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Popular BDCs Attract Regulator Scrutiny

Business development companies (BDCs), such as FS Investment Corp., are coming under regulator scrutiny, according to a recent InvestmentNews article. The products, which allow individual investors to invest in privately owned companies, are part of the $1.6 trillion private-secured-debt market.

Congress created BDCs in the early 1980s, with the hope that growing, struggling, or small companies could use them to gain access to necessary capital. Though there are only about 28 publicly traded BDCs at the moment, the products are popular with investors (primarily because of the potential for high yields), and more issuers are gearing up to launch their own.

The illiquid products are risky, however, and they are meant to be sold only to sophisticated investors with high incomes and/or significant assets. Regulators are concerned that the increase in BDC availability could trigger increases in broker misconduct or investment fraud if regulator oversight of the products isn’t increased as well.

"We're seeing a strong increase in the number of BDC filers and filings, which have necessitated us to look at whether we should draft a specific review program just for BDC issuers," Arkansas securities commissioner A. Heath Abshure toldInvestmentNews.

The SEC adopted new rules for BDCs in 2006, but the rules didn’t include additional oversight. For more information on BDCs, read the full InvestmentNews article here.

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