(Bloomberg) — The US Securities and Exchange Commission is eyeing a plan to expand access for retail investors to private markets and allow investment advisers to charge performance fees to a wider set of clients.
The regulator’s planned proposal was received by the White House Office of Management and Budget on Monday. It’s the latest sign of the agency attempting to open up an area of the market that’s off limits to most mom-and-pop investors.
“Exposure to the full dynamism of our markets – both public and private – should not be reserved for wealthy insiders,” the SEC said in a statement.
The proposed rule would amend the Investment Advisers Act of 1940 and the Investment Company Act of 1940 by “modernizing” the performance fee framework and allowing retail exposure to private markets through registered funds, the SEC’s rulemaking notice states. Further details weren’t included in the notice.
Investment advisers are currently limited to charging performance fees to so-called qualified clients, said Thoreau Bartmann, partner at K&L Gates and former attorney in the SEC’s investment management division.
“Through limiting performance fees, you’re limiting access to that asset class,” Bartmann said. “Whether that’s a good or bad thing, that’s debatable.”
Investing in private markets has historically been the domain of institutional investors or wealthy individuals who, in theory, have the knowledge to assess whether an investment is a good idea.
SEC Chairman Paul Atkins has repeatedly bristled against such restrictions, saying fast-growing companies that are able to attract capital in private markets remain unavailable to most investors. Broadening access to private markets is about “freedom and fairness,” he said at an SEC event in March.
At the same time, investments offered privately provide fewer disclosures than those in the public markets, which can make them harder to value. That exposes investors to more risks, groups like Better Markets have warned.
Once the White House completes its review of the SEC measure, the current three-member commission is expected to release a proposal for the public to the public for comment. The agency will then incorporate that input into a final version of the rule, which must be voted on by the commission again.
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