It wouldn't take much to 'Bring back Main Street'

It wouldn't take much to 'Bring back Main Street'
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President Trump recently launched an ambitious plan to “bring back Main Street,” including a complete overhaul of the U.S. tax code. But one simple way to reinvigorate Main Street requires little more than modernizing a few outdated regulations that are restricting the ability of small businesses to access the capital they need to grow.

America’s small- and mid-sized enterprises are poised for record expansion, if only they had the financing. During the recovery from the economic downturn, big business has benefitted from a record number of loans.


At the same time, however, small business lending has been “anemic,” according to a recent U.S. Treasury assessment — barely rebounding to pre-recession levels. Since 2012, demand for capital from companies with annual revenues of less than $100 million has consistently outstripped supply, according to the Private Capital Access Index compiled by Dun & Bradstreet and Pepperdine University. 


In the wake of regulations adopted after the financial crisis, traditional big banks effectively abandoned the small and middle markets. In response, the country’s Main Street businesses increasingly turned to business development companies (BDCs) for critical financing. In fact, BDC investments have tripled over the past 10 years and now represent more than $87 billion of the U.S. economy. 

Congress established BDCs almost 40 years ago to support smaller companies struggling to obtain capital from traditional lenders who have primarily focused on loaning to larger companies. BDCs are required by statute to function much like operating companies, charged not only with financing small- and mid-sized businesses, but also with providing growth strategies and operational advice.   

BDCs are regulated, however, more like traditional investment funds and are often subject to ill-suited rules that unintentionally restrict their ability to provide vital capital to Main Street businesses in need of cash.

For example, unlike their investments in other operating companies, mutual funds investing in BDCs are required by the Securities and Exchange Commission (SEC) to report the operating expenses of the BDC as though they are fees and expenses of the mutual fund.

Since its adoption in 2014, this reporting requirement has forced funds that invest in BDCs to vastly overstate their fees and overhead costs to potential investors by as much as 1,600 percent, in one case.   

By requiring index funds to artificially inflate their expense ratios, this seemingly minor reporting requirement compelled some of the largest index fund managers — like S&P and Russell — to eliminate BDCs from their indices, forcing many investors to sell their interests in BDCs,  further limiting the amount of investment capital available to Main Street businesses. 

While they are subject to similar reporting and disclosure requirements as operating companies, BDCs are not able to benefit from streamlined regulations that have reduced the administrative burden and enhanced the operational efficiency of these companies.

For example, other operating companies can file SEC disclosure forms that simply reference reports they had previously filed with the commission rather than sending full copies with each filing.

This tiny reform saved companies hundreds of hours (and reams of paper) compiling and mailing thousands of pages of information the SEC already had. Despite supporting the country’s small- and mid-sized businesses, BDCs have not been afforded the advantage of this administrative reform. 

Minor regulatory relief, such as streamlined SEC filings, may appear trivial. But, without it, BDCs must file hundreds of pages of duplicative information, not only wasting time and money, but often hampering their ability to rapidly and efficiently make capital accessible to the Main Street businesses whose success hinges on their ability to respond quickly to changing market dynamics.

Legislators on both sides of the aisle have expressed support for strengthening the country’s Main Street businesses, and there are several easy ways to do this without major legislation.

Slight changes in how the SEC interprets and applies regulations could produce significant benefits and provide Main Street businesses the capital they need to serve as critical engines of growth for the American economy.

Joseph Glatt is Chief Legal Officer at Apollo Investment Corporation, a publicly traded, non-diversified business development company and a member of the Coalition for Small Business GrowthJoshua Bloomstein is General Counsel at Ares Capital Corporation, the nation’s largest publicly traded business development company and a member of the Coalition for Small Business Growth.