What the SEC is Getting Right — And Wrong — About the Coming Wave of Retail Investors

Recent recommendations by the SEC Private Investment subcommittee point to federal regulators having largely moved beyond the question of whether to open alternative investment opportunities to new classes of investors and now seriously grappling with when and how to make those changes…and how best to protect investors when they do. 

For decades now, I’ve seen investors prohibited from playing in the private equity, private debt and real estate markets go searching for better returns (the kinds of returns they see in private markets) and fall prey to subpar offerings. I’ve seen them exposed to increased risk due to less robust diversification. And I’ve been frustrated that the industry that serves them hasn’t developed like it could have–frankly–because the profit potential has been severely limited. 

All that could change, and could change soon, as the SEC considers adjusting its restrictions on so-called retail investors. 

The recent recommendations released by the Private Investments (PI) subcommittee of the Asset Management Advisory Committee (AMAC) of the SEC are, in many ways, a hopeful sign. They indicate that US regulators may be leaning toward opening access to the alternative investments markets–with reasonable and effective protections in place. The big question, as it usually is with regulators, is when any such action may take place. 

What the committee gets right; closed-end funds as an on-ramp to alternative investments, diversification & disclosures.  

 The committee’s recommendations aren’t groundbreaking. They point to closed-end funds (useful–and underused–instruments, in my opinion) as a possible ‘on-ramp’ for new entrants into the private markets. And that idea has merit. They acknowledge (if somewhat grudgingly) that alternative investments have, on average, ‘marginally superior’ returns. By the metrics most investors use, the returns are far superior–especially given the current muted stock and bond markets–but regulators look at things somewhat differently. They recommend standardizing disclosures and terms–something standout firms have been advocating for years. And they talk a lot about the need to protect investors. 

Why truly equal access is the best protection for new entrants into the alternative investment market. 

What’s missing from their report is the understanding that the very best protection for new entrants into the private equity, private debt and real estate markets is being given exactly the same access as everybody else. Special treatment, even (perhaps especially) special protections, separates the incentives of working with the smaller, less sophisticated retail end of one’s customer base and throws it out of alignment with the incentives of working with the larger accredited, qualified and institutional clients. If we’ve learned anything from history, it’s that.

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