Five Questions for: ADISA Board of Directors President Jade Miller

In today’s installment of “Five Questions for…” our editorial team interviewed Jade Miller – president of the board of directors for ADISA, the Alternative & Direct Investment Securities Association, and president of capital markets for Bourne Financial Group – on the latest alternative investment trends and opportunities, as well as recent legislative and regulatory news. Miller sat down with The DI Wire preceding ADISA’s Spring Conference, April 8-10, 2024, and looks forward to the educational event which will showcase industry offerings and opportunities and is designed for all industry professionals who sponsor, analyze, market, distribute or sell alternative investments.

Founded in 2003, ADISA is the nation’s largest trade association representing the non-traded alternative investments space. ADISA’s members are typically involved in non-traded real estate investment trusts, business development companies, master limited partnerships and private and public funds, 1031 exchange programs, energy and oil and gas interests, equipment leasing programs, or other alternative and direct investment offerings.

The DI Wire: What do you think is the most important issue currently impacting ADISA members?

Jade Miller: There are a number of issues that ADISA members may face this year, but I believe the largest issue, and the biggest threat overall to both ADISA members and the alternative marketplace in general, is the cost of doing business. Regulatory concerns or enforcement are coming at large costs to firms. Errors and Omissions (E&O) insurance has continually risen, and with interest rates at all-time highs, profitability and viability for members is becoming difficult.

We’ve recently seen an uptick in lawsuits in the industry. According to National Economic Research Associates, there were 228 new federal securities class action suits filed in 2023, up from 206 in 2022, with filings in the finance sector more than doubling and the number of resolved cases decreasing to its lowest recorded level in the last 10 years. Additionally, FINRA reported that arbitration filings were up 30% in 2023, with many of these filings related to alternative assets. This increase in lawsuits is putting pressure on firms to increase E&O liabilities, which has become quite costly and is putting pressure on firms to either reduce alternative investment exposure or merge with another firm.

This goes hand in hand with the regulatory pressures we face as an industry. The U.S. Securities and Exchange Commission filed 784 total enforcement actions in fiscal year 2023, up 3% over the previous year. We also saw FINRA crack down on marketing, investor communications, and other various infractions last year. This also continues to put pressure on firms and advisers – and not only due to the cost of the fines. Firms must also evaluate the amount of exposure to alternatives they are willing to take on if it comes with this additional risk.

Finally, all members are seeing interest rate and inflation pressure. The cost of leverage and liquidity puts enormous pressure on issuers, sponsors, and the space in general. The cost of hiring and retaining employees has ticked up, while the margins we all run businesses on have continually compressed. Furthermore, lower margins and higher rates have led to a lack of liquidity in the space, which magnifies that the cost of doing alternative business is under pressure and challenging for all members.

DIW: Is there anything coming up on the legislative or regulatory front that we should be keeping an eye out for?

JM: The SEC has maintained a busy rulemaking agenda under its current administration, and this trend seems poised to continue in the year ahead. A final rule that was adopted in August 2023 requires private fund advisers to provide investors with quarterly statements detailing private fund performance, fees, and expenses. Additionally, the rule will in the future prohibit advisers from granting certain preferential treatment to specific clients outright, and others unless such arrangements are fully disclosed.

This rule has sparked potential legal challenges, and the Fifth Circuit Court of Appeals is considering a petition filed by several industry groups. The petition argues that the SEC overstepped its authority by mandating this level of disclosure. I expect that industry participants will be keenly watching the court’s decision.

Looking ahead in 2024, the SEC has proposed modifications to the definition of “holder of record” under the Securities Act of 1934. Currently, the definition refers to the registered owner of a security, who enjoys associated rights such as voting and receiving dividends. The proposed changes could potentially impact how ownership and related benefits are determined. Furthermore, the SEC has signaled potential revisions to Regulation D, which governs private placements, including the accredited investor definition. While details remain unclear, these potential adjustments warrant close attention from industry stakeholders.

Other areas of interest may be around technology, including crypto assets and artificial intelligence. The SEC has largely maintained that most digital assets fall under the purview of securities regulations. Final amendments to a safeguarding rule, which among other things looks to address crypto assets, are expected by April 2024. AI has also captured the SEC’s attention, with a projected final rule in 2024 aimed at mitigating conflicts of interest stemming from the use of AI and predictive data analytics. And the SEC continues its focus on cyber security and outsourcing issues, with proposals that may become final this year already on the record.

DIW: What do you hope to see from FINRA’s Regulation Best Interest enforcement actions as they continue to conduct exams and gather information on firms’ practices?

JM: First and foremost, I hope that FINRA’s enforcement actions will robustly uphold the core principles of Reg BI and prioritize investor protection. It is imperative that retail investors clearly understand the nature of investments, associated risks, and potential conflicts of interest. Our industry’s commitment to transparency and accountability is crucial for maintaining investor trust in alternative and direct investments. Similarly, I hope that FINRA will prioritize those cases which have led to tangible investor harm, as opposed to a purely technical approach. This would help to ensure that enforcement actions are both effective and proportionate in addressing the most significant investor protection concerns.

That being said, firms and financial professionals require clarity and consistency from FINRA regarding Reg BI compliance expectations. Our industry is heavily regulated, and the vast majority of industry professionals want to comply with these regulations. It is crucial for FINRA to provide clear guidance and avoid overly complex or contradictory interpretations which could impede any responsible business conduct. Clarity is essential to help these firms operate with confidence when providing suitable investment recommendations for their clients.

I would also like to see FINRA acknowledge the diverse landscape of alternatives and direct investments. This diversity calls for a nuanced approach, and I hope that FINRA will recognize the product-specific characteristics, while still applying the core principles of investor protection.

Finally, I hope that FINRA will place greater emphasis on collaboration and education. While enforcement has its place, I strongly believe that collaborative efforts and robust education initiatives by FINRA will foster a stronger compliance culture among our members and the broader industry. Proactive guidance, best practice sharing, and open communication will support firms in understanding and fulfilling their obligations under Reg BI.

DIW: Overall, alternatives are growing and becoming more widely accepted. Why do you think that is?

JM: Today, alternative investments are growing more than perhaps ever before. According to CAIA, alternative investments are currently at $22 trillion in assets under management – 15% of global assets under management. Alternative investment fundraising totaled $7.6 billion in January 2024, according to Stanger & Company.

I believe alternative investments are growing for a few reasons. One is democratization. With regulatory changes, such as the revised definition of an accredited investor, alongside the emergence of innovative structures like crowdfunding platforms, alternative investments are now available to a much broader investor base. Similarly, I believe investor preferences are evolving as well. As the investment landscape changes, a growing number of investors are demonstrating a willingness to explore options beyond traditional asset classes like stocks and bonds.

Another reason alternatives may be becoming more widely accepted is due to their potential benefits. Over the past few years, I believe that many investors may have seen the limits of relying solely on traditional assets. Although it’s crucial to remember that all investments involve inherent risks, alternative investments often exhibit low correlation with traditional markets, offering valuable diversification benefits. Additionally, they may provide the potential for higher returns, lower overall portfolio volatility, and a hedge against inflation.

Alternatives also generally offer greater transparency and can be highly or at least somewhat illiquid, which may align well with investors with a lower risk tolerance. In uncertain times, these can be attractive traits for investors.

DIW: Non-traded real estate investment trusts reported just $317 million of fundraising in January 2024 compared to $4.6 billion in January 2023. What is causing retail investors to revise their allocation strategy, and should we expect this trend to continue into 2025?

JM: For many years, REITs have been one of the most popular alternative investment options sold by many retail financial advisers, and the recent decline may stem from a variety of factors.

Investors may have moved away from non-traded REITs for several reasons. One such reason may be rising interest rates. The Federal Reserve has raised interest rates 11 times since March 2022. These rising rates can potentially impact property values and decrease cash flow from REITs. Additionally, heightened levels of redemption activity have taken place. According to Stanger, $4.6 billion of requests for net asset value REITs were satisfied in the fourth quarter of 2023. Finally, I think media coverage may have made REITs less attractive to some investors. With the rise of e-commerce, many retail centers and malls are foreclosing, while office space is still affected by remote and hybrid work options. This increased media scrutiny could be generating wariness amongst investors.

Inflation has been steadily falling for 11 months, and the Fed is expected to start lowering interest rates this year, so investors may become more attracted to the space again, especially in certain areas. With an overall housing shortage in the United States, multifamily may be a compelling choice. Also, with the shift to e-commerce and a trend toward deglobalization, industrial properties may be attractive to some investors as the need for warehouses and distribution grows. Overall, REITs are designed as a longer-term investment tool, so investors who are looking for possible benefits from an illiquid asset may find REITs to be a popular choice.

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