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by Dechert LLP: In December 2018, the SEC announced two enforcement actions involving business development companies (BDCs) - one against Fifth Street Management, LLC, the former external registered investment adviser to two BDCs, and the other against KCAP Financial, Inc., an internally managed BDC. While the two actions involve wholly separate issues, they do demonstrate the SEC Division of Enforcement staff's continuing focus on the ever-growing BDC industry and provide some helpful takeaways for BDCs and their advisers. We discuss these two actions and the related takeaways below.

Fifth Street Management, LLC Enforcement Action

This action stems from (i) the improper allocation of expenses by Fifth Street Management to the BDCs then managed by it-Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp. (together, the "Fifth Street BDCs") and (ii) failures surrounding Fifth Street Management's policies and procedures relating to (a) expense allocation; (b) the valuation of two investments held by one of the Fifth Street BDCs; and (c) the misuse of nonpublic information about the Fifth Street BDCs' portfolio companies.

A. Improper Allocation of Expenses

According to the SEC's order with Fifth Street Management, Fifth Street Management allocated rent and other overhead expenses relating to its investment professionals and other employees to the Fifth Street BDCs even though the investment advisory agreements with tho......................

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