Key Issues

How Can Washington Spark Growth in Jobs, Small Business Investment and the Economy?

By cutting regulatory red tape and modernizing taxes on business development companies.

There are 77 BDCs across the USA.

See how they’re investing in your state.

There are around 30 million small businesses in the USA. And they create roughly 2/3rds of all new jobs in the nation. But to create jobs and grow the economy, small businesses need access to capital. That’s where BDCs come in.

Business Development Companies were created by Congress in 1980 with overwhelming bipartisan support. BDCs are a job-creating engine that provides access to capital for American small- and medium-sized businesses. BDCs invest in and provide management expertise to these companies to help them grow.

BDCs invest 70% or more of their total assets in both public and private small- and mid-sized American companies. In addition to providing access to capital, BDCs also allow individual mom and pop investors access to rewarding investment opportunities that were once available to only wealthy individuals and institutional investors.

Big businesses find it easy to access credit. Smaller businesses don’t.

That’s where BDCs come in. Business Development Companies, or BDCs, help small businesses access the capital they need to grow and create jobs. After SBIA’s year-long education campaign, “BDCs Work for America,” legislation modernizing BDC regulation was signed into law in March 2017. The legislation allows the BDC industry to provide billions of dollars in additional growth capital to American small businesses through streamlined regulations and an optional increase in the leverage ratio. But in order to make small business loans, BDCs must be treated fairly.

Fix the Acquired Fund Fees and Expenses (AFFE) Rule

Acquired fund fees and expenses (AFFE) applies to funds that invest in other funds, including BDCs. It requires disclosure from the acquiring fund to include a separate line item showing its share of the acquired fund’s (BDC’s) expenses. It then adds this share of the BDC’s expenses to the acquiring fund’s overall expense ratio, creating the misperception that the acquiring fund’s expenses are higher than they are.

When the AFFE Rule was finalized in 2006, the SEC predicted that it would not adversely impact capital formation. Unfortunately, the rule has had a massive negative impact on the BDC industry, reducing liquidity, reducing institutional ownership, harming investors, and constraining the ability of BDCs to raise capital. Further, in 2014, the AFFE Rule had the unintended consequence of causing S&P, Russell and other entities that manage market indices to exclude BDCs from eligibility because it requires registered funds to include the operating expenses of BDCs in which they hold investments in their fee disclosure. As a result, many institutional investors liquidated their BDC holdings and exited the sector to avoid the distortive disclosure requirement.

The SEC should act now to stop the adverse impacts of the AFFE rule on BDC investors.

The Push for Tax Parity for BDCs

Since their creation by Congress in 1980, BDCs—like REITs—have been taxed as pass-through entities. Due to an oversight in the Tax Cuts and Jobs Act, BDCs are now taxed differently than REITs, despite their structural similarities and historically comparable treatment. Under the new tax law, shareholders of most pass-through entities, including REITs, are able to deduct 20% of their qualified business income. However, BDC shareholders are not afforded this deduction and are instead taxed at the individual rate. We are working with Congress to restore equitable tax treatment and ensure that BDC investors eligible for the 20% pass-through deduction.