On January 5, 2021, the Securities and Exchange Commission (the SEC) issued a Public Statement updating the targeted regulatory relief that the SEC previously had granted in an effort to assist market participants, including business development companies (BDCs), throughout the coronavirus (COVID-19) pandemic (the Updated Relief Statement). As discussed further below, the two primary components of the Updated Relief Statement that apply to BDCs are as follows:

• In-Person Board Meetings. The SEC confirmed that the previously granted relief, which permitted, subject to certain conditions, virtual board of directors meetings and virtual approval of certain agreements, plans or arrangements pursuant to the Investment Company Act of 1940, as amended (the 1940 Act), will remain in effect until such relief is terminated by the staff (the Staff) of the Division of Investment Management of the SEC (the Division).
• Co-Investment. Until March 31, 2021, the Division will not recommend enforcement action to the SEC to the extent BDCs with effective co-investment orders participate in a Follow-On Investment,¹ in compliance with the previously granted relief, with an Affiliated Fund² that is not already invested in the issuer.

In-person board meetings relief

On March 13, 2020, the SEC issued an exemptive order under the 1940 Act providing relief for BDCs and management investment companies registered under the 1940 Act (together, Funds) impacted by COVID-19 (the March 2020 Order). The March 2020 Order, along with subsequent extensions, provided relief through December 31, 2020 from 1940 Act sections and rules requiring that certain agreements, plans or arrangements be approved by the Fund’s board of directors by an in-person vote.

The Updated Relief Statement confirms that the March 2020 Order will remain in effect until it is terminated by Staff action, reasoning that members of Fund boards continue to face challenges traveling to meet the in-person voting requirements under the 1940 Act and rules thereunder. The termination date will be specified in a public notice, and the termination date will be at least two weeks from the date of such notice. However, the Updated Relief Statement indicates that the Division anticipates providing sufficient advance notice before setting the termination date, recognizing that travel restrictions and concerns are likely to continue for some time, thereby requiring significant lead time for members of Fund boards to make travel plans.

As described in our prior alert, the March 2020 Order provides that a Fund (and any investment adviser of or principal underwriter for such Fund) will be exempt from requirements under Section 15(c) (relating to the approval of advisory contracts) and Section 32(a) (relating to the selection of accountants) of the 1940 Act, and Rules 12b-1(b)(2) and 15a-4(b)(2)(ii) under the 1940 Act, requiring that certain board votes be cast in person, provided that:

• reliance on the March 2020 Order is necessary or appropriate due to circumstances related to current or potential effects of COVID-19;
• the votes required to be cast at an in-person meeting are instead cast at a meeting in which directors may participate by any means of communication that allows all directors participating to hear each other simultaneously during the meeting; and
• the board, including a majority of the directors who are not “interested persons” (as defined in Section 2(a)(19) of the 1940 Act) of the Fund, ratifies the action taken pursuant to the exemption by vote cast at the next in-person meeting.

Co-investment relief

On April 8, 2020, the Staff issued an exemptive order (the April 2020 Order) that, among other things, provided immediate temporary flexibility for BDCs with effective co-investment orders to participate in a Follow-On Investment with an Affiliated Fund that is not already invested in the issuer. Such relief was temporary, and only available from the date of the April 2020 Order (April 8, 2020) to the earlier of December 31, 2020, or the date on which a BDC ceased to rely on the April 2020 Order.

The Updated Relief Statement explains that, until March 31, 2021, the Division will not recommend enforcement action to the SEC to the extent BDCs with effective co-investment orders participate in a Follow-On Investment with an Affiliated Fund that is not already invested in the issuer (i.e., BDCs with effective co-investment orders may continue to engage in transactions described in Section III of the April 2020 Order until March 31, 2021). The Updated Relief Statement also notes that while the April 2020 Order has not technically been extended, the SEC is now considering requests from individual firms for similar exemptive relief pertaining to existing co-investment orders.

As described in our prior alert, without the April 2020 Order, a BDC is generally only permitted to complete Follow-On Investments under its existing co-investment order with Affiliated Funds and Regulated Funds³ that acquired securities of the issuer in a co-investment transaction with the BDC. The April 2020 Order expands the sources of capital available to a BDC’s portfolio company by permitting Affiliated Funds that are not already invested in the issuer to participate in Follow-On Investments with the BDC. Any such Follow-On Investment must otherwise be completed in compliance with the conditions of the BDC’s existing co-investment order. When a BDC’s board of directors is approving a Follow-On Investment in reliance on the April 2020 Order, the April 2020 Order requires the BDC’s board of directors, including a Required Majority,⁴ to consider the proposed Follow-On Investment both on a stand-alone basis and in relation to the total economic exposure of the BDC to the issuer. 

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