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Alternative Investment Known as Non-Traded BDC on Radar of Regulators

First it was non-traded real estate investment trusts (REITs) that financially burned investors over the past year. Now another alternative investment product is causing similar concerns: Non-traded business development companies (BDCs)

BDCs invest in various debt and equity of small to mid-size businesses with debt instruments ranging from the senior-secured level to junk status. Despite their obvious risks, BDCs are quickly becoming the investment du jour. Non-traded BDCs raised almost $1.5 billion in 2011, compared with $369 million in 2010, and just $94 million in 2009, according to a Feb. 9 article by Investment News.

The growing popularity of BDCs has sparked concern among securities regulators. Reportedly, the North American Securities Administrators Association plans to intensify its scrutiny of BDCs by drafting a statement of policy on the products in the very near future. Among other things, the statement would contain a review of policies and standards governing any offering documents for a new fund.

The Financial Industry Regulatory Authority (FINRA) also is apparently interested in non-traded BDCs. According to the Investment News article, FINRA may issue an investor alert on non-traded BDCs as early as next month. As in investor alerts previously issued on non-traded REITs, FINRA’s non-traded BDC alert would likely highlight concerns regarding customer suitability and the overall lack of liquidity in non-traded investments.

As in the case of non-traded REITs, many critics of non-traded BDCs fear that some brokers may put their due diligence to clients on the backburner in favor of the high 7% sales commissions that are attached to the products.

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