Business Context and Reporting Period
This Form 8-K is a current report filed by Fifth Street Finance Corp. (FSC) on August 4, 2016. The filing addresses significant legal and regulatory developments, specifically updates on pending securities litigation and an ongoing investigation by the U.S. Securities and Exchange Commission (SEC). Note: The request metadata referenced "Oaktree Specialty Lending Corp," but the source text explicitly identifies the registrant as Fifth Street Finance Corp.
Key Financial Metrics and Material Changes
This filing does not report standard operating financial metrics such as revenue, profit, cash flow, or debt levels. Instead, it details proposed financial settlements and fee waivers resulting from litigation:
- FSC Securities Class Action Settlement: Proposed payment of $14,050,000 to shareholders who purchased stock between July 7, 2014, and February 6, 2015. Approximately 99% of this amount is expected to be covered by insurance.
- FSAM Securities Class Action Settlement: Proposed payment of $9,250,000 to shareholders of Fifth Street Asset Management Inc. (FSAM) related to its IPO. This amount will be paid from insurance coverage.
- Shareholder Derivative Action Settlement: Includes a waiver of $1,000,000 in management fees per quarter for ten consecutive quarters (starting January 2018) by Fifth Street Management LLC. Additionally, the base management fee remains reduced from 2% to a maximum of 1.75% of gross assets for at least four years.
- Attorneys' Fees: The company agreed not to oppose a request for $5,100,000 in attorneys' fees and expenses for the derivative actions, to be paid from insurance.
Guidance, Outlook, Risks, and Contingencies
Litigation Status: All proposed settlements are contingent upon the completion of additional discovery by plaintiffs and final approval by the respective courts. Settlement agreements have not yet been filed with the courts.
Governance Enhancements: As part of the derivative action settlement, FSC agreed to adopt governance improvements, including provisions for board member equity ownership, enhanced disclosure of executive compensation, director independence, valuation policies, and the creation of a Board-level Credit Risk and Conflicts Committee.
SEC Investigation: On March 23, 2016, the SEC issued a formal order of private investigation regarding the Fifth Street Group of Companies. The investigation covers:
- Valuation of FSC's portfolio companies and investments.
- Expenses allocated or charged to FSC and Fifth Street Senior Floating Rate Corp (FSFR).
- Trading activities of Fifth Street Opportunities Fund (FSOF).
- Statements regarding fair value and expenses made to boards and investors.
- Compliance with the Investment Advisers Act of 1940.
- Accuracy of books, records, and accounts.
The company states it is cooperating with the SEC, has produced requested documents, and is maintaining communication with enforcement personnel.
Investor Verification Checklist
- Verify the final court approval status of the three proposed settlement agreements (FSC class action, FSAM class action, and FSC derivative actions).
- Confirm the actual insurance coverage payout for the $14.05 million and $9.25 million settlements to ensure no unexpected out-of-pocket costs.
- Monitor the progress and potential outcomes of the SEC's formal investigation into portfolio valuations and expense allocations.
- Review the implementation timeline for the agreed-upon governance enhancements and the specific terms of the management fee waiver starting in January 2018.
- Clarify the discrepancy between the request metadata (Oaktree Specialty Lending Corp) and the filing registrant (Fifth Street Finance Corp).