[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Notices]
[Pages 43272-43276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21322]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22146; 34-37578; 812-10072]


Allied Capital Lending Corporation, et al.; Notice of Application

August 15, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption Under the Investment 
Company Act of 1940 (the ``Act'') and the Securities Exchange Act of 
1934 (the ``Exchange Act'').

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APPLICANTS: Allied Capital Lending Corporation (``Lending''), Allied 
Capital Advisers, Inc. (``Advisers''), Allied Capital SBLC Corporation 
(``Subsidiary I''), and Allied Capital Credit Corporation (``Subsidiary 
II,'' and with Subsidiary I, the ``Subsidiaries'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an exemption from sections 12(d)(1), 18(a), 55(a), 60 and 61(a) of 
the Act, under section 57(c) of the Act for an exemption from sections 
57(a) (1), (2), and (3) of the Act, and under sections 57(a)(4) and 
57(i) of the Act and rule 17d-1 thereunder permitting certain joint 
transactions. Order also requested under section 12(h) of the Exchange 
Act for an exemption from section 13(a) of the Exchange Act.

SUMMARY OF APPLICATION: Applicants request an order to permit Lending 
to form two new subsidiaries and engage in certain joint transactions 
with such new subsidiaries or certain companies in which Lending or its 
subsidiaries have invested. The order also would permit modified asset 
coverage

[[Page 43273]]

requirements for Subsidiary I individually and Lending and its 
subsidiaries on a consolidated basis. In addition, the order would deem 
the capital stock of the Subsidiaries to be securities issued by 
eligible portfolio companies for purposes of characterizing assets 
under section 55(a) of the Act. Furthermore, the order would permit 
Lending and its subsidiaries to file Exchange Act reports on a 
consolidated basis.

FILING DATES: The application was filed on April 2, 1996 and amended on 
May 21, 1996, July 16, 1996, and August 14, 1996.

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 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on September 9, 
1996, and should be accompanied by proof of service on applicant 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 SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants, c/o Allied Capital Advisers, Inc., 1666 K Street, 
N.W., 9th Floor, Washington, D.C. 20006-2803.

FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Special Counsel, at (202) 942-0563, or Robert A. 
Robertson, Branch Chief, (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

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. Lending is a registered closed-end management investment company 
that has elected to be regulated as a business development company (a 
``BDC'') and has been approved by the Small Business Administration 
(the ``SBA'') to participate as a small business lending company (a 
``SBLC'') in the SBA's guaranteed loan program (the ``7(a) Loan 
Program'') pursuant to section 7(a) of the Small Business 
Administration Act of 1958 (the ``Small Business Act''). As an SBLC, 
Lending makes loans (the ``7(a) Loans'') that are partially guaranteed 
by the SBA.
    2. Until November 23, 1993, Lending was a wholly-owned subsidiary 
of Allied Capital Corporation (``Allied I''). On that date, the initial 
public offering of Lending's shares commenced. In 1993, the SEC issued 
an order (the ``1993 Order'') permitting Allied I and Lending to engage 
in certain joint transactions in connection with the initial public 
offering.\1\ Currently, Allied I owns 28.3% of the issued and 
outstanding shares of Lending. Pursuant to a condition of the 1993 
Order, Allied I has agreed to divest itself of all its remaining shares 
of Lending by December 31, 1998.
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    \1\ Allied Capital Corporation, Investment Company Act Release 
Nos. 19810 (Oct. 22, 1993) (notice) and 19880 (Nov. 17, 1993) 
(order).
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    3. Advisers is a registered investment adviser. Until December 31, 
1990, Advisers was a wholly-owned subsidiary of Allied I. On that date, 
Allied I distributed all the shares of Advisers to Allied I's 
shareholders. Advisers currently acts as investment adviser to Lending 
and Allied I as well as to one other BDC, two real estate investment 
trusts, and two venture capital limited partnerships. Advisers may have 
investment advisory agreements with the Subsidiaries in the future. The 
investments of these entities consist largely of loans to and 
investments in small, privately owned businesses.
    4. The ACLC Limited Partnership (the ``Limited Partnership'') 
participates in the SBA's Certified Development Company Program (the 
``504 Loan Program;'' loans generated thereunder are the ``504 Loans'') 
and generates supplemental loans, not guaranteed by the SBA, to 
accompany Lending's 7(a) Loans (the ``7(a) Companion Loans''). Because 
SBA regulations prevent Lending, as an SBLC, from making these loans, 
Lending formed the Limited Partnership, retaining 99% ownership and 
acting as general partner, to generate 504 Loans and 7(a) Companion 
Loans without violating such regulations.
    5. Each Subsidiary is a closed-end management investment company, 
and each intends to file an election to be regulated as a BDC. Each 
Subsidiary will be a wholly-owned subsidiary of Lending following the 
proposed reorganization of Lending and the Limited Partnership into a 
parent with two corporate subsidiaries structure (the 
``Reorganization''). Subsidiary I will become an SBLC and, as such, 
will participate in the 7(a) Loan Program. Subsidiary II will 
participate in the 504 Loan Program and will generate 7(a) Companion 
Loans, as well as other non-SBA guaranteed loans.\2\
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    \2\ The SBLC program was closed to new applicants in 1982, but 
Lending may transfer its SBLC license to Subsidiary I with the 
consent of the SBA.
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    6. The 7(a) Loan Program provides funds to small businesses for 
almost any legitimate business purpose. The 504 Loan Program provides 
long-term financing, partially guaranteed by the SBA, of fixed assets. 
The 504 Loan Program is more restrictive than the 7(a) Loan Program 
because 504 Loans must be secured by a purchase money mortgage on the 
fixed assets of the borrower. The 504 Loan Program is administered 
through certified development companies (the ``CDCs''), which are 
licensed by the SBA. CDCs are non-profit organizations that can be 
sponsored either by private interests or by state and local 
governments. A loan in the 504 Loan Program requires the participation 
of a private lender, such as the Limited Partnership, a CDC, and a 
qualified small business. The CDC, through the SBA, provides a second 
mortgage, and the private lender provides the first mortgage.
    7. The SBLC regulations, as revised as of March 1, 1996, prohibit 
an SBLC from participating in loans other than under the 7(a) Loan 
Program. Therefore, Lending proposes to transfer all or substantially 
all its assets (except its ownership interests in the Limited 
Partnership), including its SBLC license, and liabilities to Subsidiary 
I as a capital contribution in exchange for 100% of Subsidiary I's 
common stock. Lending also proposes to transfer all its ownership 
interests in the Limited Partnership to Subsidiary II as a capital 
contribution in exchange for 100% of Subsidiary II's common stock and 
to cause Subsidiary II to purchase the remaining 1% limited partnership 
interest from the owner thereof and to cause the dissolution and 
winding up of the Limited Partnership, which will entail the transfer 
of all the Limited Partnership's assets and liabilities to Subsidiary 
II.
    8. Subsidiary I and Subsidiary II will in effect succeed to the 
current operations of Lending and the Limited Partnership, 
respectively, following the Reorganization. Subsidiary I will become an 
SBLC and will participate as such in the 7(a) Loan Program, and 
Subsidiary II will generate 7(a) Companion Loans and will participate 
in the 504 Loan Program. Lending will not directly participate in any 
SBA-guaranteed loan programs under the proposed structure, although it 
will maintain ownership of the Subsidiaries

[[Page 43274]]

and will raise capital to finance the Subsidiaries as needed as well as 
its own non-SBA guaranteed lending activities.
    9. One or both of the Subsidiaries may enter into an investment 
advisory agreement with Advisers. Upon the effectiveness of such an 
investment advisory agreement, Advisers will not collect any fee to 
which it may otherwise be entitled under its investment advisory 
agreement with Lending with respect to the portion of Lending's assets 
represented by the value of Lending's continuing investment in that 
Subsidiary.

Applicants' Legal Analysis

Section 6(c)

    1. Applicants request relief under section 6(c) of the Act from 
sections 12(d)(1), 18(a), 55(a), 60, and 61(a). Section 6(c) authorizes 
the SEC to exempt any person, security, 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.
    2. Since each Subsidiary will be wholly-owned by Lending, any 
activity carried on by it will have the same economic effect on Lending 
shareholders as it would if carried on directly by Lending. Applicants 
believe that the public interest will not be harmed by the granting of 
the requested exemptions, while the interest of Lending and its 
shareholders will be enhanced.

Sections 12(d)(1) and 60

    1. Section 12(d)(1) makes it unlawful for any registered investment 
company to purchase or otherwise acquire any security issued by any 
other investment company and for any investment company to purchase or 
otherwise acquire any security issued by any registered investment 
company, if the acquiring company immediately after such purchase or 
acquisition owns more than the amounts of securities specified in that 
section. Section 60 makes section 12 applicable to a BDC to the same 
extent as if it were a closed-end management investment company 
registered under the Act.
    2. The purchase of voting stock in a Subsidiary by Lending, both 
pursuant to the Reorganization and thereafter, would violate section 
12. Similarly, a subsequent contribution to capital of a Subsidiary by 
Lending might be deemed to violate section 12 to the extent such 
contribution otherwise constitutes the acquisition of a security issued 
by the Subsidiary. In addition, the making of loans or advances by 
Lending or a Subsidiary (a ``Fund'') as lender, to another Fund, as 
borrower, might be deemed to violate section 12 if such loans or 
advances were viewed as purchases by the lender of the securities of 
the borrower.
    3. Accordingly, applicants request an order exempting the 
acquisition by Lending of any securities of either Subsidiary and the 
acquisition by either Subsidiary of any securities representing 
indebtedness of Lending, to the extent that such transactions would not 
be prohibited if each Subsidiary were deemed to be part of Lending and 
not a separate company, from section 12(d)(1).

Sections 18(a) and 61(a)

    1. Section 18(a) makes it unlawful for any closed-end company to 
issue any class of senior security unless such company complies with 
the asset coverage set forth in that section. ``Asset coverage'' is 
defined in section 18(h) to mean the ratio which the value of the total 
assets of the issuer, less all liabilities and indebtedness not 
represented by senior securities, bears to the aggregate amount of 
senior securities representing indebtedness of such issuer. Section 
18(k) makes certain of the asset coverage requirements of section 18(a) 
inapplicable to investment companies operating under the Small Business 
Investment Act of 1958 (the ``1958 Act''). Section 61(a) makes section 
18 applicable, with certain modifications, to a BDC to the same extent 
as if it were a closed-end company registered under the Act.
    2. Applicants believe that a question exists as to whether 
Subsidiary I may rely on section 18(k) to be excepted from the asset 
coverage and other requirements of section 18(a), as modified by 
section 61(a). As the successor to Lending's SBLC license upon 
consummation of the Reorganization, Subsidiary I will be an investment 
company operating under the 1958 Act to the extent that Title V of the 
1958 Act authorizes and sets forth the United States government 
guarantee of the 7(a) Loans, an essential part of an SBLC's business. 
The statutory authority for the 7(a) Loan Program itself is contained, 
however, within the Small Business Act, which is technically distinct 
from, although codified in large part together with, the 1958 Act cited 
in section 18(k) of the Act.
    3. Applicants believe that the rationale for the exemption 
contained in section 18(k) is that the SBA's substantive regulation of 
permissible leverage of an SBA-licensed investment company is an 
effective substitute for the SEC's substantive regulation of required 
asset coverage for each class of senior security issued by a registered 
closed-end company or a BDC. As both SBICs and SBLCs are SBA-licensed 
investment companies, both types of entities are subject to the SBA's 
substantive regulation of permissible leverage in their capital 
structure. An SBIC with outstanding ``Leverage'' may not incur any 
secured third-party debt or refinance any debt with secured third-party 
debt without prior written approval of the SBA if the SBIC's 
``Leverage'' exceeds, and if the SBIC's total outstanding borrowings 
(not including ``Leverage'') would exceed, specified percentages of its 
``Leverageable Capital''.\3\ An SBLC may not issue any securities 
(including debt securities) without prior written approval of the 
SBA.\4\ Applicants believe that an SBLC is subject to more restrictive 
capital structure regulation by the SBA than an SBIC is because the 
issuance of all debt securities is regulated by the SBA in the case of 
an SBLC, while only secured third-party debt is regulated in the case 
of an SBIC.
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    \3\ See 15 C.F.R. Sec. 107.550(b) (1996).
    \4\ See 15 C.F.R. Sec. 120.470(b)(5) (1996).
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    4. Applicants wish to avoid any questions about their compliance 
with section 18(a), as modified by section 61(a). Accordingly, 
applicants request an exemption from sections 18(a) and 61(a) to treat 
borrowings by Subsidiary I as liabilities and indebtedness not 
represented by senior securities in applying the asset coverage 
requirements of section 18(a), as modified by section 61(a), to 
Subsidiary I individually and to Lending and the Subsidiaries on a 
consolidated basis.

Section 55(a)

    1. Section 55(a) makes it unlawful for a BDC to acquire any assets 
(with certain exceptions) unless, at the time the acquisition is made, 
assets described in paragraphs (1) through (6) thereof (``Qualifying 
Assets'') represent at least 70 percent of the value of its total 
assets other than assets described in paragraph (7) thereof. Paragraphs 
(1) through (4) of section 55(a) describe Qualifying Assets which are 
either securities of an eligible portfolio company within the meaning 
of section 2(a)(46) or securities of an issuer described in 
subparagraphs (A) and (B) of section 2(a)(46), but which may not be an 
eligible portfolio company (i.e., may not satisfy one of the three 
alternative criteria of subparagraph (C) of section 2(a)(46)). 
Subparagraph (B) of section 2(a)(46)

[[Page 43275]]

disqualifies from the definition of eligible portfolio company both an 
investment company as defined in section 3 (with the exception of one 
category of such companies) and a company which would be an investment 
company except for the exclusion from the definition of investment 
company in section 3(c). The exception from this disqualification 
applies to ``a small business investment company'' licensed by the SBA 
to operate under the 1958 Act that is a wholly owned subsidiary of a 
BDC.
    2. Applicants believe that a literal reading of section 2(a)(46)(B) 
would seem to disqualify from the definition of eligible portfolio 
company both Subsidiary I and Subsidiary II. Thus, applicants believe 
that Lending's holdings of the common stock of the Subsidiaries may be 
ineligible to be counted as Qualifying Assets toward the 70 percent 
requirement under the descriptions of paragraphs (1) through (6) of 
section 55(a).
    3. Applicants believe that if the Subsidiaries themselves are 
deemed to be ``eligible portfolio companies'' within the meaning of 
section 2(a)(46) for purposes of section 55(a), the public interest 
would be served. The 7(a) Loans to be made by Subsidiary I, as well as 
the related loans (e.g., 7(a) Companion Loans and 504 Related Loans) or 
other investments to be made by Subsidiary II, will be made to the same 
category of small business borrowers which represent the type of 
persons that the BDC amendments to the Act, adopted in 1980, which 
added sections 54 through 65 (the ``1980 Amendments'') were designed to 
benefit. Because both Subsidiaries not only will be BDCs but also will 
lend to, or otherwise invest in, solely those small business borrowers 
that meet one or more of the maximum size standards established by the 
SBA for the 7(a) Loan Program, the 504 Loan Program, or SBIC 
investments, applicants believe that no harm to the public interest 
will occur if Lending's investment in each of the Subsidiaries is 
deemed to be a Qualifying Asset.
    4. Accordingly, applicants request an exemption from section 55(a) 
to treat the securities issued by the Subsidiaries held by Lending as 
securities purchased from ``eligible portfolio companies'' within the 
meaning of section 2(a)(46) for purposes of classifying such securities 
as assets of the type described in section 55(a)(1)(A).

Section 57(c)

    1. Section 57(c) directs the SEC to exempt a transaction from 
sections 57(a) (1), (2), or (3) if the following standards are met: (a) 
the terms of the proposed transaction are reasonable and fair and do 
not involve overreaching of the BDC or its shareholders on the part of 
any person concerned, (b) the proposed transaction is consistent with 
the policy of the BDC as recited in its filings with the SEC and in its 
reports to shareholders, and (c) the proposed transaction is consistent 
with the general purposes of the Act.
    2. Applicants believe that the contemplated transactions will be 
reasonable and fair and will not involve overreaching on the part of 
any person, the proposed operation of the Funds as one company and the 
requested relief are consistent with the policy outlined in the 
information to be provided in Lending's regular reporting to 
shareholders, and the proposed operation of the Funds as one company 
and the requested relief is entirely consistent with the general 
purposes of the Act. Accordingly, applicants believe the standard set 
forth in section 57(c) are met.

Sections 57(a) (1), (2), and (3)

    1. Sections 57(a) (1), (2), and (3) generally prohibit, with 
certain exceptions, sales or purchases of securities between BDCs and 
certain of their affiliates, including any director, officer, employee, 
or member of an advisory board of the BDC or any person who controls, 
is controlled by, or is under common control with such director, 
officer, employee, or advisory board member.
    2. Lending will be a related person (within the meaning of section 
57(b)) of each Subsidiary as long as it continues to own more than 25 
percent of the voting securities of, or otherwise controls, such 
Subsidiary. Each Subsidiary will be a related person of Lending as long 
as it remains controlled by Lending. The Subsidiaries will be related 
persons of each other as long as they remain under the common control 
of Lending.
    3. The acquisition by Lending of the capital stock of the 
Subsidiaries in exchange for part of Lending's investment portfolio 
could be deemed: (a) a sale of a security of a BDC (the Subsidiary's 
stock) to a BDC (Lending), (b) a sale of a security (from Lending's 
investment portfolio) to a BDC (the Subsidiary), (c) a purchase from a 
BDC (the Subsidiary) of any security (the Subsidiary's stock), and (d) 
a purchase from a BDC (Lending) of any security (from Lending's 
investment portfolio) by a BDC affiliate (the Subsidiary). In addition, 
loan transactions between Funds may be effected which may be deemed to 
be purchases and sales of securities representing indebtedness. While 
loans from Lending to a Subsidiary appear to be exempt from section 
57(a) by virtue of rule 57b-1 because each Subsidiary (the borrower) 
would be controlled by Lending (the lender), it does not appear that 
loans from either Subsidiary to Lending would be entitled to the 
exemptions contained in rule 57b-1, since, in that case, the lender 
would be controlled by the borrower.
    4. Therefore, applicants believe, absent an exemptive order, any 
loan from either Subsidiary to Lending could be deemed in violation of 
section 57(a). In addition, a Subsidiary may invest in securities of an 
issuer that may be deemed to be an affiliate of Lending or Lending may 
invest in securities of an issuer that may be deemed to be an affiliate 
of a Subsidiary, as in the case of a portfolio company deemed to be 
affiliated with Lending or a Subsidiary as a result of its ownership of 
5% or more of the portfolio company's stock. Accordingly, applicants 
request an order exempting from sections 57(a) (1), (2), and (3) any 
transaction between the Funds with respect to the purchase or sale of 
securities or other property or the borrowing of any money or other 
property. Applicants also request an order exempting from sections 
57(a) (1), (2), and (3) any transaction involving the Funds and 
portfolio affiliates of the Funds, but only to the extent that any such 
transactions would not be prohibited if a Subsidiary involved in the 
transaction were deemed to be part of Lending and not a separate 
company.

Section 57(a)(4) and Rule 17d-1

    1. Section 57(a)(4) makes it unlawful for certain persons related 
to a BDC in the manner set forth in section 57(b), acting as principal, 
knowingly to effect any transaction in which the BDC or a company 
controlled by the BDC is a joint or joint and several participant with 
that person in contravention of such rules and regulations as the SEC 
may prescribe. Section 57(i) states that the rules and regulations 
under sections 17(a) and 17(d) applicable to registered closed-end 
investment companies (e.g., rule 17d-1) shall be deemed to apply to 
transactions subject to section 57(a) until the adoption by the SEC of 
rules and regulations under section 57(a).
    2. Lending and the Subsidiaries are related persons (within the 
meaning of sections 57(b)) of one another, based on their control 
relationships. The joint transaction prohibitions of section 57(a)(4) 
and rule 17d-1 therefore apply to all the Funds as long as Lending 
continues to own more than 25 percent of the voting securities of, or 
otherwise controls, each Subsidiary. The

[[Page 43276]]

participation of two or more of the Funds in a co-investment 
transaction with a portfolio company may be deemed to be a 
participation by each of them in a joint or joint-and-several 
transaction with the other.
    3. Accordingly, applicants request an order permitting, under 
section 57(a)(4) and rule 17d-1, any transaction involving investments 
by a Fund in portfolio companies in which any other Fund is or is 
proposed to become an investor, but only to the extent that such 
transaction would not be prohibited if a Subsidiary involved in the 
transaction (and all of its assets and liabilities) was deemed to be 
part of Lending, and not a separate company.

Sections 12(h) and 13 of the Exchange Act

    1. Section 12(h) of the Exchange Act provides that the SEC may 
exempt an issuer from section 13 of the Exchange Act if the SEC finds 
that by reason of the number of public investors, amount of trading 
interest in the securities, the nature and extent of the activities of 
the issuer, income or assets of the issuer, or otherwise that such 
action is not inconsistent with the public interest or the protection 
of investors. Section 13 of the Exchange Act is the primary section 
requiring filing of periodic reports.
    2. Lending has elected to be regulated as a BDC and has securities 
registered under section 12 of the Exchange Act. In order to be a BDC, 
the Subsidiaries must register a class of equity securities under 
section 12(g) of the Exchange Act or have filed a registration 
statement to do so. Absent an exemptive order, such registration would 
subject each Subsidiary to periodic filings with the SEC even though 
each Subsidiary will have only one equity holder. Accordingly, 
applicants request an order under section 12(h) of the Exchange Act 
exempting each Subsidiary from the reporting requirements of section 
13(a) of the Exchange Act.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the relief 
required shall be subject to the following conditions:
    1. Lending will at all times own and hold, beneficially and of 
record, all of the outstanding capital stock of the Subsidiaries.
    2. Each Subsidiary will have the same fundamental investment 
policies as Lending, as set forth in Lending's registration statement; 
the Subsidiaries will not engage in any of the activities described in 
section 13(a) of the Act, except in each case as authorized by the vote 
of a majority of the outstanding voting securities of Lending.
    3. No person shall serve or act as investment adviser to a 
Subsidiary under circumstances subject to section 15 of the Act, unless 
the directors and shareholders of Lending shall have taken the action 
with respect thereto also required to be taken by the directors and 
shareholders of the Subsidiary.
    4. No person shall serve as a director of a Subsidiary unless 
elected as a director of Lending at Lending's most recent annual 
meeting, as contemplated by section 16(a) of the Act and subject to the 
provisions thereof relating to the filling of vacancies. 
Notwithstanding the foregoing, the board of directors of each 
Subsidiary will be elected by Lending as the sole shareholder of that 
Subsidiary, and such board will be composed of the same persons who 
serve as directors of Lending.
    5. Lending will not itself issue or sell, and Lending will not 
cause or permit its Subsidiaries to issue or sell, any senior security 
of which Lending or a Subsidiary is the issuer except as hereinafter 
set forth. The Funds may issue and sell to banks, insurance companies, 
and other financial institutions their secured or unsecured promissory 
notes or other evidences of indebtedness in consideration of any loan, 
or any extension or renewal thereof made by private arrangement, 
provided the following conditions are met: (i) such notes or evidences 
of indebtedness are not intended to be publicly distributed, (ii) such 
notes or evidences of indebtedness are not convertible into, 
exchangeable for, or accompanied by any options to acquire any equity 
security (except that if a Subsidiary is permitted to elect BDC status, 
these restrictions shall not be applicable to such Subsidiary except to 
the extent they are applicable generally to BDCs), and (iii) 
immediately after the issuance or sale of any such notes or evidences 
of indebtedness by either Lending or the Subsidiaries, Lending and the 
Subsidiaries, on a consolidated basis, and each Subsidiary and Lending 
individually, shall have the asset coverage required by section 
61(a)(1), except that, in determining whether the Funds, on a 
consolidated basis, have the asset coverage required by section 
61(a)(1), any borrowings by Subsidiary I shall not be considered senior 
securities and, for purposes of the definition of ``asset coverage'' in 
section 18(h), shall be treated as indebtedness not represented by 
senior securities.
    6. Subsidiary II will only make loans to, or other investments in, 
companies that meet one or more of the maximum size standards 
established by the SBA for the 7(a) Loan Program, the 504 Loan Program, 
or SBIC investments, although Subsidiary II may make various types of 
loans (e.g., 7(a) Companion Loans and 504 Related Loans) to, and 
investments in, these companies.
    7. If Advisers enters into an investment advisory agreement with 
either Subsidiary, Advisers will reduce its fees charged to Lending by 
an amount equal to the value of such Subsidiary's shares held by 
Lending times the rate at which advisory or other asset-based fees are 
charged by Advisers to such Subsidiary.
    8. Lending will: (a) file with the SEC on behalf of itself and the 
Subsidiaries, all information and reports required to be filed with the 
SEC under the Exchange Act and other federal securities laws, including 
financial statements prepared solely on a consolidated basis as to 
Lending and the Subsidiaries, such information and reports to be in 
satisfaction of the separate filing obligations of each of the 
Subsidiaries; and (b) provide to its shareholders such information and 
reports required to be disseminated to Lending's shareholders, 
including financial statements prepared solely on a consolidated basis 
as to Lending and the Subsidiaries, such reports to be in satisfaction 
of the separate filing obligations of Lending and each of the 
Subsidiaries. Notwithstanding anything in this condition, Lending will 
not be relieved of any of its reporting obligations including, but not 
limited to, any consolidating statement setting forth the individual 
statement of each Subsidiary required by rule 6-03(c) of Regulation S-
X.
    9. Lending and the Subsidiaries may file on a consolidated basis 
pursuant to the above condition only so long as the amount of Lending's 
assets invested in assets other than (a) securities issued by the 
Subsidiaries or (b) securities similar to those in which the 
Subsidiaries invest, does not exceed ten percent.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21322 Filed 8-20-96; 8:45 am]
BILLING CODE 8010-01-M