Investment Company Act of 1940 — Section 12(d)(3)
Adams Diversified Equity Fund Inc.

April 30, 2015

RESPONSE OF THE CHIEF COUNSEL'S OFFICE
DIVISION OF INVESTMENT MANAGEMENT

IM Reference No. 2015122180
File No. 811-00248

Our response to your letter, dated April 30, 2015, provides assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the "Commission") under section 12(d)(3) of the Investment Company Act of 1940 (the "1940 Act") against Adams Diversified Equity Fund Inc. ("ADX"), a closed-end management investment company registered under the 1940 Act, under the circumstances described below. Specifically, ADX proposes to organize and acquire the securities issued by a wholly owned and controlled subsidiary, organized as a Maryland limited liability company (the "Adviser Sub") that will operate as an investment adviser and intends to register as such under the Investment Advisers Act of 1940 (the "Advisers Act").[1]

BACKGROUND

You state the following:

• ADX is a Maryland corporation and an internally managed closed-end investment company registered under the 1940 Act.
   
• For federal income tax purposes, ADX has made an election to be treated as a regulated investment company ("RIC") under the Internal Revenue Code of 1986 (the "Code"), and intends to continue to be so treated. As a RIC, ADX generally will not pay corporate-level federal income taxes on any net ordinary income or capital gains that it distributes to its shareholders as dividends. To maintain its RIC status, ADX must, among other things, meet specified source-of-income requirements. ADX will satisfy these source-of-income requirements if it derives, in each taxable year, at least 90% of its gross income from dividends, interest, payments with respect to certain securities, loans, gains from the sale of stock or other securities, net income from certain "qualified publicly traded partnerships," or other income derived with respect to its business of investing in securities ("Good RIC Income").
   
• ADX's board of directors ("Board") and officers desire to expand the scope of their advisory activities beyond the management of ADX's portfolio. Expanding the scope of advisory activities would allow ADX to use its existing resources (e.g., its investment professionals) to increase its gross revenue and income.
   
• ADX's Board and officers have determined that providing advisory services through an investment adviser entity that is wholly owned and controlled by ADX would be most beneficial to ADX's shareholders. This approach would allow ADX to shield itself from potential liabilities associated with such advisory activities to which ADX would be exposed were it to engage in those activities directly. Moreover, as the advisory business grows, creating a separate subsidiary to provide advisory services and receive investment management fee income would avoid concerns that ADX might fail to satisfy the source-of-income requirements necessary to maintain its RIC status under the Code.[2] You represent that the utilization of the Adviser Sub as a tax "blocker" entity in this manner is a lawful method of tax planning under the Code.
   
• ADX has obtained shareholder approval of its proposal to enter into the business of providing advisory services to U.S. and non-U.S. registered and unregistered investment companies, institutional investors, separate accounts, private clients and others through the Adviser Sub.

You further represent as follows:

• ADX will wholly own and control the Adviser Sub. ADX will not have an investment adviser within the meaning of section 2(a)(20) of the 1940 Act. Only persons acting in their capacities as directors, officers or employees of ADX will provide advisory services to ADX.
   
• The determination to enter into the advisory business through the Adviser Sub has been made by a vote of at least a majority of ADX's directors who are not "interested persons" as defined in section 2(a)(19) of the 1940 Act.
   
• In addition to information communicated to shareholders in seeking shareholder approval of the proposed arrangement, in each of its annual reports to shareholders, ADX will discuss the existence of the Adviser Sub and the provision by the Adviser Sub of outside advisory services as well as include an assessment of whatever risks, if any, are associated with the existence of the Adviser Sub and its provision of such services.
   
• The Adviser Sub will not make any proprietary investment that ADX would be prohibited from making directly under ADX's investment objectives, policies and restrictions or under any applicable law.
   
• In assessing compliance with the asset coverage requirements under section 18 of the 1940 Act, ADX will deem the assets, liabilities and indebtedness of the Adviser Sub as its own.
   
• The Board will review at least annually the investment advisory business of the Adviser Sub to determine whether such business should be continued and whether the benefits derived by ADX from the Adviser Sub's business warrant the continued ownership of the Adviser Sub and, if appropriate, approve (by a vote of at least a majority of its directors who are not "interested persons" as defined in the 1940 Act) at least annually such continuation. In determining whether the investment advisory business of the Adviser Sub should be continued and whether the benefits derived by ADX from the Adviser Sub's business warrant the continued ownership of the Adviser Sub, ADX's Board will take into consideration, among other things, the following: (a) the compensation of the officers of ADX and of the Adviser Sub; (b) all investments by and investment opportunities considered for ADX that relate to any investments by or investment opportunities considered for a client of the Adviser Sub; and (c) the allocation of expenses associated with the provision of advisory services between ADX and the Adviser Sub.[3]

LEGAL ANALYSIS

Section 12(d)(3) of the 1940 Act generally provides that it is unlawful for any registered investment company to purchase or otherwise acquire any security issued by any person who is, among other things, an investment adviser of an investment company or an investment adviser registered under the Advisers Act.[4] The Commission has indicated that the prohibited acquisitions under section 12(d)(3) are not limited to the original acquisitions of stock, but may occur as a result of subsequent events.[5]

In support of your request, you argue that ADX's ownership of the Adviser Sub raises none of the concerns underlying section 12(d)(3) of the 1940 Act. You state that these concerns were two-fold. First, Congress wished "to prevent investment companies from exposing their assets to the entrepreneurial risks of securities-related businesses," including those of an investment adviser.[6] Second, Congress wanted to prevent potential conflicts of interest and situations in which brokers, securities dealers and other financial intermediaries were in a position to dominate investment companies.[7]

You state that the first concern stems from the fact that, in 1940, when section 12(d)(3) was adopted, most securities-related businesses were organized as privately-held general partnerships.[8] You argue that, because the Adviser Sub is organized as a limited liability company, the proposed arrangement provides a level of insulation for the shareholders of ADX from the entrepreneurial risks of concern to Congress in enacting section 12(d)(3). You also argue the potential for conflicts of interest and overreaching is mitigated due to the fact that ADX: (i) will remain internally managed and will not have an investment adviser within the meaning of section 2(a)(20) of the 1940 Act; (ii) will wholly own and control the Adviser Sub; and (iii) will have ADX's Board oversee the advisory business conducted by the Adviser Sub. You note that ADX could provide advisory services directly and would be conducting these activities through the Adviser Sub for bona fide tax planning reasons. Finally, you state that this concern in the context of section 12(d)(3) was raised by Congress primarily with respect to an investment company's ownership of a brokerage or underwriting business and not the ownership of an advisory business.[9]

CONCLUSION

Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under section 12(d)(3) of the 1940 Act against ADX if ADX organizes and acquires the securities issued by the Adviser Sub. This letter expresses our position on enforcement action only, and does not express any legal conclusion or interpretive conclusion on the issues presented. Because our position is based on the facts and representations in your letter, any different facts or representations may require a different conclusion.[10]

[7] Id. at nn. 8-9 and accompanying text.

[8] See Exemption of Acquisitions of Securities Issued by Persons Engaged in Securities Related Businesses, Investment Company Act Release No. 19204 (Jan. 4, 1993), at n. 10 and accompanying text.

[9] Compare section 12(c)(2)(B) in H.R. 8935, 76th Cong. (3d Sess. 1940) at 30, S. 3580, 76th Cong. (3d Sess. 1940) at 30, and Investment Trusts and Investment Companies: Hearings on S. 3580 before the Subcomm. on Securities and Exch. of the S. Comm. on Banking and Currency, 76th Cong. (3d Sess. 1940), pt. 1, at 10 ("Senate Hearings") with section 12(d)(3)(B) of the 1940 Act. See also H.R. Rep. No. 76-2639, at 16 (1940); S. Rep. No. 76-1775, at 15-16 (1940); Senate Hearings, pt. 1, at 243.

[10] The Division of Investment Management generally permits third parties to rely on no-action or interpretive letters to the extent that the third party's facts and circumstances are substantially similar to those described in the underlying request for a no-action or interpretive letter. See Informal Guidance Program for Small Entities, Investment Company Act Release No. 22587 (Mar. 27, 1997), at n. 20. In light of the very fact-specific nature of ADX's request, however, the position expressed in this letter applies only to the entity seeking relief, and no other entity may rely on this position.

Incoming Letter

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