Private Ayes: SEC Votes Yes on Proposals to Expand Retail Access

More often, it might pay to perform.

The Securities and Exchange Commission on Wednesday approved a host of proposals aimed at expanding retail access to private-markets investments, including giving registered investment advisors much more ability to enter into performance-based compensation arrangements on the basis of capital gains in clients’ accounts. A separate proposal would make holders of designations like CFPs, CFAs and CPAs eligible as accredited investors.

The SEC also wants to encourage private sponsors to offer more alternative strategies for retail investors and regulated funds, Brian Daly, director of the Division of Investment Management, said in the meeting.

“Private market exposure is sought out and accessed by nearly every pension fund, every university endowment, every high-net-worth family office, and every other category of institutional investor,” Daly said. “But American retail investors have been unable to access the benefits of this arrangement, and therefore have not had access to many of the world’s most sought-after portfolio managers.”

Comp Competition

The SEC’s move on compensation comes less than a year after a Schwab report found that firms with performance pay generated more long-term revenue and served more clients. Performance-based comp aligns clients’ and advisors’ priorities and can evolve to help curb “excessive risk-taking,” Daly said. In another effort to potentially expand retail access to private investments, the commission also took aim at interval funds and closed-end funds in a proposal that would permit the latter to issue multiple share classes. If approved, the measure would permit monthly repurchase intervals and extend the deferral of first repurchase offers for interval funds.

“Some critics will argue that these proposals will not further investor choice in access, but rather serve as a gift to shady financial product sponsors,” Commissioner Mark Uyeda said in the meeting. “Interval structures provide periodic liquidity; they are not a promise of frequent redemption.”

The decision follows other deregulatory actions the commission has taken under SEC Chair Paul Atkins. In May, the agency:

• Proposed giving companies the option of filing semiannual financial reports instead of quarterly ones. 
• Proposed changing the rules for how companies report to investors, aiming to encourage more companies to do an IPO.
• Signaled its intent to rescind climate-related disclosure requirements.

Accreditation Nation. The SEC then approved notices that the agency is considering making certain credentials — CFP status and Finra licenses among them — sufficient for holders to be considered accredited investors. “If the commission were to finalize these designations, that would… [provide] additional non-financial pathways for investors to demonstrate their sophistication in the areas of securities, investing, and financial and business matters,” said Jim Moloney, the agency’s Division of Corporation Finance director.