SEC Division of Investment Management staff letter: Madison Capital Funding LLC

Paul G. Cellupica
Deputy Director and Chief Counsel
U.S. Securities and Exchange Commission
Division of Investment Management
100 F Street NE
Washington, DC 20549
Re: Madison Capital Funding LLC
Dear Mr. Cellupica:
On behalf of our client Madison Capital Funding LLC (“Madison”), an investment adviser registered with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) under the U.S. Investment Advisers Act of 1940, as amended (the “Advisers Act”), we are writing to request relief from the application of Rule 206(4)-2(a)(1)(ii) and Rule 206(4)-2(a)(3) under the Advisers Act, in connection with Madison’s administrative agent services for its loan syndication business. The basis for the relief requested is that (i) due to Madison’s development and implementation of certain internal policies and procedures pertaining to its administrative agent services, allowing Madison to commingle client assets with non-client assets in a single account would not materially affect the client protections provided under Rule 206(4)-2(a)(1)(ii), and (ii) because Madison’s clients have established separate bank accounts and either (1) receive quarterly account statements from the qualified custodians of those bank accounts or (2) are pooled investment vehicles that prepare and distribute audited financial statements in accordance with Rule 206(4)-2(b)(4), not receiving a quarterly account statement relating to the commingled account would not materially affect the client protections provided under Rule 206(4)- 2(a)(3). Background

1. The Loan Syndication Industry
   A significant number of non-bank lending organizations serve the needs of the commercial loan market. Non-bank lenders, particularly following the global financial crisis of 2008, serve a critical role in the U.S. economy by making loans available to companies in the middle market that may not have access to financing from traditional banks or other financial organizations.1 Typically, non-bank lenders fund only a portion of their loans to middle market companies and syndicate the remaining portion of the loans. In many cases, a portion of the loan will be sold to pooled investment vehicles or separately managed accounts that are managed by an SEC-registered investment adviser that is affiliated with the entity organizing the loan syndicate(s). The underlying investors in these pooled investment vehicles and separately managed accounts are commonly institutional and other sophisticated investors that seek the yields available on middle market loans. 1 Although non-bank lenders loan to organizations and companies of various size and type, the focus of this letter is on middle market companies because that is the focus of Madison’s loan syndication business.