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AFFE Update: Bipartisan Senate Bill Introduced

This bipartisan bill would address unintended consequences of an SEC rule that has led to the “double counting” of BDC fees.

March 30, 2022 (Washington, D.C.) – The Small Business Investor Alliance (SBIA), the premiere association representing Business Development Companies (“BDCs”) and lower middle market private equity and its investors, expressed support for bipartisan legislation introduced by U.S. Sens. Steve Daines (R-MT) and Bob Menendez (D-NJ) that will make changes to a 2006 Securities and Exchange Commission (SEC) acquired fund fees and expenses (“AFFE”) rule for funds that invest in BDCs. This legislation is the companion bill to House legislation introduced by U.S. Reps. Brad Sherman (D-CA) and Bill Huizenga (R-MI), the “Access to Small Business Investor Capital Act”, which currently has 15 bipartisan cosponsors — including the most senior Members of the House Financial Services Committee.

“This legislation will streamline our nation’s securities laws and ensure that BDCs report the most accurate information to guarantee that the U.S. capital markets remain the most competitive, transparent, and liquid in the world,” said SBIA President Brett Palmer.

BDCs are a critical source of capital for middle market companies across the country and are mandated by law to invest 70% of their assets in private and small-cap American businesses; however, that number is closer to 95%. Currently, BDCs collectively manage more than $130 billion of investments in U.S. businesses.

Background on AFFE

  • Given the capital and personnel-intensive nature of actively sourcing and managing a portfolio of smaller private investments, BDC operating expenses are naturally higher than, for example, passive index funds. However, these expenses are already reflected in a BDC’s quarterly reported net asset value (“NAV”) and thus ultimately reflected in its trading price.
  • Requiring funds to report BDC expenses again under the current AFFE disclosure requirements results in a double counting of BDC expenses that artificially inflates acquiring fund expense ratios.
  • Between 2006 and 2014, the BDC industry experienced dramatic growth, magnifying the impact of the AFFE rule. As a result, the MSCI, Russell and S&P indices removed BDCs from their indices in 2014, which precipitated a 25 percent decrease in institutional investment (primarily by index funds) in BDCs. Between 2014 and 2018 there was another 13 percent drop in institutional investors in the BDC space.
  • Several unintended consequences of the current AFFE disclosure requirements for acquiring funds have proven harmful to retail investors: fewer analysts cover BDCs, reducing publicly available information for retail investors; reduced institutional ownership of BDCs denies retail investors the benefit of corporate governance oversight provided by sophisticated institutional investors; and, finally, reduced trading volume and liquidity of BDC shares increases the cost of capital for middle market businesses.

SBIA Fact Sheet on BDCs >

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About the Small Business Investor Alliance
The Small Business Investor Alliance (SBIA) is the premier organization of lower middle market private equity funds and investors. SBIA works on behalf of its members as a tireless advocate for policies that promote competitive markets and robust domestic investment for growing small businesses. SBIA has been playing a pivotal role in promoting the growth and vitality of the private equity industry for over 60 years. For more information, visit or call (202) 628-5055.

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