By: Anya Coverman, Senior Vice President of Government Affairs and General Counsel at the Institute for Portfolio Alternatives
Since last year, the Securities and Exchange Commission declared its intention to focus rulemaking efforts on improving the private markets – an effort with the potential to transform the alternative investments industry, and which will better align private and public market opportunities.
It’s one of many impactful policy debates coming to a head in 2020, as the result of years-long advocacy efforts on a range of critical issues facing the industry – including appropriate securities regulation, access to private funds in retirement plans and sound tax policy – collide with the impact of an unprecedented global pandemic and a momentous election.
Harmonization Efforts Take Hold
Even in the face of COVID-19, the Commission reemphasized its commitment to the stated regulatory agenda in April at the height of the pandemic’s first wave. Finally, in August, it took an important first step to advance this hallmark harmonization initiative: updating the decades-old accredited investor definition.
The definition, a cornerstone of Regulation D, had not been meaningfully updated since its inception in 1982. Chairman Jay Clayton is the first to implement significant changes and led the Commission to take this first step, which successfully struck a balance between reinforcing investor protection and enabling capital formation.
The recent updates to the accredited investor definition are a step in the right direction, but the changes are somewhat modest within the broader securities regulation framework. Additional modest changes – which have largely been telegraphed by the Commission in a March proposal – could come in a second capital formation rulemaking later this year. However, there is a tight timeline for Clayton to finalize this second rulemaking between now and the end of the year, assuming he does not or cannot stay for a second term.
Looking ahead on SEC action, there is more work to be done, including a number of items on the SEC’s Spring 2020 Regulatory Agenda, including updates to Form S-11 and Guide 5. The industry is also actively encouraging the Commission to focus future harmonization efforts on retirement plans, which present an enormous opportunity to provide retail investors with access real assets.
DOL, SEC Consider Provisions to Facilitate the Inclusion of Real Assets in Retirement Plans
Earlier this year, the Department of Labor issued a landmark letter, which clarified its guidance regarding the use of private equity in defined contribution plans. This letter effectively opened the door for a broader conversation around diversified retirement portfolios.
Defined benefit plans have used private investments and other alternative strategies for years, but as retirement assets increasingly shift to defined contribution plans, investors in workplace plans can’t easily access these investment strategies.
The SEC can also take steps to support the efforts of retirement savers and plan fiduciaries to diversify plans by using private funds in addition to traditional stocks and bonds.
From the 1990s through the 2000s, SEC staff took some initial steps towards leveling the playing field by providing defined contribution plans with access to private funds through a series of “No-Action” letters. While the letters have been viewed as positive first steps, the benefits have been very limited and – in some cases – the letters may have inadvertently chilled interest from plan sponsors to add alternative products to retirement plans.
A significant amount of work remains to be done to create greater access to capital for Main Street investors while maintaining critical investor protections. As a starting place, the Commission should follow the DOL’s lead by taking steps to update the qualified purchaser “look through” requirements.
Some creative thinking by the Commission could better allow retirement savers to diversify their portfolios. The SEC should permit an investor to be considered a “qualified purchaser” if he or she makes an investment out of a retirement account into an investment included in a retirement plan’s core lineup, and it should allow for relaxed liquidity requirements and more alternative usage by target date funds – particularly those that have a long time horizon.
Looming Election Sparks Tax Policy Conversations
As the election nears, discussions regarding changes to U.S. tax policy have reopened debate about like-kind exchanges.
The reduction or elimination of Section 1031 of the Code threatens to upend the securitized 1031 industry, which has evolved and grown over the last decade to help everyday investors participate in the US real estate market. Many industry trade groups have undertaken a campaign to protect like-kind exchanges.
The industry has also advocated for the novel opportunity zone program, initially implemented under the 2017 Tax Cuts and Jobs Act. The tax incentive for opportunity zones attracted an estimated $75 billion in capital through the end of last year, according to a White House report on the program published in August.
Since its inception, the opportunity zone program has seen a number of proposed tweaks and changes from the industry, legislators and most recently from candidates on the campaign trail. Most proposals primarily concern transparency, oversight and ensuring the program delivers on its goal of uplifting underserved communities while maintaining benefits to investors; yet, there remain pockets of vocal critics in Congress.
Meanwhile, in the background, another critical tax policy lurks: the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). FIRPTA is a tax law that imposes income tax on foreign persons disposing of U.S. real estate property interests. Numerous organizations support full repeal of FIRPTA, which alone is projected to create 147,000 to 284,000 new jobs and to generate $65-125 billion in new commercial real estate investment in the U.S.
Additionally, in 2015, Congress passed the Protecting Americans from Tax Hikes Act (PATH Act) which included provisions to encourage investment into U.S. real estate. Put simply, the PATH Act eliminated tax penalties for investment into U.S. real estate through exchange-traded REITs; however, it unintentionally excluded public non-listed REITs.
Non-listed REITs have evolved to offer increased liquidity, price transparency and corporate governance. Modifying the tax treatment for investments into non-listed public REITs – and thus providing parity with traded REITs – will encourage investment into U.S. real estate, bringing added economic opportunity to communities across the U.S.
The Industry Can Play a Proactive Role in Policy
As a whole, all of these policy issues demand ongoing attention from the industry – whether transformational or technical.
Policy change doesn’t happen by chance, it requires collaborative education and relationship-building efforts from all corners of our industry. The decisions made in Washington, big or small, will play a critical role in shaping the industry playbook for the next decade.
Anya Coverman is senior vice president of government affairs and general counsel at Institute for Portfolio Alternatives where she leads all public policy and advocacy efforts.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.