Hester Peirce and Natasha Vij Greiner kicked off an SEC conference this week by laying out vastly different views on whether the SEC should protect investors at the most risk-averse end of the capital market, or put them at greater risk for their own good.
SEC regulations treat retail investors unfairly by limiting the ability to invest in digital assets and by making it difficult for them to access private-market opportunities that are limited only to accredited investors, Peirce said during her introductory remarks at the SEC’s Conference on Emerging Trends in Asset Management June 5 in Washington D.C.
The SEC should give more autonomy to retail investors and allow registered-fund managers to include private-fund assets in their portfolios, Peirce argued.
“I would like to see more meaningful expansions, as would many retail investors who resent being cut off from an increasingly large segment of the market,” Peirce said
Private-market investment opportunities get a lot of attention, but the core protections built into the Investment Company and Investment Adviser Acts helped make US investment markets the most successful in the world by showing retail investors those markets are save and reliable enough even for part-time investors, according to Greiner, director of the SEC Division of Investment Management (DIM) that sponsored the conference.
Those protections to limit some decisions, but the SEC has also offered enough options and flexibility to avoid excessive restrictions on either fund managers or investors.
“The number of investment products and types of strategies being offered have also proliferated over the decades, showcasing endless innovation,” Greiner said. “The opportunities for American families to invest in the nation’s securities markets are broader and more varied than ever.”
Private/public-market conflict in SEC and in the market
It’s not unusual to hear differing opinions on policy from commissioners or other high-level officials at the SEC.
It is unusual for a commissioner and a division director to present detailed, directly contradictory positions in a public forum about high-level SEC policy questions.
Speakers on every other panel of the day – including one comprised entirely of former DIM directors – echoed the same arguments, however, and the same misgivings about the practical and ethical issues involved in the effort led by SEC chair Paul Atkins to narrow the gap between private markets and regulated public funds.
Many of the panel discussions boiled down to questions about whether the SEC should focus more on investor-protection measures that would ultimately benefit fund shareholders, or if it should focus, as Atkins has said, on capital formation that benefits investment companies by pressing even small retail investors to put more of their assets at risk and take more responsibility for risks taken by private-fund managers.
“Public markets are built so that unsophisticated investors can indirectly benefit from the profit-maximizing actions of sophisticated investors in the market. But private markets really aren’t built that way,” according to William Clayton, a law professor at Brigham Young University, during a panel on retail access to private markets
“For a long time every academic paper about mutual funds concluded that we need to get retail investors to stop paying for high-priced actively managed products and invest in passive funds instead,” Clayton said.
“As we think more about expanding retail access to private markets, I’m concerned that more resources will be focused on trying to persuade retail investors to do the opposite of that simple heuristic and do the opposite instead,” he said.
Private-market investments by public funds “seems like a solution in search of a problem,” Ben Schiffrin, director of securities policy at consumer-protection advocate firm Better Markets during the same panel.
“We know that private markets are in kind of a cash crunch, but it’s not really up to retail investors to solve that,” Schiffrin said. “We’ve made the private markets so big that we feel we have to let retail investors participate in them, but we’ve got it backwards.
“The equal opportunities are supposed to exist in public markets where they’re available to everybody. And that’s where retail investors get their protection,” Schiffrin said.
There has not been a lot of progress so far, but new SEC chair Atkins “is very much focused on innovation; very much focused on creating new sources of capital,” according to Yana Morris, chief content officer of ION Analytics, who moderated the retail-access panel.
Atkins effort to lower the requirements defining accredited investors is troubling because it shows not a huge change, but does seem to be the first of “little baby steps being made toward trying to attract more retail money into private markets,” Morris said.
