
[Federal Register: November 24, 2010 (Volume 75, Number 226)]
[Notices]               
[Page 71744-71746]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no10-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29500; 812-13698]

 
Fifth Street Finance Corp., et al.; Notice of Application

November 18, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 18(a), 55(a), and 61(a) of the Act.

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Summary of the Application: Applicants request an order to permit: (1) 
A business development company to look to the assets of its wholly-
owned subsidiaries, rather than the business development company's 
interest in the subsidiaries themselves, in determining whether the 
business development company meets certain requirements for business 
development companies under the Act, and (2) the business development 
company to adhere to a modified asset coverage requirement.

[[Page 71745]]


Applicants:  Fifth Street Finance Corp. (``Fifth Street''), Fifth 
Street Management LLC, Fifth Street Mezzanine Partners IV, L.P., FSMP 
IV GP, LLC, FSF/MP Holdings, Inc., FSFC Holdings, Inc., Fifth Street 
Funding, LLC and Fifth Street Fund of Funds LLC.

Filing Dates:  The application was filed on September 9, 2009, and 
amended on February 18, 2010, and November 15, 2010.

Hearing or Notification of Hearing:  An order granting the application 
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 December 13, 2010, and should be accompanied by proof of 
service on the 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 
Street, NE., Washington, DC 20549-1090. Applicants, 10 Bank Street, 
12th Floor, White Plains, New York 10606.

FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at 
(202) 551-6868, or Janet M. Grossnickle, Assistant Director, at (202) 
551-6821 (Division of Investment Management, Office of Investment 
Company Regulation).

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 an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. Fifth Street, a Delaware corporation, is an externally managed, 
non-diversified, closed-end investment company that has elected to be 
regulated as a business development company (``BDC'') under the Act. 
Fifth Street is a specialty finance company that provides capital and 
advisory services to small and mid-size companies throughout the United 
States.
    2. Fifth Street conducts, and expects to continue to conduct, a 
portion of its business through its current and future subsidiaries 
operating in the manner described in the application, all of whose 
equity securities are owned or will be owned directly or indirectly by 
Fifth Street and that are consolidated by Fifth Street for financial 
reporting purposes (each, a ``Subsidiary''). Fifth Street currently has 
six Subsidiaries, Fifth Street Mezzanine Partners IV, L.P. (the ``SBIC 
Subsidiary''), its general partner, FSMP IV GP, LLC (the ``SBIC GP''), 
FSF/MP Holdings, Inc., FSFC Holdings, Inc., and Fifth Street Fund of 
Funds LLC (together with FSF/MP Holdings, Inc. and SFC Holdings, Inc., 
the ``Blocker Subsidiaries''), and Fifth Street Funding, LLC (the 
``Financing Subsidiary'').
    3. The SBIC Subsidiary, a Delaware limited partnership, is a small 
business investment company (``SBIC'') licensed under the Small 
Business Administration (``SBA'') to operate under the Small Business 
Investment Act of 1958 (``SBIA''). The SBIC Subsidiary relies on 
section 3(c)(7) of the Act. The SBIC GP, a Delaware limited liability 
company, is the sole general partner of the SBIC Subsidiary. Fifth 
Street is the SBIC GP's sole member and owner. The SBIC GP is the sole 
general partner of the SBIC Subsidiary, and Fifth Street is the sole 
limited partner of the SBIC Subsidiary.
    4. Fifth Street intends to operate the SBIC Subsidiary through the 
SBIC GP for the same investment purposes as Fifth Street, and the SBIC 
Subsidiary will invest in the same kinds of securities as Fifth Street. 
The operations of both the SBIC Subsidiary and the SBIC GP will be 
consolidated with those of Fifth Street for financial reporting 
purposes. The assets of the SBIC Subsidiary and the SBIC GP are 
recorded on Fifth Street's balance sheet, and thus are considered 
assets of Fifth Street for U.S. generally accepted accounting 
principles purposes.
    5. The Financing Subsidiary, a Delaware limited liability company, 
is a wholly-owned subsidiary through which Fifth Street established a 
credit facility for its on-balance sheet borrowings. It is excluded 
from the definition of investment company under Section 3(c)(7) of the 
Act. The sole purpose of the Financing Subsidiary is to provide a 
legally separate entity to hold investments as collateral supporting 
Fifth Street's financings. Fifth Street solely controls the operations 
of the Financing Subsidiary, including the acquisition and disposition 
of assets by the Financing Subsidiary.
    6. Fifth Street utilizes wholly-owned subsidiaries, the Blocker 
Subsidiaries, to hold interests in certain of Fifth Street's portfolio 
companies. The Blocker Subsidiaries are excluded from the definition of 
investment company under section 3(c)(7) of the Act. The Blocker 
Subsidiaries are structured as Delaware corporations or limited 
liability companies and hold certain investment assets that are 
structured as pass-through tax entities in order to allow Fifth Street 
to continue to qualify as a regulated investment company for tax 
purposes.\1\
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    \1\ Applicants represent that these Blocker Subsidiaries are a 
lawful method of tax planning under the Internal Revenue Code and 
are frequently used by companies seeking to elect to be treated as 
regulated investment companies. Fifth Street has obtained an opinion 
from tax counsel from the firm of Sutherland Asbill & Brennan LLP 
confirming the appropriateness of this structure.
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    7. The Financing Subsidiary and the Blocker Subsidiaries are not 
operating companies and do not have any employees. The Financing 
Subsidiary and the Blocker Subsidiaries exist solely for the benefit of 
Fifth Street and do not provide any services to any other company. 
Fifth Street makes and will continue to make available significant 
managerial assistance to the issuers of securities held by the 
Financing and Blocker Subsidiaries to the extent required by section 
2(a)(48)(B).\2\
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    \2\ For the purposes of Section 2(a)(48)(B), Fifth Street will 
treat securities held by the Subsidiaries as if they were held 
directly by Fifth Street.
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Applicants' Legal Analysis

A. Relief for Fifth Street To Deem Assets Held by Its Subsidiaries To 
Be Owned by Fifth Street for Purposes of Determining Its Compliance 
With Section 55(a) of the Act

    1. Section 2(a)(48) of the Act generally defines a BDC to be any 
closed-end investment company that operates for the purpose of making 
investments in securities described in section 55(a)(1) through (3) of 
the Act and makes available significant managerial assistance with 
respect to the issuers of these securities. Section 55(a) of the Act 
requires a BDC to have at least 70 percent of its assets invested in 
assets described in sections 55(a)(1) through (7) (``Qualifying 
Assets''). Qualifying Assets generally include securities issued by 
eligible portfolio companies as defined in section 2(a)(46) of the Act. 
Section 2(a)(46)(B) generally excludes from the definition of an 
eligible portfolio company an investment company, as defined under 
section 3 of the Act, and a company that would be an investment company 
but for the exclusion from the definition of investment company in 
section 3(c) of the Act.

[[Page 71746]]

    2. Section 6(c) of the Act, in relevant part, permits the 
Commission to exempt any transaction or class of transactions 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. Applicants request an order pursuant to 
section 6(c) to allow Fifth Street to deem the assets of its current 
and future Subsidiaries as its own assets for purposes of determining 
its compliance with section 55(a).
    3. Applicants state that each Subsidiary will be formed as a 
limited liability company (``LLC''), a corporation (``Corporation'') or 
a partnership (``Partnership''). Fifth Street and/or one or more other 
Subsidiaries at all times will be the only members of each Subsidiary 
that is an LLC and will collectively hold all of the ownership 
interests in the LLC Subsidiary. No LLC Subsidiary will admit any 
person other than Fifth Street or another Subsidiary as a member, and 
no LLC Subsidiary will issue interests other than to Fifth Street or 
another Subsidiary. Fifth Street and/or one or more other Subsidiaries 
at all times will own and hold all of the outstanding equity interests 
in each Subsidiary that is formed as a Corporation. Fifth Street and/or 
one or more other Subsidiaries will at all times be the sole limited 
partner of any Subsidiary that is formed as a Partnership and the sole 
owner of such Subsidiary's general partner. Applicants also state that 
since Fifth Street, directly or indirectly through another Subsidiary, 
owns or would own the entire equity interest in any current and future 
Subsidiaries, any activity carried on by them will, in all material 
respects, have the same economic effect on Fifth Street's stockholders 
as if carried on directly by Fifth Street.

B. Relief for the Company To Adhere to a Modified Asset Coverage 
Requirement

    1. Applicants request an exemption pursuant to section 6(c) of the 
Act from the provisions of sections 18(a) and 61(a) of the Act to 
permit Fifth Street to adhere to a modified asset coverage requirement.
    2. Section 18(a) of the Act prohibits a registered closed-end 
investment company from issuing any class of senior security or selling 
any such security of which it is the issuer unless the company complies 
with the asset coverage requirements set forth in that section. Section 
61(a) of the Act makes section 18 applicable to BDCs, with certain 
modifications. Section 18(k) exempts an investment company operating as 
an SBIC from the asset coverage requirements for senior securities 
representing indebtedness that are contained in section 18(a)(1)(A) and 
(B).
    3. Applicants state that a question exists as to whether Fifth 
Street must comply with the asset coverage requirements of section 
18(a) (as modified by section 61(a)) solely on an individual basis or 
whether Fifth Street must also comply with the asset coverage 
requirements on a consolidated basis because Fifth Street may be deemed 
to be an indirect issuer of any class of senior security issued by the 
SBIC Subsidiary. Applicants state that they wish to treat the SBIC 
Subsidiary as if it were a BDC subject to sections 18 and 61 of the 
Act. Applicants state that companies operating under the SBIA, such as 
the SBIC Subsidiary, will be subject to the SBA's substantial 
regulation of permissible leverage in its capital structure.
    4. Section 6(c) of the Act, in relevant part, permits the 
Commission to exempt any transaction or class of transactions 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. Applicants state that the requested relief 
satisfies the section 6(c) standard. Applicants contend that, since the 
SBIC Subsidiary would be entitled to rely on section 18(k) if it was a 
BDC itself, there is no policy reason to deny the benefit of that 
exemption to Fifth Street.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:

Relief From Section 55(a)

    1. Each Subsidiary will be formed as a LLC, a Corporation or a 
Partnership. Fifth Street and/or one or more other Subsidiaries at all 
times will be the only members of each Subsidiary that is an LLC and 
will collectively hold all of the ownership interests in the LLC 
Subsidiary. No LLC Subsidiary will admit any person other than Fifth 
Street or another Subsidiary as a member, and no LLC Subsidiary will 
issue interests other than to Fifth Street or another Subsidiary. Fifth 
Street and/or one or more other Subsidiaries at all times will own and 
hold all of the outstanding equity interests in each Subsidiary that is 
formed as a Corporation. Fifth Street and/or one or more other 
Subsidiaries will at all times be the sole limited partner of any 
Subsidiary that is formed as a Partnership and the sole owner of such 
Subsidiary's general partner.
    2. The existing Subsidiaries, and any future Subsidiaries, may not 
acquire any asset if the acquisition would cause Fifth Street to 
violate section 55(a).
    3. No person shall serve or act as investment adviser to a 
Subsidiary unless the board of directors and stockholders of Fifth 
Street shall have taken the action with respect thereto also required 
to be taken by the board of directors of the Subsidiary and 
stockholders of the Subsidiary as if the Subsidiary were a BDC.

Relief From Section 18(a)

    4. Fifth Street will not issue or sell any senior security and 
Fifth Street will not cause or permit the SBIC Subsidiary to issue or 
sell any senior security of which Fifth Street or the SBIC Subsidiary 
is the issuer except to the extent permitted by section 18 (as modified 
for BDCs by section 61); provided that immediately after issuance or 
sale by any of Fifth Street or the SBIC Subsidiary of any such senior 
security, Fifth Street individually and on a consolidated basis, shall 
have the asset coverage required by section 18(a) (as modified by 
section 61(a)), except that, in determining whether Fifth Street on a 
consolidated basis has the asset coverage required by section 18(a) (as 
modified by section 61(a)), any senior securities representing 
indebtedness of the SBIC Subsidiary shall not be considered senior 
securities and, for purposes of the definition of ``asset coverage'' in 
section 18(h), will be treated as indebtedness not represented by 
senior securities.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29559 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P

