SEC Reporting Rule Change Lets Funds Exclude Certain Fees When Investing in Small Business Capital

The “Access to Small Business Investor Capital Act” is a highly technical bill, and Section 2 dives right into the weeds of how investment companies report their fees to the Securities and Exchange Commission (SEC). This change isn’t about cutting costs; it’s about changing how those costs are disclosed on registration forms like N1A, N2, and N3.

The Fine Print on Fund Fees

When you look at an investment fund’s prospectus—say, a mutual fund or an exchange-traded fund (ETF)—it has to list “acquired fund fees and expenses.” This is essentially the cost of the underlying investments the fund holds. If Fund A invests in Fund B, Fund A has to report the fees it indirectly pays to Fund B. This bill creates an exception to this reporting rule specifically for investments in Business Development Companies (BDCs).

BDCs are specific investment vehicles designed to invest in and lend to small and mid-sized private companies. They are often seen as a way to route capital to small businesses. Under this new rule, a registered investment company that invests in a BDC now has the option to exclude those indirect fees and expenses paid to the BDC from its total reported “acquired fund fees and expenses.”

What This Means for Your 401(k) Statement

Think of it like this: If your mutual fund (Fund A) is investing in a BDC, the BDC has its own management fees and operating costs. Currently, your fund has to roll those BDC costs into its own reported expense ratio, giving you a clearer picture of the total cost of ownership. This bill allows Fund A to file its registration statement without including those BDC fees in that specific line item. The fees still exist, and you are still paying them, but they are no longer required to be counted in the “acquired fund fees and expenses” disclosure.

For the fund managers, this is an administrative win and potentially a marketing advantage. By excluding these indirect BDC fees, the reported expense ratio on the registration statement might look lower, simplifying compliance for funds that frequently hold BDCs. However, for the busy investor—the 35-year-old trying to maximize their retirement savings—this change could make it harder to quickly assess the true total cost of the fund. If you rely on that “acquired fund fees and expenses” line to compare investment options, you might underestimate the total expenses of a fund that uses this new exclusion when investing in BDCs.