FINRA starts exams for non-traded BDCs

The US regulator governing broker-dealers is seeking information from unlisted business development companies to ensure their suitability for retail investors.

The Financial Industry Regulatory Authority is doing a sweep of non-traded business development companies to make sure they are a suitable product for retail investors.

The regulator, which governs broker-dealers, wants information from BDCs by 9 September after posting the exam on its website last week.  

Non-traded BDCs are usually sold through broker-dealers and FINRA wants to ensure there is adequate protection for retail investors who are often faced with high fees and products that are complex and have liquidity issues. The regulator flagged non-traded BDCs on its priority letter for 2016 at the beginning of the year.

In its survey, FINRA will target firms with the most sales or trades conducted through broker-dealers. The regulator is seeking information on the number of shares traded, the total amount of money broker-dealers make on a sale and the number of customers purchasing the BDC. FINRA also wants a copy of the BDC’s due diligence procedures. 

“These reviews start off as an information gathering process, it’s not a determination that a violation has occurred,” said Dan Sibears, FINRA’s executive vice-president of regulatory operations/shared services.  

The largest non-traded BDC managers operating are Franklin Square’s vehicles, sub-advised by Blackstone/GSO, with about $12 billion in assets. Corporate Capital Trust, where CNL Financial is the advisor and KKR the sub-advisor, also has a sizeable presence, with about $4 billion in assets. Franklin Square and KKR spokespeople declined to comment on the inquiry. 

Owl Rock Capital Partners and Golub Capital are also in the process of raising new non-traded BDCs. However, as they are being sold directly to institutional investors or wealthy individuals, they would not be subject to FINRA’s inquiry.