The Securities and Exchange Commission called for public comment yesterday on ideas to expand access to private alts funds, a potentially transformative initiative that could result in amended rules, greater access to products, and more secondary sale options – if the industry proposes viable options and the agency endorses them.

The new "concept release" is asking for "ways to harmonize private securities offering exemptions" – a broad call for ideas to improve the current regulatory landscape and widen access to alts without weakening protections for investors. It will collect industry and public comment for 90 days with an open invitation for "all feedback" and submissions "on any or all topics of interest" in the release.

"Our capital markets would benefit from a comprehensive review of the design and scope of the [SEC's] exempt offering framework," the agency's announcement states.

"The SEC's concept release is breathtaking in its scope of willingness to reconsider the fundamental underpinnings of securities offering rules in the U.S.," says Rajib Chanda, attorney and partner at Simpson Thacher & Bartlett, in an e-mail. "The questions asked are bold and will require serious attention from all who care about retirement security and fairness in our capital markets."

The 211-page release seeks public input on updating the exemptions that most private alts funds use to avoid registering their products under the rules that govern traditional asset management strategies. Those exemptions are restrictive in some contexts, including making it hard for less affluent investors to access alts, limiting the ways private fund managers can market their products, and putting curbs on secondary trading of private product holdings.

The SEC's initiative is seeking comment across seven topics by asking whether it should review current rules, with a nudge for ideas that might loosen some requirements and expand access. One question asks about whether current "limitations on who can invest in certain exempt offerings, or the amount they can invest" – which typically allow only those with $1 million or more to tap private funds – provide adequate protections for investors or instead are an "undue obstacle" to access alts products.

Another asks whether the SEC should "improve, harmonize, or streamline" its current framework for private fund offerings under Regulation D, under which most private equity, hedge fund, and real estate investing vehicles must operate – and which restricts to whom they can market products.

Other questions ask for comment on whether the agency should expand access for retail investors to alts through vehicles such as interval funds and other closed-end vehicles, and whether it should ease rules restricting secondary trading of private fund stakes to improve liquidity for such transactions.

The range of questions opens up an opportunity for significant changes at the retail investor level, Chanda says.

"By focusing squarely on the problem of retail investors missing out on opportunities for higher-return, lower-risk products available to wealthier individuals and institutions, it shows an openness to leveling the playing field," he says. "It is a thoughtful document that will begin a vitally important discussion for the country to have: How can we, in the age of defined contribution replacing defined benefit and companies staying private for longer periods, give regular Americans a fair shot at saving enough for retirement?"

But concept releases themselves are distant from the eventual change that might come down the line, says Owen Pinkerton, attorney and partner at Thompson Hine.

"This is brainstorming as much as anything else," he says. "It is not a set of proposals yet."

Some concept releases have led to substantive reform in the past, such as a set of updates to derivatives rules several years ago, while others have gathered comment but not resulted in changes, such as a release on whether to regulate mortgage real estate investment trusts under investment company rules, Pinkerton says. Still, the new initiative is a worthwhile exercise, he says.

"Here, it's whether investors are being served by not really having access to exempt offerings," he says. "I think it's a good question to ask. There are multiple sides to that issue."

And industry players – particularly trade associations – are likely to jump in with creative ideas for reform without having to fear blowback, Pinkerton adds.

The SEC's openness is welcome news for firms that have been seeking ways to bring alts to retail investors, says Ken McGuire, president at Aditum Alternatives, which is developing a model to ease the path for defined contribution (DC) plans to offer access to private equity products. Many industry watchers have taken heart from comments by SEC Chairman Jay Clayton that favor greater access to alts, he says in an e-mail.

"Given the SEC Chairman's public comments, I expect the SEC to be open to providing exemptive relief in adapting [1940] Act structures in a way that facilitates more faithful application of historic [private equity] investment approaches," he says. "Finally, once appropriate investment structures are established, with well-defined oversight, the [Department of Labor] will be able to establish the contours of an expanded safe harbor that allows DC plan trustees to confidently include [private equity] within the plans they administer."

Contact the reporter on this story at tstabile@fundfire.com or 212-542-1222.

SEC Mounts 'Breathtaking' Call to Widen Alts Product Access

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