SEC Staff Closes Loophole On BDC Asset Coverage Requirements

In a Guidance Update published on June 30, 2014 by the SEC's Division of Investment Management, the staff closed a loophole that allowed business development companies (BDCs) with wholly owned Small Business Investment Company (SBIC) subsidiaries to avoid meeting asset coverage requirements when the SBIC subsidiaries issue debt that is not guaranteed by the Small Business Administration (SBA).

Sections 18(a) and 61(a) of the Investment Company Act of 1940 (1940 Act) generally require BDCs to meet asset coverage requirements when they issue "senior securities," including debt instruments. A BDC may be deemed an indirect issuer of any class of "senior security" issued by its direct or indirect wholly owned SBIC subsidiaries.