On 27 April 2026, the staff (Staff) of the Securities and Exchange Commission (SEC) issued a no-action letter that extends to open-end funds, subject to certain conditions, exemptive relief that permits business development companies (BDCs) and registered closed-end funds to co-invest alongside affiliates in transactions otherwise prohibited under Sections 17(d) and 57(a)(4) of the Investment Company Act of 1940, as amended. This relief opens the door for open-end funds to participate, subject to their 15% liquidity restrictions, in co-investment transactions that were previously unavailable to these funds.
Conditions of No-Action Relief
Under the no-action relief, an open-end fund may rely on an existing co-investment order as a “Regulated Fund,” a defined term that previously covered only BDCs and closed-end funds, provided that its adviser or sub-adviser is an “Adviser” under the applicable order and the fund complies with all terms and conditions. Those conditions include participating on the same terms as other co-investment participants and adhering to the adviser’s allocation policies and fiduciary duties.
In addition, approval of co-investment transactions by a “Required Majority” of disinterested directors may be delegated to a committee of at least three disinterested directors, provided the committee reports its determinations to the full board. Such delegation is available not just to mutual funds but to all funds relying on the order.
What Does This Mean?
Historically, mutual funds have been excluded from co-investment opportunities, even where their mandates overlapped with affiliated vehicles. While mutual fund participation was contemplated in the initial FS Credit Opportunities Corp. exemptive order applications, it was removed from the final order issued in 2025. The new no action relief permits more holistic allocation of investment opportunities across clients without requiring amendments to existing orders.
Any co-investment activity remains subject to the fund’s liquidity risk management program under Rule 22e-4, including the 15% limit on illiquid investments. The no-action relief is limited to co-investment orders with conditions substantially identical to those in the FS Credit order, but it does not apply to other exemptive orders.
Further contributions to this article by Tristen Rogers and George Zornada.
