Proposed BDC Legislation Aims to Fix Unintended Consequences of Fee Disclosure Rule
SBIA Expresses Support for Bill to Ensure Accurate Disclosure for Business Development Companies
WASHINGTON, DC (March 18, 2025) – The Small Business Investor Alliance (SBIA), the premier association representing Business Development Companies (“BDCs”) and lower middle market private equity and its investors, expressed strong support for legislation introduced by U.S. Representatives Brad Sherman (D-CA), Bill Huizenga (R-MI), Janelle Bynum (D-OR), and Andrew Garbarino (R-NY). The bill will exempt funds that invest in BDCs from including the acquired fund fees and expenses (“AFFE”) calculation in the prospectus fee table. The legislation has been referred to the House Committee on Financial Services.
“SBIA supports legislation that ensures investors receive the most accurate financial information and preserves the integrity of U.S. capital markets,” said SBIA President Brett Palmer. “The AFFE rule has inadvertently penalized BDCs, restricting their inclusion in key indices and reducing investment opportunities for retail investors. We appreciate the leadership of Representatives Sherman, Huizenga, Bynum, and Garbarino in advancing this important reform. We look forward to working with Congress to pass this bipartisan bill and ensure BDCs can continue fueling economic growth.”
BDCs are a critical source of capital for middle market companies across the country and are mandated by law to invest at least 70% of their assets in private and small-cap American businesses; however, that number is often closer to 95%. BDCs also provide retail investors with opportunities to participate in the growth and success of these businesses while growing their retirement funds.
SBIA looks forward to collaborating with lawmakers and industry stakeholders to advance this legislation.
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.
Read Rep. Sherman's press release >
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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 www.SBIA.org or call (202) 628-5055.
