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Investment Fraud and Broker Negligence

Business Development Companies (or BDCs)

Business Development Companies (or BDCs)

Business Development Companies (BDCs) have become increasingly popular investments over the last few years.  BDCs are similar to closed end mutual funds, in which an investor can invest in a number of companies at once.  The main difference between a mutual fund and a BDC is that BDCs generally invest in private, startup companies, while mutual funds tend to hold publicly traded securities.

FINRA (the Financial Industry Regulatory Authority) regulates the sales of Business Development Companies by brokerage firms and their financial advisors/stockbrokers.  According to an August 4, 2016 Investmentnews.com article, FINRA recently launched an examination into sales practices of BDCs by its member firms.  FINRA also discussed a number of issues with BDCs in its 2016 Regulatory and Examination Priorities Letter, which was issued in January 2016.

BDCs can provide retail investors access to investing in a basket of smaller, startup or emerging companies.  Moreover, BDCs are heavily regulated and must distribute over 90% of their profits to investors per SEC rules and regulations.  These products can provide some investment diversification and income.

On the other hand, BDCs tend to carry significant risk.  They can yield substantially different returns than broad market indices like the S&P 500 or the Dow Jones Industrial average.  Moreover, BDCs often invest in illiquid companies with little or no market price, which subjects these companies to “fair valuation”.  If the company has an adverse event, the “fair valuation” can drop dramatically, sometimes overnight.  This can expose BDCs to significant, sudden volatility and losses.

With the recent fiduciary rule set forth by the Department of Labor, the sales of some types of investment products, like non-traded REITs, have dropped substantially.  Some brokerage firms may turn to BDCs to fill the void that non-traded REITs have left.  Investors should be wary of investing a substantial portion of their portfolios in BDCs.

Israels & Neuman PLC is a securities law firm that represents investors in FINRA arbitration proceedings in all 50 states.  Our attorneys have represented over one thousand investors against many brokerage firms in the past, including LPL Financial, Merrill Lynch, Morgan Stanley, Smith Barney, Stifel Nicolaus & Company, UBS Financial Services, Oppenheimer, Charles Schwab, Wells Fargo Advisors, Ameriprise Financial Services, Raymond James Financial Services, ProEquities, Securities America, National Securities Corp., and many others.

All of our investment loss cases are taken on a contingent fee basis, meaning that we do not get paid unless we recover money for you.

If your financial advisor recommended that you invest in a BDC and you suffered losses in the BDC,  CONTACT ISRAELS & NEUMAN for a free case evaluation.

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