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Lawmakers join BDCs' push for AFFE exemption

By David Brooke

By David Brooke

NEW YORK, March 9 (LPC) - A bipartisan group of lawmakers joined the fight to exempt business development companies (BDC) from Acquired Fund Fees and Expenses (AFFE) restrictions that stakeholders have claimed are an obstacle to more liquidity entering the market.

Republican Congressmen Steve Stivers and Bill Huizenga have joined Democratic members Gwen Moore and Brad Sherman in urging the Securities and Exchange Commission (SEC) to free BDCs from the AFFE disclosure requirement.

“Not only is the application of AFFE disclosure requirements to BDCs inconsistent with the statutory mandate for BDCs, it is also contrary to the SEC’s stated objectives for the AFFE disclosure,” the lawmakers said in a March 5 letter to SEC Chairman Jay Clayton.

“In order to restore congressional intent and correct the unintended consequences that threaten BDCs as a vehicle for allocating capital to small and mid-sized businesses, we encourage you to use your authority to tailor the AFFE rules to better align with the unique nature of BDCs and to ameliorate the harm done to BDCs,” the letter continued.

An SEC spokesman did not immediately return an email seeking comment.

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 BDCs 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.

In December 2018, the SEC solicited views from the market on the AFFE as part of its wider fund-of-funds reform proposal.

The lawmakers point to the decline in institutional ownership of BDC stocks since the adoption of the AFFE, which has reduced liquidity in the market. This followed the delisting of BDCs from multiple fund indices in 2014 due to the impact of AFFE on BDCs' expenses.

In the letter, the lawmakers argue that BDCs should be treated like operating companies, which are exempt from AFFE, reflecting the high expenses associated with sourcing and due diligence performed on private investments compared with other registered investment companies.

The SEC rebuffed BDC trade group Coalition for Business Development's (CBD) push for an AFFE exemption in a relief application in January, citing a lack of evidence that the market has been harmed due to the AFFE restriction.

Joe Glatt, chairman of the board of directors for the CBD, welcomed the latest intervention from lawmakers.

“We appreciate Congress’s continued interest in modernizing the laws and regulations governing the treatment of BDCs, ensuring we are able to meet our statutory mandate to fund America’s Main Street businesses,” Glatt said in an emailed statement. (Reporting by David Brooke. Editing by Kristen Haunss)