SEC Eases Burden of Co-Investment for BDCs and Closed-End Funds

May 1, 2025

On April 29, 2025, the SEC granted an order to FS Credit Opportunities Corp. and its affiliates (the “Applicants”) that permits business development companies (“BDCs”) and closed-end management investment companies (“CEFs”, collectively with BDCs “Regulated Funds”) to participate in co-investment transactions with affiliated funds and accounts that would otherwise be prohibited by Rule 17(d) of the Investment Company Act.

This New Co-Investment Relief updates prior relief to create a much more streamlined co-investment process for Regulated Funds. The new relief includes:

• The elimination of board-established criteria requirements;
• The reduction of board reporting and board review, and approval requirements;
• The expansion of permissible co-investment entities, including where a “related party” has a pre-existing interest; and
• The elimination of specific allocation procedures requirements in favor of board-approved policies and procedures.

The New Co-Investment Relief does create its own conditions agreed to by the Applicants in their application and referenced by the SEC’s order:

1. Same Terms: As in prior relief, all co-investment transactions are conditioned on the requirement that transactions occur at the same time, same price, and with the same rights. Where only participating affiliates gain governance rights, like the power to nominate a board member, the Regulated Fund’s board must have the power to veto such a nominee.
2. Existing Investments: Follow-on investments by Regulated Funds where affiliates have existing investments are allowed if the required majority approval is obtained unless the fund’s affiliates hold the same security and each participates in the follow-on in the approximate proportion of the existing holdings.
3. Related Expenses: Expenses related to acquiring, holding, or disposing of securities will be shared pro rata among participants in proportion to their investment amounts, unless such expenses are borne by the adviser.
4. No Remuneration: Any transaction fees received by advisers or affiliated participants will be distributed pro rata. Fees held pending transaction completion must be deposited in a qualified bank account, earning a competitive rate of interest that is also divided pro rata among participants. No additional compensation is allowed unless permitted by the affiliated agent or affiliated broker sections of the Investment Company Act or as advisory fees pursuant to investment agreements.
5. Co-Investment Policies: Advisers must adopt and implement policies and procedures to ensure (1) co-investment opportunities are allocated in a fair and equitable manner; (2) the adviser negotiating the co-investment transaction considers the interests of the Regulated Fund when negotiating co-investments; and (3) the adviser provides notice of any material changes to co-investment policies.
6. Dispositions: Each participating Regulated Fund’s adviser must receive notice of any proposed disposition by any fund affiliate of a co-investment and must be given the opportunity to participate in the disposition on a pro rata basis. A disposition by a Regulated Fund of a co-investment must receive Required Majority Approval unless (1) each participating affiliate participates in the disposition on a pro rata basis, or (2) the disposition is of a tradable security.
7. Board Oversight: The board must approve and oversee the co-investment policies and procedures and ensure that (1) they are reasonably designed to prevent co-investment transactions that disadvantage the Regulated Fund, and (2) the Regulated Fund complies with the conditions of the SEC’s order. The Regulated Fund’s adviser and CCO are to deliver: (A) quarterly reports of information requested by the board and a summary of significant co-investment matters that arose during the quarter; (B) annual reports of information requested by the board and any material changes to the co-investment program and related policies and procedures; and (C) notification of any material co-investment matter that the CCO of the Regulated Fund considers to be material.
8. Recordkeeping: Detailed records of co-investment transactions and board materials must be maintained for the life of the Regulated Fund and at least an additional two years after it terminates. Such information is subject to examination by the SEC.
9. Expiration of Relief: The SEC’s order of relief will expire if the SEC ever adopts a rule under the Investment Company Act allowing co-investments of the described type.

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