Business development company

A Business Development Company (BDC) is a company designed to help grow small and mid size companies (mostly privately owned companies). These companies are similar to venture capital funds, but are public stocks listed on the New York and NASDAQ stock exchanges. BDCs were created by Congress in the Small Business Incentive Act of 1980. To qualify as a regulated BDC, companies must be registered in compliance with Section 54 of the Investment Company Act of 1940. They are similar in structure to closed-end funds.

BDCs are similar to REITS in that they must distribute 90% of investment income; distributed income and capital gains are not taxed at the corporate level but are accessed to the individual shareholder.

On February 24, 2011 Wells Fargo & Company created the Wells Fargo Business Development Company Index, comprising 24 BDCs. In April 2011 UBS launched an exchange traded note (ETN) tracking the index.

The SEC mandates that a mutual fund must account for the expenses of a BDC as an "acquired expense".

"SEC rules nevertheless require that any expenses incurred by a BDC be included in a fund’s expense ratio as 'Acquired Fund Fees and Expenses.' The expense ratio of a fund that holds a BDC will need to overstate what the fund actually spends on portfolio management, administrative services, and other shareholder services by an amount equal to these Acquired Fund Fees and Expenses. The Acquired Fund Fees and Expenses do not impact a fund’s total return or index tracking error and are not included in a fund’s financial statements, which provide a clearer picture of a fund's actual operating expenses."