House-Passed Plan Endangers Investor Protection with Hidden Fees

The recent passage of legislation by the US House of Representatives raises significant concerns regarding investor protections. The bill, known as H.R. 3383 or the Increasing Investor Opportunities Act, allows for the exclusion of business-development company (BDC) fees from mandatory disclosures. This decision may hinder transparency for investors, particularly retail ones, who rely on clear information to make informed choices.

House-Passed Plan Threatens Investor Protection

While advocates assert that the initiative will ease capital access for small businesses, critics argue it undermines necessary fee transparency. The legislation, part of the Invest Act, passed on a Thursday but awaits Senate action.

Impact of Excluding BDC Fees

Under this new provision, mutual funds and other registered investment companies can omit BDC fees from their fee tables. This shift jeopardizes the comprehensive cost disclosure established by the Investment Company Act of 1940.

• BDC fees typically range from 1.5% to 2.0% as management fees.
• Additionally, they may incur performance fees of 15% to 20% on profits.
• This situation complicates expense reporting, as mutual fund investors will face hidden costs.

Investors will likely be unaware of these layered expenses, which could significantly inflate the total cost of investments. Accurate fee disclosure is essential for enabling investors to compare products effectively, assess value, and make sound decisions regarding their portfolios.

Need for Greater Transparency

The current legislative changes come at a time of expanding private market investments aimed at individual investors. Structures like interval and tender-offer funds frequently utilize BDC investments, raising concerns over inadequate transparency. Critics argue that if we truly aim to democratize access to these markets, we must prioritize improved disclosure standards that match or exceed those of public markets.

Many support transparency-focused frameworks to help investors navigate the complexities of private market investments. Hiding costs does not address the real issues at play; it merely makes them less visible to investors.

Misconceptions About “Double-Counting”

Supporters of the bill contend that BDC fee disclosure constitutes “double-counting.” However, this perspective underappreciates the purpose of altered fund fee reporting. Comprehensive fee disclosure reflects the reality that investors are subject to multiple fee layers.

In 2025, over 100 US open-end funds and exchange-traded funds had exposure to BDCs, totaling over $260 billion in assets. Among these, 14 funds invested over 10% of their portfolios in BDCs, with expense ratios varying widely.

Challenges for Market Efficiency

Standardized fee disclosures are crucial for market efficiency. When fees are reported uniformly, investors can make better comparisons, promoting a competitive environment that fosters positive outcomes. Exemptions for specific asset classes complicate these comparisons for both individual investors and financial advisors.

The legislation could incentivize fund managers to prefer BDC structures for regulatory advantages rather than better performance. The problem is not that current fee disclosures obstruct the fundraising process; rather, it’s that BDC investments may struggle to justify their costs.

Path to Improved Disclosure

There is strong consensus that the progression toward private market access must rest on transparency, not obfuscation. Instead of allowing for disclosure exemptions, policymakers should consider:

• Enhancing disclosure frameworks for private market investments.
• Encouraging data infrastructure development for effective due diligence.
• Implementing investor education initiatives on private market risks and costs.

Fee transparency is integral to the sustainable development of the market. Comprehensive disclosure empowers investors and enhances decision-making while ensuring fair market practices.