SEC's Mary Jo White rips bill to ease restrictions on BDCs

Despite chairwoman's concerns, backers hope legislation will pass because of bipartisan support

Nov 13, 2015 @ 1:05 pm

By Mark Schoeff Jr.

Backers of legislation that would ease regulations for business development companies hope that bipartisan momentum will propel it to a House floor vote even as Securities and Exchange Commission Chairman Mary Jo White cautions that the changes could hurt retail investors.

The House Financial Services Committee on Nov. 4 approved the Small Business Credit Availability Act, 53-4. The bill would allow BDCs to raise their leverage limits from 1:1 to 2:1, increase the amount of money that they can invest in financial firms, and allow them to own asset managers and advisory firms.

A BDC is a closed-end investment company that invests primarily in small operating businesses. They are becoming increasingly popular investment vehicles, with net assets reaching $52.3 billion as of June 30 from $5 billion in 2003.

“We hope this bill, which is one of the very few that enjoy such strong bipartisan support, can move this year,” said Michael Gerber, executive vice president of Franklin Square Capital Partners, a firm that sponsors BDCs.


But Ms. White warned lawmakers that BDCs already expose investors to more leverage than other closed-end funds and that raising the limits would be dangerous.

“From my perspective, the proposed increase in leverage for BDCs gives rise to significant investor protection concerns, concerns which are heightened because most BDC shareholders are retail investors,” Ms. White wrote in a Nov. 2 letter to the committee.

She also expressed qualms about a number of other provisions of the bill, including BDC ownership of registered investment advisers.

But Mr. Gerber said changes were made to the bill during the committee markup prior to the Nov. 4 vote. They included restoring the SEC's authority to review potential conflicts of interest in BDC control of an RIA and adding more disclosure and rules for a BDC's decision to increase its leverage.

“We take the SEC's concerns seriously and believe that investor protections that have been added to the legislation go a long way to addressing those concerns,” Mr. Gerber said.

Another group backing the bill said that bipartisan negotiations led to many investor safeguards.


“This legislation has finally struck the right balance between capital formation and consumer protection,” said Kevin Hogan, president and chief executive of the Investment Program Association. “It will drive job growth among small- and middle-sized companies across the country.”

Investors increasingly turning to BDCs and other alternative investments to boost portfolio returns in low-interest-rate environments. But the risks in such assets were highlighted on Thursday in a Massachusetts securities case involving a BDC sponsored by AR Capital, which is owned by Nicholas Schorsch and William M. Kahane.

An opponent of the measure said that BDCs are much more expensive for investors than other regulated funds and that BDCs should make internal reforms before turning to Congress.

“If they want to grow further, they can reduce their fees, which are way out of line with funds that invest in similar assets,” said Marcus Stanley, policy director at Americans for Financial Reform.

Allowing them to increase their leverage and invest in financial firms, which might also use leverage in their investments, makes BDCs a riskier bet for those seeking higher yields, according to Mr. Stanley.

“It's uncalled for and quite likely to be harmful to investors,” he said.


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