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.