Increasing retail investor access to private markets gains bipartisan support

Legislation introduced by Reps. Anthony Gonzalez, R-Ohio, and Gregory Meeks, D-N.Y., would lift restrictions on closed-end funds' investments in unregistered securities.

Legislation that would increase retail investors’ access to private markets has gained bipartisan support.

The bill, the Increasing Investor Opportunities Act, was introduced earlier this week by Reps. Anthony Gonzalez, R-Ohio, and Gregory Meeks, D-N.Y. It would allow closed-end funds more latitude to invest their assets in private funds and to sell those shares to retail investors.

Under current restrictions based on guidance from Securities and Exchange Commission staff, closed-end funds are prohibited from investing more than 15% of their assets in private funds unless it sells those shares to accredited investors who invest at least $25,000.

Last November, Gonzalez introduced the bill by himself. It died at the close of Congress at the end of last year and had to be reintroduced this year in the new Congress. This time around, Meeks joined Gonzalez as an original sponsor of the bill. Both lawmakers are on the House Financial Services Committee.

Proponents of the bill say that allowing closed-end funds to make greater investments in private securities will boost capital formation for startup businesses and give retail investors more exposure to them.

“We’re very happy to see bipartisan support,” said Ken Fang, associate general counsel at the Investment Company Institute, a trade association for regulated investment funds. “That will hopefully build momentum into this Congress. It’s an issue that will ultimately benefit investors.”

Closed-end funds are similar to mutual funds except that they do not have daily redemption requirements. They trade on the stock exchange at a market price rather than their net asset value. They are governed by the Investment Company Act and are run by registered investment advisers.

“The ability to have closed-end funds invest more in private funds is, in general, a good thing,” John Harrison, executive director of the Alternative & Direct Investment Securities Association, wrote in an email. “This can also expand these CEF opportunities beyond just the few to more investors who, using their advisers to help in the decision-making, can make a world of difference.”

Another provision of the bill would prohibit hedge funds and their affiliates from acquiring more than 10% of a closed-end fund’s assets. In a statement, ICI said “activist investors” have been using takeover strategies to force liquidations that potentially harm investors.

“This bill also will strengthen the closed-end fund structure by eliminating a loophole that activist investors have used to extract short-term profits at the expense of retail investors,” ICI Chief Executive Eric Pan said in the statement.

The bill is being floated as the SEC is considering taking public comments on ways the agency can enhance investor protections related to private securities offerings.