In a bout of good news for retail investors, the Securities and Exchange Commission’s Asset Management Advisory Committee (AMAC) unanimously approved a final report on how to increase retail investor participation in private investments.
AMAC’s report outlined various principles the SEC could promote to enable greater retail investor participation in the private investment market. The “design principles” encourage the SEC to:
1. Favor investment structures that offer at least limited redemption opportunities, or that can be traded on secondary markets without needing to liquidate an underlying private investment.
2. Allow retail investors to make investments managed by independent investment advisers who (and whose affiliates) (1) do not receive fees or other income from the underlying investments and who have an obligation to act in the best interest of investors (if broker-dealers) or (2) have a fiduciary obligation to the investors (if investment advisers).
3. Require standardized disclosure of important information about the private investment, particularly with respect to fees, risks, key terms and returns.
4. Enable retail investors to hold a diversified pool of private investments within their overall portfolio which should also comprise more liquid investments.
5. Use a regulated investment company (RIC) framework to balance investor protection with access to private investments.
Currently, most private investments are not available to retail investors. In the private investment landscape today, retail investors can participate in certain securities offerings that do not require registration with the SEC, but many of these offerings require that investors be “accredited” by earning more than $200,000 or being worth more than $1 million. Retail investors can also invest in open-end funds, such as mutual funds, and closed-end funds (e.g., bond funds, tender offer funds, and interval funds) that can hold no more than 15 percent of their investments in private funds. Thus, the current landscape for retail investors to participate in private investments is limited.
The report found that the overall demand for innovative investment products with higher returns will be more attractive to the increasing number of retirement accounts and retail investors with assets under management. In 2020, there were approximately $35 trillion assets under management that were in the retirement market. Additionally, over the past 15 years, 401(k) and individual retirement accounts have increased to about $19 trillion from $6 trillion.
The higher returns offered by private equity provide a unique opportunity for employees’ retirement plans to have marked improvement. According to the AMAC’s report, “PE funds offer potential benefits to retail investors compared to public equity investments due to their higher average returns and their diversification potential.”
AMAC’s report concluded that:
1. The SEC should consider permitting retail investors access to a wider range of private investments;
2. Wider access could initially be considered within a set of “Design Principles” that balance the potential benefits to retail investors from wider access to private investments with sufficient investor protection; and
3. The current RIC framework could serve as the basis on which to achieve the balance sought by the Design Principles.
The SEC would do good to listen to the advice that the AMAC has provided. Where it can, the agency should strive to expand access to private investment options for all retail investors.