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Business Development Companies (“BDCs”) are a type of closed end investment company, created when Congress amended the Investment Company Act of 1940 in 1980. BDCs were first created to make it easier to invest in venture capital pools and private equity investments. Over the past decade, interest in BDCs has increased. BDCs provide funding to small and mid-sized businesses. Following the financial crisis, BDCs were able to provide loans to businesses that may not have been able to receive financing from more traditional sources. In 2009, the first non-traded public BDCs were issued, raising almost $100 million that year. The following year, sales more than tripled to $369 million. Non-traded BDCs hit their peak in 2014, raising $5.5 billion. In 2020, broker-dealers sold only $362.3 million of non-traded BDCs, the lowest volume since 2010. This article describes the regulations that govern BDCs: federal, state, and SRO. Next, the article examines recent enforcement actions concerning the sale of BDCs by broker-dealers. Finally, the article discusses concerns raised by the sale of non-traded BDCs to investors.

We study incentive contracts in asset management business under dynamic actions and relationships between an investor, a partner of an investment company, and a fund manager of the company. The investor cannot perfectly observe the partner and manager’s actions, and similarly, the partner cannot perfectly observe the manager’s actions. We show how the actions of the participants and the costs of their actions interact. For instance, the optimal effort of the manager falls in the partner’s fundraising cost. We extend the model to a case with an investor, a partner, and multiple managers. In this case, each manager’s effort rises in the effectiveness of the managers’ cooperation and falls in their other managers’ effort cost.

In this paper, we use the content of U.S. mutual funds' prospectuses to examine the informational value of funds' qualitative disclosures. We document significant heterogeneity in the cross-section of funds' qualitative disclosures, primarily attributed to characteristics at the investment company level. Using textual analysis, we decompose funds' qualitative disclosures into informative and standard content. Our results show that funds' risk-taking behavior and risk-adjusted-performance increase with the informativeness of their disclosures. Content-based updates of disclosures are informative about funds' future risk-taking and their future performance. Finally, we document evidence that investors react to some extent to the informativeness of fund disclosures.

Mutual fund investors pay over $100 billion every year in management fees to investment advisers. Throughout decades of litigation under Section 36(b) of the Investment Company Act, federal courts have yet to find that even a single management fee charged by an investment adviser for any period of time was excessive under the Section 36(b) standard. This paper argues that a combination of docile fund boards, hesitant federal courts, and a functioning, yet imperfect, market have allowed fund fees and expenses to decline in some areas, but not others. Outlier funds persist with unjustifiably high management fees, and have seemingly avoided market pressures. Fund boards and courts should play their legislatively assigned roles and check the ability of advisers to reap supracompetitive compensation.

In recent years, U.S. companies have raised more equity through private offerings available only to institutional and high-net-worth investors than through initial public offerings (“IPOs”) that are available to the general public. The number of U.S. public companies has also been steadily declining, and private start-up companies are frequently reaching billion-dollar valuations without opening up to the public for investment. In this report, Expanding Opportunities for U.S. Investors and Retirees: Private Equity, we examine whether U.S. policymakers should expand access to investments in private companies through private equity funds. A private equity fund refers to an investment vehicle that invests in the securities of private companies and that is not registered with the Securities and Exchange Commission (“SEC”) as an investment company. Private equity funds include buyout funds that acquire controlling stakes in businesses and venture capital funds that invest in young private companies with high growth opportunities. We find that private equity funds have a well-established performance history that justifies expanding investor access to them. We recommend three ways to do so. First, legislative reforms to expand access to direct investments in private equity funds. Second, SEC reforms to expand access to public closed-end funds that invest in private equity funds. And finally, Department of Labor (“DOL”) reforms to facilitate the ability of 401(k) plans to invest in private equity funds.

Over 26% of investment company assets are held in passive managed vehicles. Thus, it is important to understand what affects the performance of passive vehicles and how to choose among the multiple passive options following any index. This paper examines the factors that are important in explaining differences across funds following the same index and demonstrates how to select a passive vehicle that has a high probability of having the best performance in the following year.

Financial regulation poses special challenges because markets a constructed in the sense that they reflect a web of existing regulations. Moreover, financial regulation frequently comes as a package, such as the Sarbanes-Oxley Act of 2002 or the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 where multiple provisions are together injected into a regulatory setting. In this context, compliance costs with a particular requirement can be isolated, measurement of the benefits are more problematic. After Business Roundtable this calculus has become more perilous for regulators, particularly the SEC. This article suggests that a non-exclusive strategy to address the challenges posed by Business Roundtable is for the SEC to return to an earlier time of proceeding on an iterative basis. The process is principle based at its heart, but through enforcement and prudential actions that over time emerge from the principle a highly textured body of practices evolves that ultimately informs rule making. The article examines classic illustrations of such iterative regulation and makes the case that that such an iterative process is consistent with the most recent D.C. Circuit decision, Investment Company Institute v. CFTC.

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This paper investigates the role of boards in founder-managed firms with concentrated ownership in emerging markets. The existing literature suggests that this type of company, even if they decide to recruit high-profile individuals as directors, rarely empowers the boards in the corporate governance structure. The paper conducts a case study of AFK Sistema — a large Russian investment company which is controlled and managed by the founder. We observe that, contrary to expectations, in this company the founder empowered the board of directors at the same time focusing on recruiting independent (mainly foreign) directors to the board, in spite of the costs associated with this governance structure in the Russian context. Based on this case, we develop a theory of entrepreneurial boards where directors are expected to take the initiative in relations with both internal and external actors and where the empowerment of boards is necessary to provide them with proper motivation.

This paper analyzes the Securities and Exchange Commission's June 2013 proposal relating to money market funds. It argues that the proposal seeks to address a problem originating in the banking industry, not the MMF industry, and whose solution lies in banking regulation, not MMF regulation.

Professors John C. Coates, IV, and R. Glenn Hubbard have prepared a study entitled, Competition and Shareholder Fees in the Mutual Fund Industry: Evidence and Implications for Policy. I will refer to it henceforth as "Coates-Hubbard." The working paper was published in June of 2006 under the auspices of the American Enterprise Institute. Coates-Hubbard joins with the Investment Company Institute in claiming that fees for mutual fund advisory services are not excessive and that findings to the contrary are based on faulty scholarship. In truth, as is explained below, it is the Coates-Hubbard scholarship that is defective, featuring conclusions that are unsupported and unsupportable.

What are the duties of the independent trustees of an open-end registered investment company (a mutual fund) with respect to the fee paid by the fund for investment advisory services? Presumably, the trustees are responsible for ensuring that the fund does not pay too much for advisory services, but how do the trustees ensure that the fee is not excessive? To answer these questions, it is necessary to consider the structure of mutual funds and the respective interests of the independent trustees, the investment adviser and the shareholders.