Reconciliation Bill Falls Short on BDC Tax Parity, but Reform Momentum Builds

Washington has been in overdrive for the past few months due to the One Big Beautiful Bill Act, and it’s clear the blistering pace of policymaking will continue into the second half of 2025.

In Washington, there are three high impact steps to come: the modernization of the accredited investor definition; changes that substantially improve access to alternative investment funds in defined contribution retirement savings accounts like 401(k)s; and third, another push for more equitable tax treatment of business development companies.

Outside the Beltway, the news is equally impactful but not as promising. The North American Securities Administrators Association is expected to vote on a proposal to change its statement of policy regarding real estate investment trusts.

More to Do in Congress on BDCs 

While we celebrate major wins for our industry in the recent reconciliation bill, there were missed opportunities, such as not establishing parity for BDCs by aligning their tax treatment with similar entities, such as real estate investment trusts and S-Corp banks.

BDCs provide needed capital to businesses, enabling companies to grow and create jobs. By law, BDCs are required to support small- and mid-sized businesses and, as a group, invest more than 70% of their total assets in public and private U.S. operating companies with budgets under $250 million. BDC investments boost every industry while providing attractive, portfolio-diversifying returns for investors. They also fill a funding gap for businesses that traditional banks often don’t address.

Congress should return to and address this issue.

Action Expected on the Accredited Investor Definition  

More Americans deserve access to private market investment opportunities that can build wealth and expand America’s capital markets. Regulators and legislators should seize this moment to expand the pool of accredited investors while preserving appropriate investor protections.

The current outdated standard focuses solely on income and net worth thresholds rather than important factors like financial sophistication or acumen. There should be additional pathways for individuals to qualify as accredited investors, such as through examination and select credentials or job experience.

And individuals who receive individualized investment advice or individualized investment recommendations with respect to a private offering from a qualified professional, such as a broker-dealer or registered investment adviser, should also be able to qualify as accredited investors.

Paul Atkins, chairman of the U.S. Securities and Exchange Commission, has repeatedly cited the need to modernize the accredited investor definition. While revising a definition takes time, that work is on track, and the IPA is staying closely engaged with the SEC staff as it advances.

We’re also pleased that the House of Representatives voted on a broad, bipartisan basis to advance legislation that would enable individuals with certain licenses and pertinent education or job experience to qualify as an accredited investor and look forward to working to advance similar legislation in the Senate.

Retirement Plan Reforms Will Boost Alternative Investment 

The White House strongly supports the effort to expand access to private market funds for retirement savers and reportedly is on the verge of issuing an executive order that will underscore the importance of expanding access and choice in plans such as the 401(k).

Officials at both the U.S. Department of Labor and the SEC are taking a fresh look at dated rules that discourage 401(k) plans and their like from offering private market investment. They are looking to lower the barriers on every front possible.

Negative News at the State Level 

NASAA is expected to vote in September on changes to its statement of policy on REITs.

The proposal is out-of-date and has not been modernized in decades, but the proposed changes make little improvement on the original or the failed 2022 proposal. It remains fundamentally misaligned with the investment products it purports to regulate. And the proposal, despite being focused on REITs, would also regulate other investment vehicles, such as BDCs.

Unfortunately, new proposed amendments since NASAA’s last proposal reflect little new understanding of how these investments function and call for investor-level limits, which will only further discourage state-level registration.

There are countless failings with this proposal, but one fundamental flaw is a requirement for sponsors to monitor investor-level concentration limits. This information is unavailable to product sponsors and is only accessible to the broker-dealer or investment adviser who has a direct client relationship.

Replacing a financial professional’s best interest judgment with a rigid, one-size fits-all concentration limit undermines principles-based regulatory frameworks like Reg BI and the fiduciary duty applicable to broker-dealers and investment advisers, respectively.

Both standards are product-agnostic, requiring financial professionals to evaluate the individual needs and circumstances of each investor – regardless of asset class or product type.

NASAA’s proposed limits are incompatible with federal standards. And the contrast between state and SEC regulations is important. IPA’s analysis shows that the proposal fundamentally contradicts the operation of federal securities laws.

NASAA attempts to address some of the concerns surrounding the limits by offering state regulators a discretionary carve-out for accredited investors on an individual investor basis. But this confusing approach will result in further fragmentation and inject additional subjectivity into the system, producing inconsistent treatment across jurisdictions.

This is moving beyond a state issue. Confusion and contradiction between state and federal roles is already on the SEC’s radar. Commissioner Uyeda recently noted the need to reevaluate the roles of federal and state securities laws in regulating the registration or qualification of securities transactions.

Make Your Voice Heard 

Private capital is a driving force for American prosperity. Regulators and policymakers are looking for the industry’s experiences, data, and views as they consider reforms.

Everyone in the industry has an important role to play. Be sure you’re gathering data and stories based on your work that can inform these policy debates. Working together, leaders in the alternative investment space can encourage meaningful and lasting changes that support responsible growth, broaden investor access, and strengthen the role of private capital in the U.S. economy.

Anya Coverman serves as president and chief executive officer of the Institute for Portfolio Alternatives, an advocacy organization for the portfolio diversifying investment industry. In this role, she leads the organizations’ efforts to bring together top asset managers, product distribution partners and industry service providers, as well as drive industry progress through education and advocacy initiatives. Previously, she served as IPA’s senior vice president of government affairs and general counsel. Prior to joining IPA in 2017, Coverman was the deputy director of policy and associate general counsel at the North American Securities Administrators Association, the national association representing state financial regulators. She has also practiced corporate and securities law at the international law firm Greenberg Traurig LLP in Washington, D.C. Coverman received her J.D. from American University’s Washington College of Law and her bachelor’s degree from the University of Miami.

The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of AltsWire.

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