A big portion of the cash used to finance loans is raised by listing BDCs on stock exchanges, where mom-and-pop investors can purchase their shares. Some of the largest public BDC’s carry the names of their private-equity backers, such as Ares Capital Corp. and TPG Specialty Lending Corp.
Yet due to the SEC rules, if mutual funds buy stock, they have to include BDC operating expenses in the expense ratios that funds must calculate and disclose to prospective investors. Because that would force mutual funds to overstate their costs, the BDC industry says most funds shun their shares.
Adding to frustrations is that the SEC regulations have a similar impact on the expense ratios of broad equity indexes like those operated by by Standard & Poor’s and Russell. So indexes exclude BDCs, further restricting investment because many mutual funds and exchange traded funds are specifically set up to track benchmarks.
In September, Apollo and Ares wrote a letter to the SEC laying out why they think BDCs should be exempt from the regulations, known as acquired fund fees and expense rules.
The rules are “misleading and materially overstate” operating costs, Glatt and Bloomstein said in their statement, speaking on behalf of a BDC trade group they founded. While they’ve sought support from lawmakers, Glatt and Bloomstein said their primary focus is getting the SEC to act.
The SEC didn’t respond to a request for comment.
U.S. Representative Steve Stivers, an Ohio Republican who’s sponsored legislation that would require the SEC to reexamine it rules, said there’s a good chance Congress will give BDCs relief in the year-end spending bill because the issue isn’t “controversial.”
Still, there are major political hurdles. With President Donald Trump bickering with Democrats over funding for his wall along the U.S.-Mexico border, financial firms could face long odds getting items from their wish lists added to any legislation.
But even if the BDC provision isn’t included, Stivers said he believes “Congress will continue to pressure the SEC.” In a statement, he added that “the SEC has seemed amenable to working with Congress to address this issue.”
Private equity firms have given lots of money to politicians over the years, and that should help them get what they want on BDCs, said Isaac Boltansky, a financial regulation analyst at Compass Point in Washington.