Performance Interval: Statement on Proposals to Facilitate Retail Investor Access to Private Investments

Thank you, Mr. Chairman. Thank you also Brian [Daly] and Josh [White]. I happily support today's two proposals to increase main street investors' opportunities to access private investments through professionally managed, diversified funds. With the decline in the breadth of the public markets, retail investor access to private markets is important for the sake of portfolio diversification and investor choice.[1] These proposals would enhance retail investors' ability to decide for themselves how to meet their financial goals.

The Commission historically has not looked kindly on retail investor exposure to private markets even when it comes through professionally managed registered investment companies. Because most retail investors do not meet the definition of an accredited investor in Regulation D,[2] they cannot directly invest in privately offered securities. By rule, open-end funds, because they offer investors easy redeemability, generally cannot invest more than fifteen percent of their net assets in illiquid investments.[3] Unlike open-end fund shareholders, shareholders in closed-end funds and business development companies ("BDCs") cannot redeem their shares anytime they wish. As a result, closed-end funds and BDCs align better with investments in less liquid private securities. Nevertheless, until last year, according to a decades old informal regulatory practice that sprouted within one of the SEC's many secret gardens,[4] closed-end funds and BDCs either had to restrict themselves to accredited investors and have high investment minimums or limit private fund investments to 15 percent of their assets.[5] Last year's change recognized that neither the Investment Company Act nor Commission rules required such limitations.

Today's proposals build on this change by inviting professional investment managers operating under the protective constraints of fiduciary duty to serve retail investors seeking access to the private markets. The proposed amendments, which expand the ability of advisers to closed-end funds and BDCs to charge performance fees,[6] could make these funds more attractive for investors and advisers by better aligning incentives. Performance fees are common in the private fund industry, where assets have more than tripled over the last decade.[7]

A second set of changes similarly could make interval funds, which offer periodic liquidity through share repurchases,[8] a more attractive way for investors to access the private markets. Among other things, the proposed amendments would permit extended deferral of initial fund repurchase offers, allow for monthly repurchase offers,[9] and provide less prescriptive portfolio liquidity requirements. Lengthening the time before a fund must make its first repurchase offer would enable an adviser to ramp up the fund's investments as the adviser would not have to hold back capital to finance an early first repurchase offer. The proposed amendments also would provide interval funds with increased investment flexibility during the period between the repurchase notification and the repurchase pricing time. The proposal would replace current prescriptive rules, under which funds may hold a greater portion of liquid assets than necessary, with a principles-based liquidity management provision.[10]

The public's input will help the Commission refine these proposals, but I hope the spirit that inspired them will motivate future work by the Commission. That spirit seeks to foster innovation not for the sake of change, but for the sake of serving the investing public. Great innovations in the investment management space, including mutual funds and exchange-traded funds, have given countless Americans financial security. Our regulations can either encourage incumbents to sit on their laurels or challenge existing firms and new entrants to offer better products at lower prices to more investors so that they can live more financially secure lives. I want to thank staff in the Divisions of Investment Management and Economic and Risk Analysis and Office of General Counsel for their work on these proposals and their commitment to maintaining a ruleset that fosters the competition necessary to provide retail investors with an excellent selection of diversified investment funds. These funds may lack the flash of many of the financial products that dominate today's headlines, but they are the stuff of which dreams of homes, education, and retirement are made.

I have two questions for the staff.

1. Will these proposals do anything to address the persistent gaps between net asset value and the prices at which closed-end fund shares trade? If not, can the Commission do anything else to address this problem?
2. The release notes that "we anticipate that the uptake of performance fees on capital gains in existing open-end funds would be limited." In what limited circumstances do we anticipate that open-end funds, even though they can provide only limited access to private markets, might use performance fees?