Experts warn SEC about perils of loosening private offering rules

Older investors and retirement savers could suffer, they say, but alternatives industry representatives tout portfolio diversification advantages

Sep 25, 2019 @ 2:15 pm

By Mark Schoeff Jr.

Some experts are warning the Securities and Exchange Commission that loosening the rules on purchases of private investments could hurt the elderly and retirement savers, while alternatives industry organizations are touting their portfolio diversification benefits.

The dueling points of view are on display in comment letters regarding the SEC's concept release on unregistered securities offerings. The deadline was Tuesday.

The concept release focused on simplifying and harmonizing regulations on the sale of nonpublic investments, or private placements.

One of the questions the SEC raised is whether it should amend the definition of an accredited investor. Currently, only people who meet certain wealth and income thresholds can buy private securities.

Michael Finke, an economics professor at the American College of Financial Services, and Tao Guo, an assistant professor at William Paterson University, cautioned that elderly investors who meet the sophisticated investor definition have diminished financial literacy and would be vulnerable to deregulation of the private market.

"Reduced financial capability among older investors suggests that the SEC should consider exempting investors over age 80 from accredited investor eligibility unless working with a financial advisor subject to a fiduciary standard of care," Mr. Finke and Mr. Guo wrote in their Sept. 22 comment letter.

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SEC Chairman Jay Clayton has advocated allowing more investors to get in on the ground floor of startup companies and giving more retirement savers access to private funds.

Ken McGuire, president of Aditum Alternatives and Aditum Asset Management, suggested that target-date funds would be the appropriate avenue for private offerings.

"Given their well-defined, typically long-term investment horizon and relatively predictable pattern of inflows and outflows, target date funds are an ideal vehicle for incorporating private equity into an individual's retirement portfolio," Mr. McGuire wrote in a Sept. 23 comment letter.

But Aaron Szapiro and Jasmin Sethi, both in Morningstar Inc.'s policy research department, cautioned that it would be difficult to give ordinary retirement investors access to private offerings through target-date funds.

"If the SEC were to make it easier for target-date funds to invest in private equity funds, we think those funds would largely end up in [individual retirement accounts] rather than in employer-sponsored accounts," Mr. Szapiro and Ms. Sethi wrote in a Sept. 24 letter. "As there are fewer protections for investors outside of employer-sponsored accounts, the SEC should proceed with caution."

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Anthony Chereso, chief executive of the Institute for Portfolio Alternatives, countered in a Sept. 24 letter that alternative investments can be "a vital part of a long-term investment strategy" and that retirement savers in defined-contribution plans "have largely been left on the sidelines."

Mr. Chereso encouraged the SEC to "eliminate the requirement to 'look through' 401(k) plans to each individual plan participant as long as the decision to offer an investment option on a plan's investment menu is made by [a federal retirement law] fiduciary or other investment professional."

The IPA recommended that the accredited investor standard be expanded to include individuals who are represented by a fiduciary adviser or a financial professional covered by the SEC's new Regulation Best Interest.

The Securities Industry and Financial Markets Association also backs expanding private offerings to more retail investors. In its Sept. 24 letter, the organization suggested the SEC eliminate restrictions on the purchase of closed-end funds that invest 15% or more of their assets in private funds.

But the Consumer Federation of America, Americans for Financial Reform, Better Markets, the Center for American Progress and the AFL-CIO said the SEC should halt its effort to loosen restrictions on private offerings until it has data showing the impact on investor protection and public markets.

"Despite mounting evidence of declining public markets and increased problems in private markets, the commission hasn't given serious attention to either issue in the concept release," Barbara Roper, director of investor protection at the Consumer Federation of America, said in a statement. "With its focus on harmonizing the existing exemptions, the commission is rearranging the deck chairs on the Titanic instead of fixing the hole in the boat. Worse, its proposals to expand retail investor access to private markets threaten to make the hole much bigger."

In 2018, $2.9 trillion in capital was raised in the private market compared to $1.4 trillion in the public market, according to the SEC.

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