Overview
On April 3, 2025, the U.S. Securities and Exchange Commission (“SEC”) issued a notice of proposed exemptive relief to FS Credit Opportunities Corp. and its affiliates (Applicants), introducing more flexible co-investment conditions for business development companies (“BDCs”) and closed-end funds (“CEFs,” and together with BDCs, “Regulated Funds”1).2 The proposed relief streamlines existing co-investment relief conditions, offering significant benefits to Regulated Funds through relaxation of board approval requirements, removal of limitations on Regulated Fund participation in follow-on investments (“follow-ons”) where affiliates have pre-existing investments, and a lower compliance burden on advisers, including a reduction in board reporting requirements. This new relief will allow Regulated Fund boards to reduce the amount of co-investment information they must review on a quarterly basis.
There is a 25-day public comment period for all exemptive relief orders before they are formally granted. If, within the 25-day period, the SEC does not receive a request for hearing on the application, the order will be issued soon thereafter.
Comparison of Existing and New Co-Investment Relief
The following table outlines the key differences between the existing co-investment relief and the proposed new relief requested by the Applicants:3
| Condition | Existing Relief | New Relief |
| Existing Investments | Prohibits Regulated Funds from participating in co-investments if certain affiliates had already invested. | Allows Regulated Funds follow-on investments where affiliates have existing investment. Required majority board approval, following procedures outlined in Section 57(f) of the Investment Company Act of 1940 (“1940 Act”),4 is required, unless the Regulated Fund and each other affiliate holding the security is participating in the acquisition in approximate proportion to its then-current holdings. The new relief will remove the “propping up” restriction of prior relief orders. |
| Co-Investment Policies | Requires all potential co-investment opportunities (including follow-on investments and dispositions) to be presented to the Regulated Fund board, potentially disrupting standard allocation processes. | The Regulated Fund board Required Majority Approval is needed only if there is an existing investment by an affiliate and either (1) the Regulated Fund intends to make a new investment, or (2) the Regulated Fund and its affiliates are not entering the transactions pro-rata to their then-current holdings. |
| Board Oversight | Requires quarterly reports to the board that include records of (1) all co-investments made by affiliates that were not offered to the Regulated Fund, (2) all follow-ons and dispositions made by an affiliate, and (3) information concerning co-investment transactions, including investments that affiliates made that the Regulated Fund declined. | Requires periodic board reporting, in the form requested by the board, to ensure Regulated Fund policies and procedures are reasonably designed to prevent the fund from being disadvantaged by participation in co-investment transactions. The Regulated Fund’s Chief Compliance Officer (“CCO”) must notify the board of material compliance matters and provide an annual report on the fund’s participation in co-investment transactions. |
The New Relief Conditions:
The SEC’s notice indicates that the Applicants have specified the following nine conditions to ensure that co-investment transactions are conducted fairly and in the best interests of investors.
- Same Terms: All participating funds and affiliated entities must acquire or dispose of the same class of securities simultaneously, at the same price, with the same conversion rights, financial reporting and registration rights, and with substantially identical other terms. Settlement dates for affiliates may occur up to ten business days after the Regulated Fund’s settlement, and vice versa. If only participating affiliates gain governance rights, such as board nomination or board observer appointment rights, the Regulated Fund board must have the opportunity to veto such nominees or appointees.
- Existing Investments: Follow-ons by a Regulated Fund where affiliates have existing investments are allowed if Required Majority Approval is obtained unless the fund’s affiliates each participate in the follow-on pro rata according to their existing holdings in the security.
- Expense Sharing: Expenses related to acquiring, holding, or disposing of securities will be shared among participants in proportion to their investment amounts (pro rata), unless borne by the adviser.
- Transaction Fees: 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 competitive interest, which is also divided pro rata among participants. No additional compensation is allowed unless permitted by the affiliated agent or affiliated broker sections of the 1940 Act applicable to BDCs or CEFs or as advisory fees per investment agreements.
- Co-Investment Policies: Advisers must implement policies ensuring fair and equitable allocation of co-investment opportunities among funds, the adviser considers the interests of the Regulated Funds when negotiating co-investments and the adviser inform boards of any material changes to co-investment policies.
- Dispositions: Each participating Regulated Fund adviser must receive notice of any proposed disposition by any fund affiliate of a co-investment and the Regulated Fund 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.
- Board Oversight: Board must approve and oversee the Regulated Fund’s 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 deems material.
- Recordkeeping: Detailed records of co-investment transactions and board materials must be maintained for the Regulated Fund’s existence plus two years, and are subject to SEC examination.
- Expiration of Relief: The SEC’s order of relief will expire if the SEC adopts a rule under the 1940 Act allowing co-investments of the described type.
Implications for Fund Sponsors:
The enhancements provided by the proposed exemptive relief offer significant operational benefits:
- Operational Efficiency: By aligning co-investment processes with standard investment allocation procedures, fund sponsors can reduce administrative complexities and focus on strategic investment decisions.
- Increased Investment Opportunities: The removal of the “propping up” condition and the ability of Regulated Funds to serve as acquiring funds in follow-on co-investment transactions opens new avenues for strategic investments, potentially enhancing portfolio performance.
- Board Autonomy: The proposed relief lessens the advance presentation requirements and no longer prescribes what regulated funds must report for board review; instead, the proposed relief allows for board determination of information requests which promotes more relevant review of fund activity.
The noticed exemptive relief the ongoing trend of the SEC to facilitate efficient investment structures while maintaining investor protections. The new conditions aim to harmonize the interests of participating Regulated Funds and affiliated entities, ensuring equitable treatment and reducing fund adviser and board compliance burdens.
Notably, the ninth condition of the proposed relief would cause the automatic termination of the SEC’s order granting the relief when the SEC adopts a rule on co-investments. The number of SEC exemptive orders permitting co-investments by BDCs and CEFs is in the hundreds. At this time, the SEC may be indicating that it has enough exemptive experience with co-investment transactions so that it can engage in rulemaking, which would reduce the time and effort expended on “pattern” exemptive relief.
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If you have any questions regarding Regulated Fund Co-Investment Transactions and the application and implementation of the exemptive relief, please contact your Investment Management Group attorney at Seward & Kissel LLP.
