Access to Small Business Investor Capital Act

Floor Speech

Mr. Speaker, at the outset, I thank the chair and the ranking member for getting us to this stage on this bill.

I also thank the cosponsors of this bill. Just from the committee, we have some 13 Democrats and 8 Republican members of the Financial Services Committee to cosponsor this bill. I especially thank the original cosponsors, Mr. Huizenga, Mr. Garbarino, and Ms. Bynum, for their efforts in bringing us to this point.

Mr. Speaker, this is a bipartisan bill. Like all of the most fascinating bills that come to the floor of the House, it deals with accounting. Like the most important bills that come to the floor of the House, it deals with accounting. In this case, it deals with accounting for the expense ratios of mutual funds.

This bipartisan bill, H.R. 2225, the Access to Small Business Investor Capital Act, makes a narrow technical correction of the Federal securities rules that had a major unintended consequence over the last two decades.

In 1980, Congress created Business Development Companies to facilitate capital formation and get that capital to small- and medium- sized businesses. I want to point out that, as we have had tighter and tighter bank regulations, banks have been reluctant to lend money to small businesses except where their risks are guaranteed by the Small Business Administration. SBA loans are, of course, limited.

We need BDCs to provide investment and to provide management assistance to growing businesses that are often underserved by traditional lending institutions.

By law, a BDC must invest at least 70 percent of their assets in small- and medium-sized domestic companies. Over time, BDCs have filled that critical gap in our capital markets by funding businesses and industries in geographies often overlooked by other financial institutions. BDCs are often the first institutional investors to step in.

This bill will play an important role in getting BDCs the capital that they then put into small- and medium-sized businesses. Calculations are that $120 billion more will be available to invest by BDCs because we expect a 30 percent increase in total investment. That is because this bill opens the door to mutual fund investments in BDCs.

Despite the success of BDCs, in 2006, the SEC adopted a rule that inadvertently discouraged capital flows into BDCs, constraining their ability to serve small business. The rule is part of SEC's Acquired Fund Fees and Expenses framework. AFFE requires mutual funds and other investment vehicles that invest in BDCs to disclose as management fees of the mutual fund the expenses and the overhead of the BDC. This is in radical opposition to how similar investments are treated.

If a mutual fund invests in the bank, the mutual fund, of course, lists as an expense of the mutual fund the expenses of the mutual fund. It does not list the overhead of the bank as if that is an expense of running the mutual fund.

Banks and BDCs are two of the major types of institutions that make business investments and business loans. The double counting of BDCs by counting those as expenses of the mutual funds simply makes it impossible for mutual funds to invest in BDCs.

The SEC rule artificially inflates the expense ratios of those mutual funds that are used to invest in BDCs, and so many of them don't. The result is misleading. Investors see a fund's expenses as higher than they actually are simply because the fund decides to invest in BDCs. This perception has led many fund managers to exclude BDCs from their portfolio, not because of performance but because of this distorted regulatory accounting.

The intent of this rule to provide transparency was well-meaning. The execution, when applied to BDCs, has been counterproductive.

Research by U.S. and international financial professors shows that after BDCs were removed from major U.S. stock indexes, as a consequence of this misguided AFFE rule, BDCs experienced a 29 percent to 33 percent lower investment growth as compared to similar potential investments.

The effects were not limited to the financial sector. Companies that rely on BDCs saw lower job creation with employment falling by between 1.5 to 6.5 percentage points compared to pre-exclusion levels.

The rule also fails to recognize the unique structure and mission of BDCs. Unlike passive funds, BDCs are actively managed and intentionally incur higher costs in order to provide tailored investment and advisory services to the small businesses that they invest in.

This model creates long-term value, but the AFFE rule unfairly penalizes it. This is, of course, a departure. The rule is inconsistent with the way the AFFE rule applies to mutual fund investments in rates and, more importantly, the way it applies to mutual fund investments in banks.

Because of this rule's miscounting, BDCs were removed from several stock indexes, as I pointed out earlier. If the SEC had the benefit of hindsight, I think it is unlikely that they would have adopted this rule, which contradicts the rule that they have for investments in banks and rates. That is why Congress needs to reverse this.

The Access to Small Business Investor Capital Act fixes this by allowing BDCs' acquired fund fees and expenses from disclosures, while maintaining transparency around the BDC management fees and costs. This restores fairness and aligns the regulatory disclosures with economic reality and gives investors a clear view of their actual costs. Importantly, it does so without rolling back investor protections or weakening SEC oversight.

Mr. Speaker, I would point out that this bill will provide $120 billion of capital to our small- and medium-sized businesses without a penny of cost to the American taxpayer and without any risk to the American taxpayer.

This bipartisan legislation will open the door to more investment in BDCs, thereby unlocking capital for small- and medium-sized businesses.

The most important thing that our financial institutions and the most important thing that our capital markets can do is provide capital for growing American enterprise, particularly small- and medium-sized businesses.

Business Development Companies play a vital role, and I am proud to work with a bipartisan group of Members. As I pointed out earlier, we have a substantial number of cosponsors, 25 in all, including 13 Democrats on the Committee.

We have seen bipartisan support for this bill, not only in this Congress but in prior Congresses. This is the Congress in which we actually have to get it adopted. The bipartisan legislation will open more investments and unlock capital for small businesses, as I have said.

Mr. Speaker, I urge my colleagues to support this bill, and I reserve the balance of my time.

Mr. Speaker, I want to point out that I think this is the best thing that Congress can do without risk or cost to the American taxpayer. It makes sure that small- and medium-sized businesses have access to capital.

With the BDC methodology, BDCs not only provide the capital but also provide the advice that so many growing businesses need.

Mr. Speaker, I thank the original cosponsors that I mentioned earlier and all the cosponsors of this bill. I once again thank the chair and the ranking member for getting us to this point.

Mr. Speaker, I urge my colleagues to support this bill, and I yield back the balance of my time.

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