The asset management industry is undergoing an era of innovation, with new products and emerging trends appearing in the investment universe. In this new scenario, the SEC will promote greater retail access to private markets, as these, together with tokenization, will expand the menu of investment options available to investors, according to Hester Peirce, Commissioner of the U.S. Securities and Exchange Commission, in the speech she delivered to attendees at the Third Annual Conference on Emerging Trends in Asset Management.
Peirce referred to the importance of portfolio diversification, noting that retail investors need access to a broad range of investment opportunities. “The breadth of the public markets, where most retail investors invest,” she stated, “has been affected by the decline in the number of listed companies, the delay in companies going public, and the dominance of several large companies in market indexes.”
“The Commission should work on reforming public company regulation to help reverse this trend. But some asset classes are not suitable for public markets. Therefore, retail investors and the professionals who advise them also seek additional diversification in private markets,” she added.
The Commissioner then stated that the Commission’s rules and regulations, along with staff positions, have contributed to excluding retail investors from private markets. “We should consider amending the definition of ‘accredited investor’ in the Commission’s rules so that more people are eligible to invest in these markets.”
In August 2020, the Commission slightly expanded the existing income and net worth categories for individuals, a change that the Commission itself acknowledged was marginal, Peirce recalled. “I would like to see more significant expansions, just like many retail investors who resent being excluded from an ever-growing segment of the market,” she admitted.
The official advocated for the elimination of the initial $25,000 limit that exists for closed-end funds that invest 15% or more of their assets in private funds, and the restriction on sales to accredited investors. “Neither the law nor the Commission’s rules require such limitations. Eliminating them would allow greater retail access to private investments through a closed-end fund vehicle with the benefit of professional management,” she asserted, also stating that SEC staff should ensure that funds make appropriate disclosures on conflicts of interest, illiquidity, and fees for exchange-listed closed-end funds. “We should also work with fund sponsors interested in experimenting with interval funds,” she announced.
Digital Investments
According to the official, the staff of Trading and Markets is working diligently on many applications to list a variety of digital asset ETPs. “A standardized approach to these ETPs could ease the burden for both the industry and SEC staff, and greater guidance could open the door to a broader range of options and diversification for investors,” she noted.
The Commission should also address—she asserted—whether registered investment companies can have exposure to cryptoassets through investments that are not traded on regulated exchanges in the U.S. and through the tokenization of securities issued by such companies.
When speaking about the “proliferation” of investment products, she referred to the growth and variety of exchange-traded funds (ETFs). On this topic, she pointed out that the breadth of offerings meets diverse investor needs and often does so very cost-effectively. However, she objected that some of these products “are complex and not suitable for all portfolios. Some are designed to be held only for a day. They are tools for managing risk and volatility, boosting returns, and limiting losses. If misused, they can have the opposite effect.”
Peirce concluded her speech by saying that she “would like the Commission to consider whether overly conservative regulatory limits on fund marketing are unintentionally inhibiting educational efforts by fund sponsors toward financial professionals and investors.”
