SEC Issues Guidance on Business Development Companies with Wholly Owned SBIC Subsidiaries

The SEC issued guidance regarding business development companies with wholly owned small business investment company ("SBIC") subsidiaries.

In the guidance, the SEC stated that certain business development companies ("BDCs") file exemptive applications for relief from asset coverage requirements under Investment Company Act Section 18(a) and Section 61(a), which requires a BDC to treat assets and liabilities of certain subsidiaries as its own for purposes of calculating asset coverage. Subsidiary SBICs presumably would be captured within this consolidation rule. However, the SEC has generally granted limited relief that permits a BDC to treat certain indebtedness issued by a subsidiary SBIC as indebtedness not represented by senior securities, therefore the BDC does not need to treat such SBIC's assets and liabilities as its own.

Recently, the SEC limited this interpretation after several BDCs sought relief where the indebtedness issued by a subsidiary SIBC was not held or guaranteed by the Small Business Administration ("SBA"). The SBA generally provides SBA-guaranteed leverage to a SBIC, but it also regulates the permissible leverage in such SBIC's capital structure. Therefore, the SEC has stated that the grant of asset coverage relief is implicitly conditioned upon the indebtedness issued by a subsidiary SBIC being held or guaranteed by the SBA, and that granting such relief is consistent with representations historically included in exempting applications. In light of this, all new applications for relief are required to include this condition.

See: SEC Guidance.