The US House recently passed a bill that would allow registered investment companies to exclude business-development company fees from their disclosures of acquired fund fees and expenses, which, we believe, would be a detriment to investors.
While proponents frame the proposal as facilitating capital access for small businesses, others believe that it would have a negative impact on investors by undermining the fee transparency they depend on to make informed decisions.
The idea was introduced as H.R. 3383, the Increasing Investor Opportunities Act. It was included in the Invest Act, which passed the House on Thursday. It is not yet clear what the Senate plans to do with this proposal.
This so-called small-business provision would permit mutual funds, closed-end funds, and other registered investment companies to omit from their fee tables the costs they incur when investing in business-development companies, or BDCs.
This creates a dangerous precedent, allowing complex, fee-laden investment vehicles to be hidden from the comprehensive cost disclosure that has been a cornerstone of investor protection since the Investment Company Act of 1940 was signed into law.
The Fee Transparency Imperative
Investors have a fundamental right to understand what they pay for investment management. The acquired fund fees and expenses line item exists precisely because layered investment structures can obscure true costs. When a mutual fund invests in other funds, investors bear both the mutual fund’s direct expenses and their proportionate share of the underlying funds’ expenses. Without complete disclosure of these layered costs, investors cannot accurately compare products, assess value, or make informed allocation decisions.
BDCs are not simple, low-cost investment vehicles. They typically charge management fees of 1.5% to 2.0% of assets, plus performance-based incentive fees of 15% to 20% of profits above specified hurdle rates. Many BDCs also incur significant leverage costs, organizational expenses, and transaction fees. When a mutual fund or interval fund invests in BDCs, shareholders indirectly bear all these costs, in addition to the fund’s own management fees and expenses.
Excluding BDC fees from standardized disclosure doesn’t make these costs disappear; it simply makes them invisible to investors. This information asymmetry particularly harms retail investors who lack the resources and expertise to conduct independent due diligence on complex, multilayered investment structures.
Private Markets Require More Transparency, Not Less
This legislation arrives at a critical moment when private market investments are expanding into retail distribution channels. Interval funds, tender-offer funds, and other semiliquid structures are increasingly marketed as portfolio diversifiers to individual investors and financial advisors. Many of these vehicles gain private market exposure through BDC investments.
If we are serious about responsibly democratizing access to private markets, which Morningstar supports when the appropriate guardrails are in place, we must insist on transparency standards that meet or exceed those in public markets, not create carve-outs that obscure costs.
Retail investors entering private markets need more information, better disclosure, and clearer cost comparisons, not regulatory accommodations that make fee analysis more difficult.
Proponents of the legislation suggest that this proposal solves the “double-counting” problem. However, the argument that BDC fee disclosure is somehow double-counting fundamentally misunderstands the purpose of acquired fund fees and expenses reporting. This disclosure exists precisely to capture the economic reality that investors bear multiple layers of fees in fund-of-funds structures. When an investor pays 1% to a mutual fund that invests in BDCs charging 2% plus incentive fees, the investor’s true all-in cost might approach 4% to 5% annually. That’s not double-counting; that’s accurate accounting.
For context, more than 100 US open-end funds and exchange-traded funds had exposure to listed or unlisted BDCs as of Dec. 11, 2025. In total, these funds have more than $260 billion in assets. While many of these funds have minimal exposure, 14 have at least 10% of their portfolio invested in BDCs. For these funds, the expense ratios range from 1.17% to 13.69%, with the acquired fund fees ranging from 0.46% to 12.74%. On average, the acquired fund fees represent 79% of the total expense ratio for these funds.
Market Efficiency Requires Comparable Data
Standardized fee disclosure serves a critical market function beyond individual investor protection: It enables efficient capital allocation across the entire investment landscape. When costs are reported consistently and comprehensively, capital flows toward managers who deliver better net-of-fee returns. This competitive pressure benefits investors and strengthens market efficiency.
Creating exemptions for particular asset classes or investment structures fragments the data ecosystem and undermines comparative analysis. How should an investor compare an interval fund that discloses BDC fees against one that doesn’t? How should a financial advisor construct portfolios when some products report comprehensive costs while others hide significant expense layers?
The legislation also creates perverse incentives for product design. If BDC investments receive preferential disclosure treatment, fund managers might favor BDC structures over direct private market investments or other approaches. Not because BDCs offer superior risk-adjusted returns, but rather because they offer regulatory arbitrage on fee disclosure.
The Real Barrier Isn’t Disclosure—It’s Performance
Proponents suggest that fee disclosure requirements somehow impede capital formation for small businesses. This logic is backward. If BDCs and the funds that invest in them deliver value to investors after all fees, transparent disclosure of those fees poses no barrier to fundraising. Investors regularly accept high fee structures when they’re clearly disclosed and justified by strong net returns.
The real concern underlying this legislation appears to be that comprehensive fee disclosure might reveal that layered BDC investment structures are expensive relative to alternatives. But if that’s true, then the solution is not to hide the fees. Instead, it should be to improve performance, reduce costs, or help investors understand the value proposition more clearly.
A Better Path Forward
Morningstar supports expanding responsible access to private markets, including small-business investments. But this expansion must be built on a foundation of transparency, not opacity. Rather than creating disclosure carve-outs, policymakers should focus on:
- Developing enhanced disclosure frameworks specifically designed for private market investments that provide investors with standardized performance, valuation, and fee information.
- Supporting data infrastructure and research that enables better due diligence and portfolio construction across public and private markets.
- Creating investor education initiatives that help individuals understand private market risks, costs, and opportunities.
- Ensuring that product structures genuinely serve investor needs rather than simply facilitating easier distribution.
Fee transparency is not an obstacle to market innovation; it’s a prerequisite for sustainable market development. Accordingly, Morningstar supports reforms that expand private market access while strengthening, not weakening, the disclosure standards that protect investors and promote efficient capital allocation.
