
[Federal Register Volume 77, Number 45 (Wednesday, March 7, 2012)]
[Notices]
[Pages 13657-13659]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5514]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29973; 812-13493]


American Capital, Ltd., et al.; Notice of Application

March 1, 2012.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``1940 Act'') granting an exemption 
from section 12(d)(3) of the 1940 Act.

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    Applicants: American Capital, Ltd. (the ``Company''), American 
Capital, LLC (``AC LLC''), American Capital Mortgage Management, LLC 
(``ACMM''), and European Capital Financial Services (Guernsey) Limited 
(``ECFSG'').

SUMMARY: Summary of Application: The Company, AC LLC, ACMM, and ECFSG 
(collectively, the ``Applicants'') request an order (``Order'') of the 
Commission pursuant to section 6(c) of the 1940 Act granting an 
exemption from the provisions of section 12(d)(3) of the 1940 Act, to 
the extent necessary at such time as AC LLC and the AC Subs (as defined 
below) are required to become registered investment advisers under the 
Investment Advisers Act of 1940 (the ``Advisers Act''), in order to 
allow: the Company to continue to hold up to 100% of the outstanding 
membership interests of AC LLC; AC LLC to continue to hold up to 100% 
of the outstanding membership interests of the AC Subs and ACMM; ACMM 
to continue to hold up to 100% of the outstanding membership interests 
of American Capital AGNC Management, LLC (``AC Agency'') and American 
Capital MTGE Management, LLC (``AC Mtge''); and ECFSG to continue to 
hold up to 100% of the outstanding membership interests of European 
Capital Financial Services Limited (``ECFS'').

DATES: Filing Dates: The application was filed on February 12, 2008, 
and amended on March 11, 2011, November 23, 2011, February 22, 2012, 
and February 29, 2012.
    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 March 26, 2012, 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: Elizabeth M. Murphy, Secretary, Securities and Exchange 
Commission, 100 F Street NE.,

[[Page 13658]]

Washington, DC 20549-1090. Applicants, 2 Bethesda Metro Center, 14th 
Floor, Bethesda, MD 20814.

FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Senior Counsel, at (202) 
551-6819, or David P. Bartels, Branch Chief, 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 for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.

Applicants' Representations

    1. The Company, incorporated in Delaware in 1986, is a non-
diversified, closed-end investment company that has elected to be 
regulated as a business development company (``BDC'') within the 
meaning of section 2(a)(48) under the 1940 Act.\1\ The Company's 
primary business objectives are to increase its net operating income 
and net asset value by investing primarily in senior debt, subordinated 
debt and equity of middle market businesses with attractive current 
yields and potential for equity appreciation and realized gains. Most 
of the Company's investments are made in connection with buyout 
transactions, which are sponsored either by the Company or another 
entity. The Company also makes investments in certain structured 
financial products and alternative asset funds managed by AC LLC, as 
well as certain portfolio companies in which the Funds (as defined 
below) also are investors.
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    \1\ Section 2(a)(48) 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 1940 Act, makes available significant managerial 
assistance with respect to the issuers of such securities, and has 
elected to be subject to the provisions of sections 55 through 65 of 
the 1940 Act.
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    2. The Company is internally managed with an eight-member board and 
a senior management staff consisting of eight executive officers (one 
of whom also is a director). Seven of the eight current members of the 
board are not ``interested persons'' of the Company as defined in 
section 2(a)(19) of the 1940 Act. In addition to approving investment 
decisions, the Company's directors are actively involved in the 
oversight of the Company's affairs, and the Company relies extensively 
on the judgment and experience of its directors.
    3. The Company's alternative asset fund management business is 
conducted through AC LLC, a Delaware limited liability company that was 
created in 2007 and is a wholly-owned subsidiary of the Company. AC LLC 
currently manages a number of private investment funds and two public 
real estate investment trusts (collectively, the ``Funds'') through the 
following direct and indirect subsidiaries (collectively, the ``AC 
Subs''): American Capital Equity Management, LLC (``ACEM''); American 
Capital Equity Management II, LLC (``ACEM2''); American Capital Asset 
Management, LLC (``ACAM''); American Capital CRE Management, LLC 
(``ACREM''); AC Agency; AC Mtge; ECFSG; and ECFS.
    4. ACEM, ACEM2, ACAM, ACREM, and ECFSG are each wholly-owned by AC 
LLC. ECFS is wholly-owned by ECFSG. AC Agency and AC Mtge are wholly-
owned subsidiaries of ACMM. ACMM is owned by AC LLC, with one employee 
of ACMM owning a less than 25% economic (non-voting) interest, and AC 
LLC owning a 100% voting interest. The Company, AC LLC, and the AC Subs 
utilize certain overlapping personnel, as described in the application.
    5. The AC Subs generally earn base management fees based on the 
gross assets or net asset value of the Funds they manage, and certain 
of them earn incentive income based on the performance of the Funds. 
ACREM earns collateral administration fees based on the collateral 
balance in the Fund it manages.
    6. AC LLC and the AC Subs currently rely on the registration 
exemption set forth in section 203(b)(3) of the Advisers Act, which 
provides generally that an investment adviser with fewer than 15 
clients is not required to register with the Commission. However, the 
Dodd-Frank Wall Street Reform and Consumer Protection Act \2\ 
eliminated this exemption, and AC LLC and the AC Subs will, based on 
their assets under management, be required to register with the 
Commission.\3\
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    \2\ Private Fund Investment Advisers Registration Act of 2010, 
Title IV of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. Neither AC LLC nor any of the AC Subs qualify for 
any exemption from registration available under rules recently 
adopted by the Commission. Exemptions for Advisers to Venture 
Capital Funds, Private Fund Advisers With Less Than $150 Million in 
Assets Under Management, and Foreign Private Advisers, Release No. 
IA-3222 (June 22, 2011) (adopting release).
    \3\ Rules Implementing Amendments to the Investment Advisers Act 
of 1940, SEC Release No. IA-3221 (July 22, 2011). AC LLC and the AC 
Subs will be registered as investment advisers under the Advisers 
Act, and the Company will not acquire any interest in an investment 
adviser that is not registered under the Advisers Act.
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Applicants' Legal Analysis

    1. Section 12(d)(3) makes it unlawful for any registered investment 
company, and any company controlled by a registered investment company, 
to acquire any interest in the business of a person who is either an 
investment adviser of an investment company or an investment adviser 
registered under the Advisers Act, unless (a) such person is a 
corporation all the outstanding securities of which are owned by one or 
more registered investment companies; and (b) such person is primarily 
engaged in the business of underwriting and distributing securities 
issued by other persons, selling securities issued by other persons, 
selling securities to customers, or any one or more of such or related 
activities, and the gross income of such person normally is derived 
principally from such business or related activities. Section 60 of the 
1940 Act states that section 12 shall apply to a BDC to the same extent 
as if it were a registered closed-end investment company.
    2. Section 6(c) of the 1940 Act provides that the Commission may 
conditionally or unconditionally exempt any person, security or 
transaction from any provision of the 1940 Act or any rule thereunder 
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 1940 
Act.
    3. Applicants do not expect that AC LLC and the AC Subs would be 
broker-dealers that primarily engage in the business of underwriting 
and distributing securities issued by other persons. Accordingly, 
provided that the ``related activities'' phrase of section 12(d)(3)(B) 
is not interpreted to include investment advisory services, when it 
becomes necessary for AC LLC and the AC Subs to register as investment 
advisers, the Company's current ownership of AC LLC and the AC Subs 
could cause the Company to be in violation of the provisions of section 
12(d)(3).\4\ Therefore, Applicants request the Order pursuant to 
section 6(c) of the 1940 Act granting an exemption from the provisions 
of section 12(d)(3) of the 1940 Act, to the extent necessary at such

[[Page 13659]]

time as AC LLC and the AC Subs are required to become registered 
investment advisers, in order to allow: the Company to continue to hold 
up to 100% of the outstanding membership interests of AC LLC; AC LLC to 
continue to hold up to 100% of the outstanding membership interests of 
the AC Subs and ACMM; ACMM to continue to hold up to 100% of the 
outstanding membership interests of AC Agency and AC Mtge; and ECFSG to 
continue to hold up to 100% of the outstanding membership interests of 
ECFS.\5\
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    \4\ Rule 12d3-1 under the 1940 Act provides limited relief from 
the restrictions of section 12(d)(3). Applicants do not believe the 
Company may rely on this relief with respect to its investment in AC 
LLC or the AC Subs because AC LLC's and the AC Subs' gross revenues 
derived from securities-related activities will exceed the rule's 
quantitative limits for such revenues.
    \5\ The Company will only rely on the Order with respect to its 
investments in AC LLC and the AC Subs, AC LLC will only rely on the 
Order with respect to the AC Subs, ACMM will only rely on the Order 
with respect to AC Agency and AC Mtge, and ECFSG will only rely on 
the Order with respect to ECFS.
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    4. Applicants state that section 12(d)(3) was intended (a) to 
prevent investment companies from exposing their assets to the 
entrepreneurial risks of securities-related businesses and (b) to 
prevent potential conflicts of interest and certain reciprocal 
practices between investment companies and securities-related 
businesses.
    5. Applicants submit that the Company's retention of its majority 
ownership of AC LLC and the AC Subs does not raise the issues regarding 
entrepreneurial risk that section 12(d)(3) was designed to prevent. 
Applicants state that the form of organization of many securities-
related businesses has changed since 1940, when section 12(d)(3) was 
adopted, from general partnerships to structures that are characterized 
by limited liability. Applicants assert that AC LLC and the AC Subs do 
not expose the Company's stockholders to the risk of unlimited 
liability because each is organized as a separate entity whose owners 
have limited liability.
    6. Applicants also submit that the Company's retention of its 
majority ownership of AC LLC and the AC Subs does not raise the issues 
regarding conflicts of interest and reciprocal practices that section 
12(d)(3) was designed to prevent. Because the Company is the sole owner 
of AC LLC and the sole or majority owner of each AC Sub and will 
maintain a majority voting interest and economic interest in AC LLC and 
each of the AC Subs, Applicants believe that ultimately the interests 
of the companies are generally aligned and that the likelihood of 
conflicts of interest arising is low. Applicants also assert that there 
are generally no investment allocation conflicts between the Company 
and the Funds.\6\ Applicants represent that the procedures and policies 
that the Company has adopted with respect to AC LLC and the AC Subs and 
the methods of operations proposed will ensure that the Company will 
continue to be operated and managed in the interests of its 
stockholders and that ownership by it of AC LLC and the AC Subs will 
otherwise be consistent with the purposes fairly intended by the policy 
and provisions of the 1940 Act. Applicants also represent that, at such 
time as AC LLC and the AC Subs are required to register as investment 
advisers under the Advisers Act, they will maintain formal policies and 
procedures related to their operations (including appointing a chief 
compliance officer) that are designed to ensure that management of AC 
LLC and the AC Subs is conducted in the best interests of the Funds, as 
well as their shareholders.\7\
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    \6\ Applicants nevertheless state that they are focused on 
ensuring that any potential conflicts of interest are identified and 
addressed. Among other things, Applicants represent that, although 
the Company, AC LLC, and the AC Subs utilize overlapping personnel, 
their legal and compliance teams would generally implement 
procedures to restrict communications between investment 
professionals should a conflict arise. Applicants also represent 
that each maintains investment committees that follow consistent 
processes for investment decisions and vote separately on behalf of 
each fund. Applicants believe this structure facilitates the 
detection and avoidance of potential conflicts of interest 
throughout the investment process, as well as during the time a 
portfolio investment is held.
    \7\ Applicants also assert that the Company's ownership of AC 
LLC and the AC Subs does not raise concerns of ``propping'' because 
the Company is not dependent on AC LLC or any AC Sub either for 
revenue or investment advice and because the advisory subsidiaries 
will not issue any public securities to ``prop up.''
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    7. Applicants further submit that the conditions to the requested 
relief proposed in the Application will protect the Company from 
potential conflicts of interest and reciprocal practices by making it 
impossible for the Company to become a minority owner of AC LLC or any 
AC Sub, and the Company's board of directors will periodically review 
whether continued ownership of the advisory businesses is warranted. In 
addition, Applicants assert that the 1940 Act would not prevent the 
Company from engaging directly in the activities that it conducts 
through AC LLC and the AC Subs.
    8. Applicants state that registering AC LLC and the AC Subs as 
investment advisers and maintaining a majority of both their voting 
rights and economic interests, will enable the Company to continue to 
increase its earnings potential through AC LLC's existing advisory 
business, as well as other potential advisory business, and maintain 
and, ultimately, increase the profitability of the Company. Applicants 
also state that the organizational structure of the Company and its 
investment management affiliates could assist the Company in qualifying 
as a ``regulated investment company'' (``RIC'') under Subchapter M of 
the Internal Revenue Code of 1986.\8\
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    \8\ Taxation as a RIC relieves the Company of federal income tax 
on its net investment income and net realized capital gains, if any, 
to the extent that they are distributed to stockholders.
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    9. Applicants represent that the Company's management and its board 
believe that ensuring the ability to continue to own and invest in AC 
LLC is in the best interests of the Company's stockholders and its 
business. Applicants state that requiring the Company to divest itself 
of AC LLC and the AC Subs would cause substantial economic harm to the 
Company and, thus, the Company's stockholders.
    10. Accordingly, Applicants represent that the requested relief is 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the 1940 Act.

Applicants' Conditions

    Applicants agree that the Order of the Commission granting the 
requested relief shall be subject to the following conditions:
    1. The Company will not dispose of the interests of AC LLC or an AC 
Sub if, as a result, the Company would own, directly or indirectly, 50 
percent or less of the outstanding voting interests or economic 
interests of AC LLC or the AC Sub unless the Company disposes of 100 
percent of its membership interests in AC LLC or the AC Sub.
    2. The board of directors of the Company will review at least 
annually the investment management business of the Company, AC LLC and 
the AC Subs in order to determine whether the benefits derived by the 
Company warrant the continuation of the ownership by the Company of AC 
LLC and the AC Subs and, if appropriate, will approve (by at least a 
majority of the directors of the Company who are not ``interested 
persons'' of the Company as defined by the 1940 Act) at least annually, 
such continuation.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5514 Filed 3-6-12; 8:45 am]
BILLING CODE 8011-01-P


