- SEC proposes broader access to private assets for accredited investors
- Proposals include changes to performance fees and increased closed-end fund liquidity
- Critics say effort would help Wall Street at the expense of retail investors
WASHINGTON, Sept 30 (Reuters) - The US securities regulator proposed new regulations on Wednesday aimed at expanding access to private assets that have traditionally been reserved for professionals, potentially offering higher returns but also exposing everyday Americans to more risk.
The Securities and Exchange Commission's proposals are part of a broader push by the Trump administration to "democratize" private assets, such as private equity, private credit, real estate and venture capital that can potentially result in higher returns than traditional stock and bond portfolios.
This included enabling potentially hundreds of thousands of certified professionals, such as accountants, financial analysts and planners and licensed research analysts to access private investments as so-called accredited investors, a status that currently requires wealth and income tests or holding accredited professions such as being a broker-dealer.
Critics say the effort is a boon for Wall Street, coming at the expense of retail investors who may not understand the fees involved or risks of such assets, which are often hard to price and cannot be immediately redeemed for cash.
"As I've said repeatedly, exposure to the full dynamism of our markets should not be reserved for the wealthiest or for those who are deemed to be the most sophisticated," SEC Chair Paul Atkins said at a public meeting. "Private market investments, like any investments, are not without risks. But the mere presence of investment risk is not grounds to exclude individual investors in perpetuity."
Analysts' views differ as to the extent to which private investments typically outperform the stock market, however.
The three-member SEC, which currently has no Democratic commissioners, proposed changes to so-called performance fees for investment advisers and share redemptions at "closed-end" funds. It also issued five separate notices that it is considering allowing accountants, chartered financial analysts, certified financial planners, investment banking license holders and licensed research analysts to qualify as accredited investors.
"For too long, the accredited investor definition has focused on income and wealth as a stand-in for sophistication, and that choice has shut out many Americans who understand investing well, but have not yet built up a large personal balance sheet or income statement," said Republican SEC Commissioner Mark Uyeda.
If adopted, the changes would give asset managers more freedom to charge performance fees based on their clients' capital gains, a change SEC officials say would encourage such advisers to offer retail investors access to funds holding private assets where compensation is structured this way. Currently, investment advisers can only charge performance fees to "qualified" clients with a net worth or portfolio assets that surpass certain thresholds.
Several financial advisers told Reuters that such changes could create a perverse incentive to expose clients to greater risk.
"An adviser paid a share of gains has a reason to reach for risk, so I'd want strong valuation policies and informed client consent," said Jeff Judge of Chesapeake Financial Planners.
The second proposal would allow closed-end funds — investment companies that raise fixed amounts of capital — to redeem investor shares on a monthly basis and offer more classes of shares. Susan Ali, an attorney in the commission's investment management division, said the change would boost liquidity for shareholders. A regulatory advisory committee last year said such moves would give retail investors better access to private assets.
The changes are subject to public notice and comment before any decision on whether to adopt them.
Reporting by Douglas Gillison in Washington; Editing by Michelle Price, David Gaffen and Mark Porter
Source: Reuters