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Regulatory Perspective: The Path Ahead for Alts in 2023

By: Anya Coverman, president and chief executive officer, Institute for Portfolio Alternatives

Following downturns in the stock and bond markets, financial professionals and Main Street investors are turning to alternative investments to further diversify in a volatile market. Looking back, throughout the last two Congresses our industry has been extremely active on both sides of the aisle, educating lawmakers and advancing policies to support increased access to alternative investment strategies with low correlation to the broader markets.

While this work must continue, with divided government, legislative gridlock looms.  In turn, we expect the lack of legislative prospects to lead to increased regulatory activity, both in the number of proposed regulations and amount of guidance, from state and federal agency regulators, to fulfill the Biden administration’s policy agenda.

At the state level, the North American Securities Administrators Association proposed revisions to the NASAA Statement of Policy Regarding Real Estate Investment Trusts (the “REIT Guidelines”) last year. NASAA received nearly 400 public comment letters on its proposal, many of which sought a full withdrawal of the proposal.

After reviewing the comments, NASAA’s Corporation Finance Section and Project Group will consider whether to present the proposed revisions to the REIT Guidelines to the NASAA Board of Directors for potential adoption by vote of the NASAA membership or repropose the rule and begin a second notice and comment period. Additionally, we expect that NASAA may consider revisions to other existing guidelines or propose new guidelines applicable to non-traded business development companies.

On the federal level, we’re watching several key issues at the U.S. Securities and Exchange Commission, the Department of Labor and the Financial Industry Regulatory Authority.

The SEC’s most recent regulatory agenda includes a planned proposal to amend Regulation D and Form D, including redefining accredited investor status, potentially restricting the pool of investors who can participate. This will certainly have an impact on alternative funds conducting private offerings.

While the agency has considered the issue in the past, given SEC Chair Gensler’s rulemaking breadth and speed, we expect the agency to significantly narrow who may qualify as an accredited investor by raising the income and net worth thresholds. While we commend the SEC’s investor protection mandate, we caution that changes may unintentionally limit opportunities for both sophisticated investors as well as investors from underrepresented communities.

The SEC’s agenda also suggests a greater focus on advisor compliance and funds. Among planned rulemaking proposals are custody rules for advisors; changes related to fund fee disclosure, including 12b-1 fees; and a requirement for advisors to vet third-party providers. The agenda also indicates issuance of several proposals earlier than expected, underscoring the rapidity of rulemaking.

Importantly, the SEC is expected to release final regulations related to ESG investing and disclosures over the next 10 months. The closely watched ESG rulemakings would impose mandatory climate risk disclosures for public companies, strengthen ESG disclosures for investment funds and investment advisers and reform how investment funds are named to better reflect their strategies.

We’ll also keep a pulse on the host of recent, more technical SEC rulemaking activity in addition to Reg BI and Advisers Act fiduciary duty issues, which remain a top priority for SEC exams, and the SEC’s new investment adviser marketing rule which required compliance this past November.

The DOL may be steering those offering financial services or products to a fiduciary model. In particular, the DOL included in its most recent regulatory agenda that it intends to propose an updated rule defining when salespeople are subject to a fiduciary standard. The DOL signaled that it is concerned that salespeople are often not subject to a fiduciary standard when giving advice related to IRAs. This rulemaking would impose a new high standard of care, as well as require elimination of conflicts (such as commission), unless the salesperson relied on and satisfied the conditions of a DOL “exemption”. In connection with the rulemaking, DOL has signaled that it intends on revising existing exemptions.

The DOL has other initiatives that could also have a large impact. The DOL is in the process of implementing a recent rule related to ESG investing by ERISA plans and it recently proposed a rule that could require new indemnification by large asset managers of the ERISA plans that they provide management services to.  Each of these initiatives signal a trend by the DOL to become more prescriptive about what financial services can and cannot be offered in the retirement space.

Finally, at FINRA, we expect the organization to continue reviewing firm’s communications and broadening examination priorities with an increased focus on identifying compliance risks and strengthening broker-dealer compliance programs.

Of particular interest for the alternative investments industry is the follow up to Regulatory Notice 22-08. Last year, the agency put out its most significant statement on sales of complex products since 2012 and received thousands of comment letters. FINRA has not yet indicated clearly what actions will be taken; however, it recently released its 2023 Report on Exam and Risk Monitoring Program, which highlights complex products, along with cybersecurity, Reg BI, and best execution as its top priorities in 2023.

As the year moves forward, and new regulatory priorities emerge, we must continue to build the strong, constructive relationships with regulators that allow us to build a modern regulatory framework that can efficiently provide investors both access and protection.

Anya Coverman is president and chief executive officer of the Institute for Portfolio Alternatives. 

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