January 23, 2020 / 2:16 PM / a month ago

Regulator deals BDCs a blow on AFFE exemption

NEW YORK, Jan 23 (LPC) - The Securities and Exchange Commission (SEC) dealt a setback to Business Development Companies (BDCs) after declining to exempt the market from specific fee disclosure requirements that many see as an obstacle to liquidity.

In December 2018, the SEC provided hope to the market that it was open to exempting BDCs from the Acquired Funds Fees Expenses (AFFE) rule as it added a request for views from the market alongside its broader fund-of-funds reforms proposal.

But in December 2019, the SEC quashed the market’s hope for relief, citing a lack of clear evidence of the harm to the BDCs compared with Exchange Traded Fund counterparts, according to an account from the Coalition for Business Development (CBD), a lobby group for BDCs.

The AFFE calls for investment companies such as mutual funds to provide an additional line on their expenses outlining the fees and operating costs charged by the BDC they are investing in, which results in inflating the overall expense ratio of the fund. BDCs have pushed back on the requirement since its introduction in 2006.

BDCs were delisted by multiple fund indices in 2014 because of the AFFE, the CBD has argued, ultimately deterring a base of institutional capital from entering the market and depressing share prices.

“While we are disappointed in the SEC’s decision to not move forward with our proposal to harmonize BDC treatment with that of other operating companies, we urge the staff to take up another solution and adopt AFFE relief when it issues its final fund-of-funds proposal,” said Joseph Glatt, chairman of the CBD, in an emailed statement. “BDC rules must be updated.”

The SEC declined to comment.


Players in the BDC market are anticipated to continue to push for the removal of these investment vehicles from the AFFE requirement.

Casey Alexander, an analyst at Compass Point, characterized the SEC decision as a “near-term disappointment” for the market in a report published on January 21.

Others market participants agreed the battle is not yet over for BDCs, and were not surprised that the latest effort fell short.

“The public record showed overwhelming support for a correction to AFFE. The relief application was a long shot, but it was worth the attempt and we’re still optimistic. There are other avenues for the exemption, such as under the fund-of-funds rule,” said Brett Palmer, president of the Small Business Investor Alliance, a trade body representing BDCs.

BDCs face an uphill battle, especially amid pressures from other markets subject to the AFFE requirements.

“My sense is that the SEC staff could very well have struggled with the very issue of disparate treatment, and I suspect they might have anticipated strong opposition from other constituencies that would have remained subject to the AFFE requirements,” said Steve Boehm, a partner at law firm Eversheds Sutherland.

“I think CBD made a strong case for the exemption, and I think there really is a basis to distinguish the manner in which BDCs on the one hand and registered investment companies on the other should be regulated,” he said. (Reporting by David Brooke. Editing by Michelle Sierra.)

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