SEC provides green light to new exemptive relief

On April 3, 2025, the US Securities and Exchange Commission (SEC) issued a notice of the co-investment exemptive application filed by FS Credit Opportunities Corp., et al. (FS Credit).¹ That application presented a new, principles-based model of compliance for the regulatory regime governing co-investment transactions among registered investment companies, business development companies (BDCs) and private funds on the same platform. As of April 14, the SEC has issued three additional notices to BDC platforms that have also requested this new principles-based approach to co-investment (Modernized Co-Investment Application).² If no hearing is requested related to the application filed by FS Credit by the end of the day on April 28, 2025, the SEC will likely issue an order granting the application filed by FS Credit the following day, and the orders for the other noticed applications will follow soon thereafter.

The Modernized Co-Investment Model – What’s Changing?

In the main, the Modernized Co-Investment Application shifts away from the prescriptive nature of the current exemptive relief model and provides platforms with the ability to demonstrate their compliance with their fiduciary obligations and the conditions of the exemptive relief with more discretion around the manner in which they achieve, document and test such compliance. In addition, the Modernized Co-Investment Application reduces the required involvement of a Regulated Fund’s board of directors in the day-to-day processes for co-investment transactions. Major notable changes include each of the following:

• Investment Processes and Procedures. Currently, investment advisers to Regulated Funds must be made aware of all potential co-investment transactions under a platform’s order, and Regulated Funds must be able to participate (if such participation is appropriate under the Regulated Fund’s investment objectives and strategies). Under the Modernized Co-Investment Application, however, there is no specific requirement to make investment advisers aware of all deals or to share deals with Regulated Funds, with exception for dispositions of investments made under a co-investment order in which the Regulated Fund has an investment (as detailed further below). Instead, the Modernized Co-Investment Application requires investment advisers to adopt and act in compliance with policies that are “reasonably designed” to ensure the “fair and equitable” allocation of potential co-investment transactions to the Regulated Funds. This more principles-based approach gives advisers greater flexibility to tailor their policies to their allocation processes while adhering to their fiduciary duties.

• Co-Investment Transactions for Investments Held by a Related Party. Currently, if a “Related Party”³ of a Regulated Fund is invested in an issuer, the Regulated Fund may not participate in an initial co-investment transaction under the order.⁴ In perhaps the most significant change to the restrictions in the current co-investment exemptive relief conditions, the Modernized Co-Investment Application lifts this prohibition, and permits Regulated Funds to participate in co-investment transactions where an Affiliated Entity has an existing interest in the issuer if the Regulated Funds’ boards of directors approves the transaction and makes certain findings with respect to the co-investment transaction.⁵

• Eligible Co-Investment Participants. Currently, co-investment transactions are limited to Regulated Funds and Affiliated Funds, the former of which includes closed-end management investment companies regulated under the 1940 Act, BDCs, and wholly owned investment subsidiaries of such companies, the latter of which includes certain types of private funds or entities that are exempt from regulation under the 1940 Act as specifically noted in the application and, for some platforms, “proprietary accounts.” The Modernized Co-Investment Application extends co-investment exemptive relief to the following entity types:
  • Sub-Advised Regulated Funds. Currently, to sub-advise a Regulated Fund, the Regulated Fund and its unaffiliated primary adviser must be listed as applicants and sign the application. The Modernized Co-Investment Application allows Advisers to serve as a sub-adviser to a Regulated Fund where an unaffiliated investment adviser serves as the primary investment adviser without naming the primary investment adviser, and notes that if an Adviser serves as sub-adviser to a Regulated Fund whose primary adviser is not also an Adviser, such primary adviser would be subject to limited conditions regarding transaction fees, expenses and compensation.
  • Joint Ventures. Joint ventures operating as unconsolidated subsidiaries of a Regulated Fund, with the caveat that for such entities to qualify, all portfolio decisions, and generally all other decisions in respect of the joint venture, must be approved by an investment committee consisting of representatives of the Regulated Fund and the unaffiliated joint venture partner.
  • Section 3(c) Funds. Rather than limit private funds to the exemptions from regulation as an investment company under Sections 3(c)(1), 3(c)(5)(C), or Section 3(c)(7) of the 1940 Act, the Modernized Co-Investment Application permits private funds relying on exemptions set forth under all of the subsections of Section 3(c) of the 1940 Act to co-invest as an “Affiliated Entity.”

• Compliance Policies and Procedures. The current model of co-investment exemptive relief contains specific conditions that, in effect, dictate the content of a platform’s policies and procedures for compliance with the order. In contrast, the Modernized Co-Investment Application provides flexibility, and requires advisers to enact policies that are “reasonably designed” to ensure:
  • the “fair and equitable” allocation of potential co-investment transactions to the Regulated Funds,
  • that the adviser negotiating the co-investment transaction considers the interest in the transaction of any participating Regulated Fund, and
  • that an adviser will make an independent determination of the appropriateness of a co-investment transaction and the proposed allocation size based on each participant’s specific investment profile and other relevant characteristics.

• Role of the Board. The current model of exemptive relief contains prescriptive requirements for a Regulated Fund’s board of directors –which effectively mandates the board’s involvement on a day-to-day basis in the consideration and approval of co-investment transactions. The Modernized Co-Investment Application shifts the board’s role to one of oversight, with heavy reliance on the business judgment rule. This change manifests in the following ways:
  • Transaction Approval. Currently, the members of a Regulated Fund’s board of directors that are eligible to vote on a potential co-investment transaction under Section 57(o) of the 1940 Act (Eligible Directors) must receive information regarding each co-investment transaction, and approval of the Eligible Directors is required for each initial co-investment and non-pro rata follow-ons and dispositions. Under the Modernized Co-Investment Application, approval of the Eligible Directors is not required for a co-investment transaction where no Affiliated Entity is invested in the issuer (as described below) or where the transaction is pro rata based on current holdings.
  • Review and Approval of Policies and Procedures. Prior to participating in any co-investment transaction under an order granted under the Modernized Co-Investment Application model, a Regulated Fund’s board of directors must:
    • review the adviser’s co-investment policies and ensure they are “reasonably designed” to prevent the Regulated Fund from being disadvantaged by participation in the co-investment program.
    • approve policies and procedures to ensure the Regulated Fund’s compliance with the order, which the Regulated Fund must also adopt.

• Reporting Requirements.
  • Periodic Reporting. The current model of co-investment exemptive relief enumerates specific types of transactions and events related to a platform’s co-investment program that must be included in quarterly and annual reports to a Regulated Fund’s board of directors. The Modernized Co-Investment Application significantly relaxes the prescriptive nature of this requirement.
    • Quarterly Reporting. Platforms will only be required to provide two categories of information on a quarterly basis: (i) a summary of any “significant” matters that may have arisen in the adviser’s implementation of its co-investment policies and/or the policies and procedures of the Regulated Fund that are designed to ensure its compliance with the co-investment order, and (ii) any other information that the Regulated Fund’s board of directors requests (and which, as a matter of best practice, is sufficient to permit the board to exercise its reasonable business judgment in overseeing the Regulated Fund’s participation in the platform’s co-investment program).
    • Annual Reporting. The adviser and CCO to each Regulated Fund are required to notify the board of material changes in the Affiliated Funds’ participation in the co-investment program.
  • Ad Hoc Reporting. The Modernized Co-Investment Application also requires the adviser and CCO to each Regulated Fund to notify the board of material compliance matters relating to the Regulated Fund’s participation in the platform’s co-investment program.

The Modernized Co-Investment Application- What’s Staying the Same?

While the Modernized Co-Investment Application changes the prescriptive nature of how firms comply with co-investment orders, many of the features of the current precedent for co-investment application remain in the Modernized Co-Investment Application, particularly with respect to the co-investment transactions themselves. These include the following:

• The “Same Time, Same Securities, Same Terms” Requirement. All participants in a Co-Investment Transaction are required to acquire, or dispose of, as the case may be, the same class of securities, at the same time, for the same price and with the same conversion, financial reporting and registration rights, and with substantially the same other terms. There are two limited exceptions to these requirements:
  • Differing Settlement Dates. The earliest settlement date and latest settlement date of each participant in a co-investment transaction may occur up to a maximum of ten business days apart.⁶
  • Right to Nominate a Director or Board Observer. If a participating fund, but not all of the Regulated Funds (i.e., the BDCs and registered investment companies on the platform), has a right to appoint an observer to the portfolio company’s board of directors, or any similar right, the board of directors of each Regulated Fund that does not hold this right must be given the opportunity to veto the selection of such person.

• Transaction Fees. Any “transaction fee” received by an adviser and/or a participant in connection with a co-investment transaction must be distributed to the participating funds pro rata to the amounts they invested or committed in the co-investment transaction.

• Expenses. Any expenses associated with acquiring, holding or disposing of any securities acquired in a co-investment transaction, to the extent not borne by the Adviser(s), will be shared pro rata among the participants, with the limited exception that expenses that are unique to certain participating funds can be borne solely by those participating funds.

• Board Approval of Certain Transactions. As discussed above, the approval of the Board of Directors of a Regulated Fund is no longer required for co-investment transactions where no Affiliated Entity is invested in the issuer or where the transaction is pro rata based on current holdings. Approval of a Regulated Fund’s Board of Directors continues to be required for follow-on investments and dispositions where the Regulated Fund is participating on a basis that is not pro rata to the current holdings of each Participating Fund. 

Rulemaking Foreshadowing? In an interesting inclusion, the Modernized Co-Investment Application contains a new condition stating simply that any rulemaking finalized by the SEC that governs co-investment transactions of the type described in the Modernized Co-Investment Application would, upon the date of its effectiveness, supersede the relief granted in the Modernized Co-Investment Application. This condition mirrors a condition contained in Ares Core Infrastructure Fund’s application for multi-class relief (as discussed below) and signals potential future movement from the SEC to regulate the co-investment transactions landscape from a rulemaking perspective.

Next Steps

Following the application and notice process for a Modernized Co-Investment Application, platforms may begin to consider changes to their processes for co-investing among one or more Regulated Funds and Affiliated Funds, including updating their allocation and co-investment policies and procedures at the adviser and Regulated Fund level to maximize internal efficiencies. The Modernized Co-Investment Application permits this flexibility; however, what remains from the current precedent are the mandate to follow fiduciary duties and the requirement for policies and procedures to be reasonably designed to ensure opportunities to participate in Co-Investment Transactions are allocated in a manner that is fair and equitable to every Regulated Fund. As a result, platforms should consider the importance of documentation, reporting and testing frameworks to meet all respective parties’ responsibilities under the new model of relief.

Extension of Multi-Class Relief to Private BDCs

In another new relief to BDCs, on April 8, 2025, the SEC issued an exemptive order to Ares Core Infrastructure Fund, a private BDC, that extends existing relief for closed-end registered funds by permitting the fund to issue multiple classes of shares with varying front-end sales loads, contingent deferred sales charges, early withdrawal charges, and/or asset-based service and/or distribution fees (multi-class relief). This was the first time the SEC has granted such relief to a private BDC, and the SEC has indicated its willingness to quickly grant the same relief to other private BDCs to the extent the applications for such relief are substantially identical to the Ares Application. The Ares Application provides for two conditions, the first of which requires compliance with the same rules adopted under the 1940 Act that is in applications for previously granted multi-class relief orders , and the second of which – like the Modernized Co-Investment Application – provides that such relief would immediately expire upon the effective date of any rule or regulation adopted by the SEC that permits BDCs to offer multiple classes of shares.

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1 FS Credit first requested this relief in 2019, but no SEC action occurred at that time. On March 20, 2025, FS Credit re-filed the same application and made two additional amendments before the SEC issued its notice.

_{2 See Blue Owl Capital Corporation, et al. (File No. 812-15715), IC Release No. 35529, April 9, 2025 (notice); BlackRock Growth Equity Fund LP, et al. (File No. 812-15712), IC Release No. 35525, April 8, 2025 (notice); Sixth Street Specialty Lending, Inc., et al. (File No. 812-15729), IC Release No. 35531, April 10, 2025 (notice).}

3 “Related Party” is defined as including any (i) “Close Affiliate” (defined as the Advisers, the Regulated Funds, the Affiliated Funds, and any other person described in Section 57(b) of the 1940 Act (after giving effect to Rule 57b-1 thereunder) in respect of any Regulated Fund, except for limited partners included solely by reason of the reference in Section 57(b) to Section 2(a)(3)(D) of the 1940 Act, and (ii) any person described in Section 57(e) of the 1940 Act in respect of any Regulated Fund, and any limited partner holding 5% or more of the relevant limited partner interests that would be a Close Affiliate but for the exclusion in that definition.

4 Certain platforms currently operate under an older model of co-investment exemptive relief that prohibits Regulated Funds from co-investing in issuers in which a Regulated Fund, Affiliated Fund, or affiliate of a Regulated Fund or Affiliated Fund is currently invested.

5 Like the current co-investment regulatory regime, this approval is not required if the transaction is pro rata based on current holdings.

6 Certain platforms currently operate under an older model of co-investment exemptive relief that does not include this exception.