The SEC just proposed major updates that could make life easier for BDCs, closed-end funds, and their advisers when it comes to co-investing.
Under the proposed relief granted to FS Credit Opportunities Corp., the SEC is signaling a more streamlined, flexible approach to co-investment rules. While still focused on investor protection, the changes aim to ease operational and compliance burdens that have long frustrated fund sponsors.
Here’s what’s changing:
- Follow-ons are back on the table. Funds can now participate in follow-on investments even if affiliates already hold the security — something previously restricted — so long as either (a) they do so pro rata or (b) get board approval.
- Board involvement gets smarter, not heavier. Instead of rigid reporting rules, boards now have the discretion to decide what information they need to oversee co-investment activity. That means less time in the weeds and more focus on material issues.
- More room for business-as-usual. Allocation processes and oversight are being brought closer to standard practices, which reduces friction for fund advisers juggling multiple affiliated entities.
- Governance guardrails remain. The proposal still includes important investor protections — same-terms investing, board oversight, transparency, and recordkeeping — but in a way that emphasizes flexibility and fairness.
Why it matters:
If finalized, this relief could increase the number of attractive deals Regulated Funds can participate in — particularly follow-ons — while cutting back on time-consuming procedural hurdles. For fund sponsors, it’s a win in terms of efficiency, opportunity, and regulatory clarity.
What’s next:
There’s a 25-day public comment period before the SEC finalizes the relief. But the inclusion of an automatic sunset clause — relief ends when the SEC adopts a formal rule — suggests a broader rulemaking effort may be on the horizon.
Our Take:
This is the SEC acknowledging that the old one-size-fits-all approach to co-investing needed updating. The proposed relief reflects practical realities in how affiliated investment platforms operate today, without giving up key oversight. It’s a positive step — and possibly a preview of long-awaited rulemaking in this space.
Photo by Shlok Jethwa on Unsplash
