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.

Changes at a glance

• 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 they either do so pro rata, or 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.

Janaya Moscony, President, SEC3. As a former SEC regulator, Janaya has significant experience in the examination, implementation and enforcement of securities regulations. Contact: janaya@sec3compliance.com