The Securities and Exchange Commission’s Asset Management Advisory Committee has unanimously approved a report recommending that the SEC consider how to amend the regulatory framework to provide retail investors with wider access to private investments while also maintaining appropriate safeguards.
The committee, comprised of “outside experts,” was formed in November 2019 to give advice and insight to the SEC on asset management-related topics. Committee members serve a two-year term, unless renewed, and include individuals who represent the views of retail and institutional investors, small and large funds, intermediaries, and other market participants.
According to the report, private investment returns are typically higher than their public market equivalents, specifically for private equity, private debt and private real estate investments. However, most retail investors lack access to these investments as they require income and asset minimums or educational and professional qualifications.
The committee did point out the difficultly in drawing a definitive conclusion on returns due to differences in methodologies used, as well as, in the case of private real estate funds, the focus on different sectors within the asset class.
In their examination of private real estate, the committee said, “Overall, we believe that private real estate funds do provide comparable to better returns to public REITs and therefore, we believe the SEC ought to consider providing retail investors access to private real estate funds. In addition, given the different types of real estate REITs and private funds generally focus on, private real estate funds may provide some diversification within the real estate sector for retail investors.”
Similarly, after reviewing the data on private equity funds, the committee said that they offer potential benefits to retail investors compared to their public counterparts due to their higher average returns and their diversification potential.
However, the committee cautioned that the SEC should “play a central role in designing an appropriate disclosure and regulatory regime” for private equity products, due to the difficulty in measuring and reporting returns on a comparable basis, as well as the potentially high fees associated with retail private equity pools.
The committee also provided guidelines to the SEC that could balance retail investors’ access to private investments while also taking investor protection into account. These include favoring investment structures that offer some liquidity options or that can be traded on secondary markets without needing to liquidate the underlying investment; developing standardized disclosure with respect to fees, risks, key terms and returns; encouraging diversification in the overall portfolio; using a modified registered investment company framework; and limiting retail access to private investments to those with certain third-party participation – referred to as “chaperoned access.”