-On Investments as being in the best interests
of the Investing BDC. If the Investing BDC Board does not so approve,
any such disposition or Follow-On Investment will be submitted to the
Investing BDC's Eligible Directors. The Investing BDC Board may at any
time rescind, suspend or qualify its approval of pro rata dispositions
and Follow-On Investments with the result that all dispositions and/or
Follow-On Investments must be submitted to the Eligible Directors of
the Investing BDC.
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\12\ With respect to any security obtained in a Co-Investment
Transaction, a ``Follow-On Investment'' is an additional investment
in securities of the issuer of the security, including through the
exercise of warrants, conversion privileges, and other rights to
purchase securities of the issuer.
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Applicants' Legal Analysis:
1. Section 57(a)(4) of the Act prohibits certain affiliated persons
of a BDC from participating in joint transactions with the BDC (or a
company controlled by such BDC) in contravention of rules as prescribed
by the Commission. Under section 57(b)(2) of the Act, in general, any
person who is directly or indirectly controlling, controlled by, or
under common control with a BDC, is subject to section 57(a)(4).
Section 57(i) of the Act provides that, until the Commission prescribes
rules under section 57(a)(4), the Commission's rules under section
17(d) of the Act applicable to registered closed-end investment
companies will be deemed to apply to transactions subject to section
57(a)(4). Because the Commission has not adopted any rules under
section 57(a)(4), rule 17d-1 applies.
2. Rule 17d-1 under the Act prohibits affiliated persons of a
registered investment company from participating in joint transactions
with the company unless the Commission has granted an order permitting
such transactions. In passing upon applications under rule 17d-1, the
Commission considers whether the company's participation in the joint
transaction 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.
3. Transactions effected as part of the Co-Investment Program would
be prohibited by Section 57(a)(4) and Rule 17d-1 without a prior order
of the Commission to the extent that each of the Company or MSCC falls
within the category of persons described by Section 57(b), as modified
by Rule 57b-1 thereunder, vis-[agrave]-vis MSCC or the Company,
respectively. Section 57(b) applies to any investment adviser to a
business development company, including a sub-adviser. Therefore, HMS
Sub-Adviser could be deemed to be
[[Page 16069]]
related to the Company in a manner described by Section 57(b). MSCC
controls HMS Sub-Adviser and therefore MSCC (or a Wholly-Owned
Investment Subsidiary of MSCC) could be deemed to be related to the
Company in a manner described by Section 57(b) and prohibited by
Section 57(a)(4) and Rule 17d-1 from participating in the Co-Investment
Program with the Company.\13\
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\13\ As discussed in the application, applicants do not believe
that the Company would be related to MSCC in a manner described by
section 57(b) because applicants assert that HMS Sub-Adviser does
not control the Company. However, if HMS Sub-Adviser were deemed to
control the Company, then the Company would be related to MSCC in a
manner described by section 57(b) and, therefore, prohibited by
section 57(1)(4) and rule 17d-1 from participating in the Co-
Investment Program.
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4. Applicants state that they expect that increasing the
opportunities available to the Investing BDCs with a co-investment
structure would generate greater deal flow, broaden the market
relationships of the Company and MSCC, and posture them to make the
most attractive risk-adjusted investments and optimize performance of
their portfolios. Applicants represent that the Co-Investment Program
will be implemented only if a Required Majority of each Investing BDC
approves it on the basis that it would be advantageous to the Investing
BDC.
5. Applicants submit that the Required Majority of an Investing
BDC's approval of each Co-Investment Transaction before investment, and
other protective conditions set forth in the application, will ensure
that each Investing BDC will be treated fairly and reasonably.
Applicants state that an Investing BDC's participation in the Co-
Investment Transactions will be consistent with the provisions,
policies and purposes of the Act and on a basis that is not different
from or less advantageous than that of other. Applicants further state
that the terms and conditions of the application will ensure that all
such transactions are reasonable and fair to each Investing BDC and do
not involve overreaching by any person concerned, including the
Advisers.
Applicants' Conditions:
Applicants agree that any Order granting the requested relief will
be subject to the following conditions:
1. Each time an Adviser, other than HMS Adviser, considers a
Potential Co-Investment Transaction for an Investing BDC that falls
within the other Investing BDC's then-current Objectives and
Strategies,\14\ the Adviser(s) to an Investing BDC will make an
independent determination of the appropriateness of the investment for
the Investing BDC in light of the Investing BDC's then-current
circumstances. If HMS Adviser refers a Potential Co-Investment
Transaction to MSCC, MSCC will make an independent determination of the
appropriateness of the investment itself in light of MSCC's then-
current circumstances.
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\14\ ``Objectives and Strategies'' means an Investing BDC's
investment objectives and strategies, as described in the Investing
BDC's registration statement on Form N-2, other filings the
Investing BDC has made with the Commission under the Securities Act
of 1933, as amended (the ``1933 Act''), or under the Securities and
Exchange Act of 1934, as amended, and the Investing BDC's reports to
shareholders.
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2. a. If the Adviser(s) to an Investing BDC deems the Investing
BDC's participation in any Potential Co-Investment Transaction to be
appropriate for the Investing BDC, the Adviser(s) to the Investing BDC
will then determine an appropriate level of investment for the
Investing BDC.
b. If the aggregate amount recommended by the Adviser(s) to an
Investing BDC to be invested in the Potential Co-Investment
Transaction, together with the amount proposed to be invested by the
other Investing BDC, in the same transaction, exceeds the amount of the
investment opportunity, the amount of the investment opportunity will
be allocated between the Investing BDCs pro rata based on the ratio of
each Investing BDC's Available Capital in the asset class being
allocated to the aggregated Available Capital for the asset class being
allocated of both Investing BDCs, up to the amount proposed to be
invested by each. The Adviser(s) to an Investing BDC will provide the
Eligible Directors of the Investing BDC, with information concerning
each Investing BDC's Available Capital to assist the Eligible Directors
with their review of the Investing BDC's investments for compliance
with these allocation procedures.
c. After making the determinations required in conditions 1 and
2(a), the Adviser(s) to an Investing BDC will distribute written
information concerning the Potential Co-Investment Transaction,
including the amount proposed to be invested by each Investing BDC, to
the Eligible Directors of the Investing BDC for their consideration.
The Investing BDCs will co-invest with one another only if, prior to
participating in the Potential Co-Investment Transaction, a Required
Majority of each Investing BDC concludes that:
(i) the terms of the Potential Co-Investment Transaction, including
the consideration to be paid, are reasonable and fair and do not
involve overreaching in respect of the Investing BDC or its
stockholders on the part of any person concerned;
(ii) the Potential Co-Investment Transaction is consistent with:
(a) the interests of the Investing BDC's stockholders; and
(b) the Investing BDC's then-current Objectives and Strategies;
(iii) the investment by the other Investing BDC would not
disadvantage the Investing BDC, and the participation of the Investing
BDC is not on a basis different from or less advantageous than that of
the other Investing BDC; provided, that if one Investing BDC but not
the other gains the right to nominate a director for election to a
portfolio company's board of directors or the right to have a board
observer or any similar right to participate in the governance or
management of the portfolio company, such event will not be interpreted
to prohibit a Required Majority of the Investing BDC from reaching the
conclusions required by this condition 2(c)(iii), if:
(a) the Eligible Directors of the Investing BDC will have the right
to ratify the selection of such director or board observer, if any;
(b) the Adviser(s) to an Investing BDC agrees to, and does, provide
periodic reports to the Board of the Investing BDC with respect to the
actions of the director or the information received by the board
observer or obtained through the exercise of any similar right to
participate in the governance or management of the portfolio company;
and
(c) any fees or other compensation that the Investing BDC or any
affiliated person thereof, as applicable, receives in connection with
the right of the Investing BDCs to nominate a director or appoint a
board observer or otherwise to participate in the governance or
management of the portfolio company will be shared proportionately
between the Investing BDCs in accordance with the amount of each
party's investment; and
(iv) the proposed investment by the Investing BDC would not benefit
the other Investing BDC or any affiliated person of either of them
(other than the parties to the Co-Investment Transaction), except (a)
to the extent permitted by condition 13; (b) to the extent permitted by
section 57(k) of the Act; (c) indirectly, as a result of an interest in
the securities issued by one of the parties to the Co-Investment
Transaction; or (d) in the case of fees or other compensation described
in condition 2(c)(iii)(C).
[[Page 16070]]
3. Each Investing BDC has the right to decline to participate in
any Potential Co-Investment Transaction or to invest less than the
amount proposed.
4. The Adviser(s) to an Investing BDC will present to the Board of
the Investing BDC, on a quarterly basis, a record of all investments
made by the other Investing BDC during the preceding quarter that fell
within the Investing BDC's then-current Objectives and Strategies that
were not made available to the Investing BDC, and an explanation of why
the investment opportunities were not offered to the Investing BDC. All
information presented to the Investing BDC Board under this condition
will be kept for the life of the Investing BDC and at least two years
thereafter, and will be subject to examination by the Commission and
its staff.
5. Except for Follow-On Investments made in accordance with
condition 8, an Investing BDC will not invest in reliance on the Order
in any issuer in which the other Investing BDC or any affiliated person
of the other Investing BDC is an existing investor.
6. An Investing BDC will not participate in any Potential Co-
Investment Transaction unless the terms, conditions, price, class of
securities to be purchased, settlement date, and registration rights
will be the same for the Investing BDC as for the other Investing BDC.
The grant to one Investing BDC, but not to the other, of the right to
nominate a director for election to a portfolio company's board of
directors, the right to have an observer on the board of directors or
similar rights to participate in the governance or management of the
portfolio company will not be interpreted so as to violate this
condition 6, if conditions 2(c)(iii)(A), (B) and (C) are met.
7. a. If an Investing BDC elects to sell, exchange or otherwise
dispose of an interest in a security that was acquired in a Co-
Investment Transaction:
(i) The Adviser(s) to the Investing BDC will notify the other
Investing BDC of the proposed disposition at the earliest practical
time; and
(ii) The Adviser(s) to the Investing BDC will formulate a
recommendation as to participation by the Investing BDC in the
disposition.
b. Each Investing BDC will have the right to participate in such
disposition on a proportionate basis, at the same price and on the same
terms and conditions as those applicable to the other Investing BDC.
c. An Investing BDC may participate in such disposition without
obtaining prior approval of a Required Majority of the Investing BDC
if: (i) the proposed participation of each Investing BDC in such
disposition is proportionate to its outstanding investments in the
issuer immediately preceding the disposition; (ii) the Investing BDC
Board has approved as being in the best interests of the Investing BDC
the ability to participate in such dispositions on a pro rata basis (as
described in greater detail in the application); and (iii) the
Investing BDC Board is provided on a quarterly basis with a list of all
dispositions made in accordance with this condition. In all other
cases, (i) the Adviser(s) to an Investing BDC will provide the
Advisers' written recommendation as to the Investing BDC's
participation in such disposition to the Eligible Directors of the
Investing BDC and (ii) the Investing BDC will participate in such
disposition solely to the extent that a Required Majority of the
Investing BDC determines that it is in the Investing BDC's best
interests.
d. Each Investing BDC will bear its own expenses in connection with
any such disposition.
8. a. If an Investing BDC desires to make a Follow-On Investment in
a portfolio company whose securities were acquired in a Co-Investment
Transaction:
(i) The Adviser(s) to the Investing BDC will notify the other
Investing BDC of the proposed Follow-On Investment at the earliest
practical time; and
(ii) The Adviser(s) to the Investing BDC will formulate a
recommendation as to participation by the Investing BDC in the Follow-
On Investment.
b. An Investing BDC may participate in such Follow-On Investment
without obtaining prior approval of a Required Majority of the
Investing BDC if: (i) the proposed participation of each Investing BDC
in such Follow-On Investment is proportionate to its outstanding
investments in the issuer immediately preceding the Follow-On
Investment; (ii) the Investing BDC Board has approved as being in the
best interests of the Investing BDC the ability to participate in such
Follow-On Investment on a pro rata basis (as described in greater
detail in the application); and (iii) the Investing BDC Board is
provided on a quarterly basis with a list of all Follow-On Investments
made in accordance with this condition. In all other cases, (i) the
Adviser(s) to an Investing BDC will provide the Advisers' written
recommendation as to the Investing BDC's participation in such Follow-
On Investment to the Eligible Directors of the Investing BDC and (ii)
the Investing BDC will participate in such Follow-On Investment solely
to the extent that a Required Majority of the Investing BDC determines
that it is in the Investing BDC's best interests.
c. If, with respect to any Follow-On Investment: (i) the amount of
the Follow-On Investment is not based on the Investing BDCs'
outstanding investments in the issuer immediately preceding the Follow-
On Investment; and (ii) the aggregate amount recommended by the
Adviser(s) to an Investing BDC to be invested by the Investing BDCs in
the same Follow-On Investment exceeds the amount of the opportunity;
then the amount invested by each such party will be allocated between
them pro rata based on the ratio of each Investing BDC's Available
Capital for investment in the asset class being allocated to the
aggregated Available Capital for investment for the asset class being
allocated of both Investing BDCs, up to the amount proposed to be
invested by each.
d. The acquisition of Follow-On Investments as permitted by this
condition will be considered a Co-Investment Transaction for all
purposes and subject to the other conditions set forth in the
application.
9. The Eligible Directors of each Investing BDC will be provided
quarterly for review all information concerning Potential Co-Investment
Transactions and Co-Investment Transactions, including investments made
by the other Investing BDC that the Investing BDC considered but
declined to participate in, so that the Eligible Directors may
determine whether all investments made during the preceding quarter,
including those investments that the Investing BDC considered but
declined to participate in, comply with the conditions of the Order. In
addition, the Eligible Directors of each Investing BDC will consider at
least annually the continued appropriateness for the Investing BDC of
participating in new and existing Co-Investment Transactions. All
information presented to the Investing BDC Board under this condition
will be kept for the life of the Investing BDC and at least two years
thereafter, and will be subject to examination by the Commission and
its staff.
10. Each Investing BDC will maintain the records required by
section 57(f)(3) of the Act as if each of the investments permitted
under these conditions were approved by the Required Majority of the
Investing BDC under section 57(f).
11. No Independent Director of an Investing BDC will also be a
director, general partner, managing member or principal, or otherwise
an ``affiliated person'' (as defined in the Act), of the other
Investing BDC.
[[Page 16071]]
12. The expenses, if any, associated with acquiring, holding or
disposing of any securities acquired in a Co-Investment Transaction
(including, without limitation, the expenses of the distribution of any
such securities registered for sale under the 1933 Act) will, to the
extent not payable by the Advisers under an Investing BDC's investment
advisory agreements, be shared by the Investing BDCs with respect to a
Co-Investment Transaction, in proportion to the relative amounts of the
securities to be acquired or disposed of, as the case may be.
13. Any transaction fee (including break-up or commitment fees but
excluding broker's fees contemplated by section 57(k) of the Act)
received in connection with a Co-Investment Transaction will be
distributed to the Investing BDCs on a pro rata basis based on the
amount they invested or committed, as the case may be, in such Co-
Investment Transaction. If any transaction fee is to be held by an
Adviser pending consummation of the transaction, the fee will be
deposited into an account maintained by the Adviser at a bank or banks
having the qualifications prescribed in section 26(a)(1) of the Act,
and the account will earn a competitive rate of interest that will also
be divided pro rata between the Investing BDCs based on the amount they
invest in the Co-Investment Transaction. No Investing BDC or any
affiliated person of the Investing BDC will receive additional
compensation or remuneration of any kind as a result of or in
connection with a Co-Investment Transaction (other than (a) in the case
of the Investing BDCs, the pro rata transaction fees described above
and fees or other compensation described in condition 2(c)(iii)(C) and
(b) in the case of the Advisers, investment advisory fees paid in
accordance with the Investing BDC's investment advisory agreements).
14. The Advisers will each maintain written policies and procedures
reasonably designed to ensure compliance with the foregoing conditions.
These policies and procedures will require, among other things, that
HMS Adviser will be notified of all Potential Co-Investment
Transactions that fall within the Company's then-current Objectives and
Strategies and will be given sufficient information to make its
independent determination and recommendations under conditions 1, 2(a),
7 and 8.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06306 Filed 3-21-14; 8:45 am]
BILLING CODE 8011-01-P