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Home > Investor News > More Oversight Coming to BDCs?

More Oversight Coming to BDCs?

A turbulent economy often sends investors searching for alternative investments that offer promises of significant yield. Sometimes, however, those promises can lead investors astray, causing them to unknowingly put their money in unsuitable and entirely inappropriate investment vehicles.

Non-traded real estate investment trusts (REITs) have become one of those vehicles. In recent months, brokers who pitched non-traded REITs have found themselves at the center of scrutiny by regulators over investor complaints of misrepresentation and a lack of due diligence.

Many of the arbitration claims that have since been filed are by elderly investors who contend their brokers never made them unaware of the risks connected to non-traded REITs. As a result, many of these investors now face substantial financial losses because their dividends from their non-traded REIT investments have all but disappeared.

Now another alternative financial product is garnering the spotlight – and concern – of securities regulators: non-traded business development companies (BDCs).

Business development companies are considered closed-end funds that invest in the debt and equity of small to middle-market companies. The debt instruments of a BDC range from the senior secured level to below investment-grade.

A Feb. 9 article by Investment News sheds insight on BDCs, stating that the North American Securities Administrators Association is “gearing up to draft a statement of policy” on the products in the very near future.

“The attention is on the marketplace,” said Arkansas securities commissioner A. Heath Abshure in the story. Abshure says that one or two filings a year for a new non-traded BDC were considered typical. Now there are at least 10 either raising money or preparing to become offerings.

The Financial Industry Regulatory Authority (FINRA) also apparently is taking issue with non-traded BDCs, and may distribute an investor alert next month.

The concerns regarding non-traded BDCs are similar to those associated with non-traded REITs: Lack of transparency, illiquidity, high commissions and fees, complexity and hidden risks.

Those characteristics make it all the more imperative for independent broker/dealers to thoroughly do their homework before offering a BDC to clients.

“Firms should focus on what resources the sponsor has in-house to manage the portfolio and whether those managers have the technical expertise and understanding of the various sectors in which they are buying securities,” said Tony Chereso, chief executive of FactRight LLC, a due-diligence firm, in the Investment News article.


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