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Update on SEC’s private investment recommendations for U.S. retail investors

Insight 9 November 2021

Update on SEC’s private investment recommendations for U.S. retail investors

On September 27, 2021, the Securities and Exchange Commission (“SEC”) and its Asset Management Advisory Committee (“AMAC”) published their final report and recommendations for private investments. This article offers a summary of the update.


On September 27, 2021, the Securities and Exchange Commission (“SEC”) and its Asset Management Advisory Committee (“AMAC”) published their final report and recommendations for private investments, available here [1]. This report comes at a time where interest rates, for now, remain low and the hunt for yield is pushing investors towards alternative asset classes, generally seen as generating higher returns, although asymmetrical, but less accessible to retail investors.

Key observations

The attractiveness of illiquid assets results in their apparent superior returns and lower correlation against other asset classes. The AMAC summarized the interest of each asset class and its key observations below:


  • PE returns being at least slightly better to somewhat better than those for public equity markets historically but some concern that some performance measures (e.g. “IRR”) are not fully understood by retail investors
  • Trend of declining additional PE returns vs public equity due to a lower illiquidity premium and/or a lower interest rate environment.

Similar to better returns to comparable public market indices.

Similar to better returns to comparable public market REIT indices.

Main conclusions

Supply and demand

There are certain factors that are pushing investors to want access to more asset classes:

  • Increase in population age is pushing retirement funds/products (e.g. 401(k)) for more solutions.
  • Retirement related AuM to grow at a higher pace than the U.S. economy and the wider asset management industry.
  • Although retail products such as ETFs have increased dramatically, the report noted a sharp decrease in number of listed companies by nearly 50% between 1996 and 2018.
  • A few companies hold a higher weight in public markets, increasing concentration.

With an increase in demand for retail products countered on one hand, countered by public markets that no longer offer a diversified source of risk on the other hand, investors have begun turning to private investments.

Current choices for retail investors

  • Include mutual funds which can hold up to 15% of their assets in illiquid investments.
  • With such a low holding in private investments, investors would not benefit from the latter's performance.
  • Include tender offer and interval funds
  • Small portion of the investment company market and does not offer as much choice as ideally hoped for retail investors
  • Some closed-ended funds may require investors to be Accredited Investors and/or Qualified Clients.
  • Companies in scope for such listings may be too early in their lifecuycles to represent a diversified exposure to private investments.
  • No professional manager between the retail investor and the issuer.

Design principles

Retail investors tend to generally place a much higher importance on liquidity compared to institutional ones. Any access to private investments by retail investors should include limited redemption opportunities or the possibility to trade such investments on secondary markets.

“Chaperoned” access to private investments (e.g., only investing in funds managed by independent investment advisors (and whose affiliates)):

  • Broker dealers: do not receive fees or other income from the underlying investments and who have an obligation to act in the best interest of investors, or
  • Investment advisors: have a fiduciary obligation to the investors.

Another option considered is to allow retail investors to gain access to a fund/private investment on the same terms compared to an institutional investor, with the benefit of being able to benefit from the diligence carried out by the institutional inventor.

Creation of standardized disclosures about the private investments, their risk/returns and fees.

Exposure to private investments to be achieved through diversification, either through separate investments in private funds and/or investing in a funds with exposure to a variety of private investments.

Use of the Registered Investment Company (“RIC”) framework

Two of the Design Principles, the chaperoned access and disclosure items would be covered under a RIC framework.

AMAC recommendations

Review Accredited Investor and Qualified Client rules

RIC rules already provide sufficient investor protections.

Allowing more investors may help create liquidity in a secondary market

Ease listing conditions for private funds

May provide secondary market liquidity while allowing closed-ended funds to invest in illiquid assets.

Additional flexibility for interval and tender offer funds

Interval funds: More flexibility on the initial investment period before the first repurchase and allowing flexible repurchase dates based on underlying liquidity instead of a fixed schedule.

Tender offer funds: allowing the more flexible repurchases fund to be undertaken in a similar manner to interval funds, e.g., alignment of Form N-23 with Schedule TO requirements.


Standardized disclosure of fees, risks, key terms and returns as well as liquidity constraints of private investments that retail investors have access to.

RIC diversification requirements

Consider whether diversification requirements should be required for RICs investing in private investment funds that retail investors can invest in. Examples:

  • Minimum fund size and other qualifying criteria for each private fund a RIC invests in
  • RICs to have a defined maximum exposure to any particular private fund investment.

Chaperoned Access

Mitigation of potential additional fees from RIC investment advisers by allowing large sponsors to also act as investment adviser to closed-end funds. Conflicts of interest would need to be disclosed and managed.

Allowing closed-end funds to invest only in “approved” private funds. The approval status would be based on size/diversification of investments and potentially a majority of commitments coming from Qualified Purchasers or large institutional investors. Consideration on whether such “approved” funds could be invested directly by retail investors without the need for the additional layer of an investment adviser.

Potential headwinds to U.S. proposal becoming Law

Democrat administrations, such as that of President Biden, have traditionally been more hostile to capital formation, especially private capital. The administration and its supporters have already proposed[1] higher taxes on private funds. Elizabeth Warren, a main ally of the Biden administration in the U.S. Senate who sits on the Banking Committee (the main Wall Street oversight body in the Senate), has expressed wariness of the private fund industry at least since her chairmanship of the Troubled Asset Relief Program (“TARP”) in the wake of the great recession. She recently sponsored a bill, along with Senator Sherrod Brown (Chair of the Banking Committee), targeting certain private equity practices — called the “Stop Wall Street Looting Act”.[2]



The proposal seems to run counter to regulatory trends that have limited access to private funds in the U.S. For example, the Qualified Client standard has risen twice in recent years, and the Accredited Investor standard appears overdue. Even the recent attempt to liberalize private fund marketing via the new 506(c) exemption[1], only reinforced the Accredited Investor standard. Moreover, with retail investor money largely lying in highly regulated retirement accounts, tax and ERISA law may have to be rewritten to accommodate private fund allocations in those accounts. Current ERISA fiduciary standards (which already make it difficult to find a custodian to hold private paper), as well as stringent conflicts and diversification rules applicable to retirement accounts may otherwise present too great a risk of liability.

Gary Gensler, President Biden’s appointment as head of the SEC, has been a strong voice for greater regulation of the financial industry. Chairman Gensler has also expressed concern about the growth of the private fund industry and the SEC’s ability to keep pace, an issue that would only be exacerbated by the proposal[2].



It may be fair to ask whether there is truly a market being filled by this proposal. Top institutional advisory firms already capture the lion’s share of assets and consolidation has only accelerated this in the last few years[1]. Fewer, larger firms with plentiful institutional money may see no need to access small retail investors in this way, which may also only cannibalize their pre-existing retail products, such as their numerous ETFs. The growing ETF market also seems to reflect retail investor appetite for cheap, indexed products over more actively managed mutual funds, let alone hedge funds or private equity funds.


A global trend

Interest in retail investors accessing private assets is not limited to the U.S. market.

In the UK, the FCA just released a Policy Statement on the creation of the Long-Term Asset Fund (“LTAF”) regime[1]. The recent paper[2] issued by the Productive Finance Working Group notably recommends offering liquid assets to Defined Contribution (“DC”) schemes and retail investors through an FCA approved LTAF product. Another way being explored is the removal of the 0.75% charge cap on DC pension funds to allow them to invest in traditionally more expensive – and presumably more lucrative – private funds.

The European Union has been looking to amend its European Long-Term Investment Fund (“ELTIF”) framework with one of the main features of this framework being its ability to be marketed to retail investors.

Overall, private markets continue to attract more capital from a wider range of sources. A key challenge for regulators around the world will include liquidity management and investor protections in a market that has already seen record valuations.



Should you require any further details, we would be delighted to speak with you. Please contact Paul or Daryoush directly.

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Paul Séjournant Director, Product Development - United Kingdom
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Daryoush Niknejad General Counsel, North America - Dallas
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