The proposed rule would require BDCs to change the way they disclose acquired fund fees and expenses (AFFE), which was first required by the SEC in 2006. It would permit a fund that invests 10% or less of its total assets in “acquired funds” to disclose AFFE in a footnote as opposed to the prospectus fee table.
David P. Cohen, executive director of the Coalition for Business Development, called the proposed rule “a first step to addressing the unintended negative consequences caused by the current AFFE disclosure requirements.” The SEC, however, leaves the underlying problem in place. “The AFFE rule requires funds to add the actual expenses that acquired funds incur to their own operating expenses, resulting in an inflated, artificial percentage for the ‘total annual fund operating expenses’ line item in the prospectus fee table,” Cohen said.
Tom Quaadman, executive vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said the current AFFE disclosure as it applies to BDCs ends up misinforming investors as to the true cost of investing in the acquiring fund. “This has resulted in the exclusion of BDCs from certain indices and an outflow of institutional investment,” he said.
Another SEC proposed rule is also raising concerns about available funding for small and medium-sized companies. The SEC wants to amend Rule 144 to revise the holding period determination for securities acquired upon the conversion or exchange of certain market-adjustable securities of issuers that don’t have securities listed on a national securities exchange.
“The proposed amendments to Rule 144 would eliminate a vital source of financing—market-adjustable convertible loans—for thousands of small and medium-sized businesses, such as ours, that generally cannot obtain affordable capital from other sources,” said Gene Cartwright, CEO of Guided Therapeutics.
Jef Lewis, chairman and CEO of BrewBilt Manufacturing Inc., had an even harsher assessment of the proposed rule, calling it “a misguided, and entirely unnecessary, intervention in our public capital markets…[which] would significantly increase the risk to convertible lenders of making such loans…driving up the cost of financing our businesses.”
April 2021
