The Securities and Exchange Commission wrapped up a formal comment period for its concept release on expanding access to alternative investments Tuesday, collecting a range of proposals to update the accredited investor definition, widen access to alts funds, and boost protections for retail clients.

The agency posted nearly 50 comment letters sent over the 90-day comment period, but additional letters piled in just before the deadline yesterday and many more are likely to arrive in the coming days and weeks, says Tony Chereso, CEO and president at the Institute for Portfolio Alternatives (IPA), an alts fund manager association.

"We may see a trickling in over the weeks to come," he says.

The agency is likely to consider late comments given the wide scope of the release, a 211-page document it unveiled in June, says Rajib Chanda, attorney and partner at Simpson Thacher & Bartlett.

Less clear is what may come next, with no template for the agency's next move, Chanda says. "The question is what will the SEC pick up?" he asks.

Accredited investor definition

Many comment letters addressed the longstanding debate over whether to update the definition of an accredited investor, set decades ago. Many SEC restrictions on access to alts products hinge on whether an investor meets criteria of income exceeding $200,000 for individuals or $300,000 for joint filers and a net worth topping $1 million excluding the value of a primary residence.

Numerous industry players called on the SEC to expand the definition to no longer be solely based on wealth, but to include provisions for investors who are "financially sophisticated" through industry knowledge or other means. A letter from Ryan Metcalf, head of U.S. regulatory affairs for Funding Circle, says investors with advanced investing knowledge who don't meet the financial criteria "should still be able to invest up to a certain percentage of their net worth in non-registered securities."

The Hedge Fund Association asks the SEC in its letter to leave current wealth and income cutoffs, but similarly to allow "knowledgeable investors with substantial industry experience" to invest alongside accredited investors, while requiring passage of an examination or "some reasonable process" to demonstrate their eligibility.

Some comment letters may also push the SEC in the other direction, however, including calls to tighten accredited investor rules, Chanda says.

Registered fund format

Various comment letters address another idea – allowing private equity fund of funds today accessible only to accredited investors to become SEC-registered products and essentially become listed, tradable vehicles, Chanda says. Most of them will echo the position of the Committee on Capital Markets Regulation, a research and advocacy group of industry professionals and academics that in its Sept. 19 comment letter asks the SEC to rescind an informal rule that limits public closed-end funds from investing more than 15% of their portfolios in private equity funds.

"As opposed to just making it easier for individuals to invest in single, private opportunities, this would expand access by putting them into registered, commingled vehicles run by a fiduciary," Chanda says. "It would be interesting to see academics, the private equity industry, the mutual fund industry, and law firms ... all of those boats rowing in the same direction."

On a similar theme, a letter filed this week by Aditum Alternatives asks the SEC to up the private fund investment limit to 25% for closed end funds available to retail investors.

401(k) alts adoption

Several industry outfits encouraged the SEC to help expand retail investor access to alternatives through defined contribution plans, including a Sept. 9 letter from the Defined Contribution Alternatives Association. Its letter asks the SEC to "eliminate the requirement to 'look through' 401(k) plans to each individual plan participant as long as the [plan's] decisions are made by an experienced fiduciary," a change that would effectively allow individual participants to rely on their retirement plans to qualify as the accredited investor.

"As it stands, plan participants are sufficiently shielded by the layers of protection offered by their plan's fiduciary," the letter states.

Similarly, the IPA's own letter submitted yesterday, but not posted by the SEC as of this morning, recommends allowing retirement plan products such as target date funds and managed account products to have more than 15% of their assets in illiquid investments.

But any changes in this area would require the U.S. Department of Labor to amend retirement plan regulations under its purview, Chanda says. "It's a little bit like arguing to your dad about a fight you have with your mom," he says.

However, Morningstar warned the SEC to "proceed with caution" around expanding alts in retirement plans in a letter filed yesterday. That letter detailed concerns about adequately calculating returns and current valuations in active private funds and argued against calls to loosen liquidity requirements on retirement plans, noting that "[s]imply because a worker has a long-term investment time horizon vis-à-vis their retirement does not mean they can give up liquidity."

Investor protections

Various letters also urged the SEC to not forget its investor protection role in any efforts to expand alts access.

"We believe there are opportunities in the private markets for individuals, but the question is how to structure that for retail investors to have the protections they need around transparency and alignment and to ensure a strong commitment to fiduciary duty," says Christopher Hayes, senior policy counsel at the Institutional Limited Partners Association.

Various letters raised concerns about expanded access to alts potentially exposing individual investors to bad actors. For instance, Michael Finke at the American College of Financial Services wrote that older investors with cognitive impairment might more easily meet loosened accredited investor standards, but could be at greater danger of financial fraud.

And several letters addressed the inadequacy of current private fund reporting, asking the SEC to couple any expansion of alts access with more rigorous data requirements. Morningstar's letter criticizes the data on today's private fund forms required by the SEC, which often is "incomplete" and lacking in penalties for non-compliance.

And Grant Gulovsen, an attorney, proposed in his letter that the SEC require "more statistical data be collected and made available to prospective investors for all exempt offerings" beyond the "nearly useless" information now available in most private fund documents.

Industry Pushes SEC to Loosen Rules on Alts for Individuals

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