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Congressional Report May Kill BDC Reform Bill

Posted in Investment Adviser Regulation

A congressionally mandated budget report may ring the death knell for proposed legislation that would increase the leverage limit for business development companies (BDCs).

The April 10, 2014 report by the Congressional Budget Office (CBO) estimates that the Small Business Credit Availability Act, H.R. 1800, if enacted, would cost taxpayers $354 million over the next 10 years.

H.R. 1800, introduced in April 2013, would

  • Reduce from 200 percent to 150 percent the asset coverage requirements that apply to BDCs;
  • Allow BDCs to invest in shares of investment advisers to BDCs;
  • Eliminate certain protections for holders of preferred stock issued by BDCs; and
  • Amend certain SEC rules and forms to allow BDCs to use streamlined securities offerings provisions that are available to other public companies.

The loss of federal tax revenues would result from the differences in taxation of income to individuals.  BDCs pass through income to their shareholders, so the income they generate typically is subject only to individual income tax.  In contrast, taxable income from “C” corporations is subject to taxation at the corporate level and at the individual tax level.  The report estimates that by shifting income from C corporations to BDCs, enacting the legislation would reduce federal tax revenues by $350 million between 2014 and 2024.

The Statutory Pay-As-You-Go Act of 2010 established budget reporting and enforcement procedures for legislation affecting direct federal spending or federal tax revenues.  The CBO report could block the legislation, unless its sponsors propose alternatives that would make the bill revenue neutral.