SEC moving toward opening private markets to more ordinary investors

Rulemaking agenda includes items on accredited investor definition, exempt offerings

Nov 20, 2019 @ 4:52 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission could issue over the next several months proposals to open private securities markets to more ordinary investors.

The agency's fall regulatory agenda, released on Wednesday, includes an item to reform the definition of who qualifies as an accredited investor eligible to buy non-public securities and a separate item to reform rules for unregistered, or exempt, offerings.

Both are categorized as being in the proposed rule stage. In the spring regulatory agenda, the "harmonization of exempt offerings" was at the "prerule stage," and the accredited investor item did not appear.

The proposed rules for the accredited investor definition and private offerings are both due by September. The SEC is not bound by the timetable on the agenda and often does not meet the self-imposed deadlines.

SEC Chairman Jay Clayton has indicated he wants to allow retail investors to buy private securities, especially for their individual retirement accounts. Currently those sales are limited to investors who meet income and wealth thresholds. He often notes that big pension plans invest in private offerings.

"I think we should be asking ourselves that question: Do I want the person who has a self-directed, defined contribution plan to have a different makeup of investments than a person who has a…defined benefit plan?" Mr. Clayton said Wednesday at the Securities Industry and Financial Markets Association annual meeting in Washington.

Brian McCabe, a partner at Ropes & Gray, credits Mr. Clayton for following through on a priority.

"These initiatives are expected to give Main Street investors more access to investments in the private markets," Mr. McCabe said. "It's nice to see Chairman Clayton continue to pursue the interests of Main Street investors."

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Earlier this year, the SEC issued for public comment a concept release on exempt offerings. In its comment letter, the Consumer Federation of America said the SEC hasn't determined the potential harm to ordinary investors that could occur if more of them buy private placements.

Giving retail investors more leeway in the private markets shouldn't be on the SEC's agenda, said Barbara Roper, CFA director of investor protection.

"They have a heavy burden to meet in proving this is a problem to be solved because there's no evidence of investor demand," Ms. Roper said. "They don't know enough about this market to make informed policy. What we have is private issuers wanting to expand access to the non-accredited investor population."

The regulatory agenda for the Department of Labor indicates that the agency still intends to release by December a revised fiduciary rule for investment advice in retirement accounts.

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