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Business development companies ask SEC to change fee-disclosure rule

A group of business development companies has filed with the SEC to exempt the BDC industry from making fee disclosures that they say prevent many institutions and mutual funds from investing in BDCs with public shares.

The disclosure in question, known as the "acquired fund fees and expense" disclosure, requires BDCs to aggregate and display the fees charged by any funds they invest in. Because a BDC's share price already reflects the fees it must pay for those funds, disclosing the acquired fund fees separately double-counts the expenses, wrote the group, which is led by Ares Capital Management LLC and Apollo Investment Management LP.

The policy discourages mutual funds and institutional investors from purchasing BDC stocks, according to the companies' filing with the SEC. The BDC's expenses appear "grossly overstated" and could mislead mutual fund investors, the companies wrote.

Real estate investment trusts, which are structured similarly to BDCs, have long been excluded from the fee-disclosure requirement.

The BDCs' collective request for a similar waiver from the fee disclosure is a positive development for the space, Compass Point analyst Casey Alexander wrote following the filing. A waiver from the disclosure would allow BDCs to be included in large indexes and in mutual fund portfolios, giving the companies higher price-to-net-asset-value multiples and "significantly greater liquidity," the analyst said.

Ares Capital Management manages the BDC Ares Capital Corp., while Apollo Investment Management is the investment adviser to the BDC Apollo Investment Corp.