Statement Summary
The SEC’s Director of the Division of Investment Management discusses initiatives aimed at increasing retail investor access to alternative investments, such as hedge funds and private equity, which were historically limited to institutional investors. The proposal, termed “Responsible Retailization,” emphasizes three components: access through regulated fund structures that ensure fiduciary oversight, transparency via improved fund listings, and incentivizing advisors to offer innovative strategies. The SEC aims to modernize regulations while ensuring investor protection, promoting responsible innovation, and enabling informed decision-making on risk. The initiative seeks to democratize investment opportunities and empower more investors in the evolving financial landscape.
Original Statement
Thank you, Scott [James], for that kind introduction. Before I begin, I must – as always – inform you that my remarks today are provided in my official capacity as the Securities and Exchange Commission’s Director of the Division of Investment Management, but do not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.
It’s a great privilege to be back at Stanford. On my way over here, I walked through the Huang Engineering Center and stood inside the replica of the garage in which William Hewlett and David Packard founded an electronics company. The lore is that they started with a drill press and $500 of working capital, and they ended up helping change the world.
Now, I never met Bill or Dave — or Jerry or David, or Sergey or Larry — but like so many Americans I feel connected to all of them through the companies they started on this campus, companies financed by venture and growth capital providers.
Sadly, I – like so many Americans – was never able to invest in any of those startups before they went public. Nor could I invest in hedge fund strategies, private equity and buyout funds, or other “alternative” assets and exposures. Those options were as a practical matter the exclusive purview of “institutional” investors.
As you may have read in the papers, the Administration, and more specifically the Commission, is trying to change that. And, with your indulgence, I’d like to briefly outline that plan and how it seeks to provide more retail access to alternatives without sacrificing the protections that retail investors have relied upon for over eight decades.
Responsible Retailization Initiative
Under our securities laws, institutional investors and high net worth individuals can:
It might not be overstating the matter to describe the desire to provide retail investors, in a thoughtful and intentional manner, access to these same markets as an historical imperative.
President Trump, by Executive Order, has instructed that retirement account participants have more private market options in their 401(k) accounts. Chairman Atkins (also known as “my boss”) has directed us in the SEC’s Division of Investment Management to propose “responsible retailization” measures that would allow retail investors more freedom to direct their “post-tax, pre-retirement” dollars to alternative assets and strategies.
So-called “alternative” investments — like all investments — are not without risk and uncertainty. Some of these risks are familiar to retail investors, like the possibility of poor performance. Others are less familiar or even novel, like suspension gates and binary payouts. This is why the Chairman has insisted, from day one, that any retail access proposal have fiduciary protections and other “guardrails” to address these kinds of risks. This is the basis of our “Responsible Retailization” initiative.
Three Essential Components
The Responsible Retailization initiative relies on three essential components (which we refer to as a “three-legged stool”):
- Access: Utilizing, and modernizing, the existing regulated fund regime to provide retail access to alternatives in structures that still provide for fiduciary oversight.
- Transparency: True retailization requires that retail investors and the broader market both see the underlying exposures in these funds and that the market be able to assess their values.
- Incentives: Expanding the ability for advisers to charge performance fees could incentivize advisers currently operating in the private markets to bring diverse strategies to a wider group of clients and investors.
Millions of Americans invest in regulated funds, and this has allowed many ordinary investors to build wealth and provide for their families. While our retail regulatory regime can be paternalistic and limiting, its durability and penetration is undeniable. In other words, by and large, it works pretty well. But, like any 86-year old, the structure could use some updating.
Over the past year and a half, my colleagues in the Division have provided guidance and no-action letters and issued orders pursuant to delegated authority addressing tools and techniques traditionally exclusive to private funds. We have, for example, addressed the ability of:
All of these actions were done with a focus on investor protection. While these efforts may have been inspired by common practices in the private fund space, they occur under regulated fund safeguards, including independent board approval and oversight.
Transparency is the second leg of our stool. We believe that true retailization requires that retail investors and the broader market both see the underlying exposures in these funds and that the market be able to assess their values. By facilitating retail funds listing on exchanges (we – most unoriginally – call this “ticker-ization”) we are actively encouraging sponsors of regulated alts funds to provide position-level transparency.
Every system requires. It is very, very hard for fund sponsors to make money in the retail space; fees are comparatively low, distribution can be expensive, margins can be razor-thin, and competition is fierce. It is no surprise that very, very few successful alternatives managers have dared to swim in the retail waters.
The Commission has proposed a solution to this situation: make it worth your while. My recommendation to advisers and sponsors is to enthusiastically innovate in a responsible and thoughtful manner. And don’t wait for regulators to hold your hands through this shift, because you may receive guidance that is both too limited and too late.
Conclusion
Risk and reward are interlinked. Everyone – not just the people in this room – should be able to make informed decisions on how much risk to accept. But the regulators must try to ensure those decisions are made within a system of intelligent safeguards. Great things can happen when people take calculated risks — just ask Hewlett and Packard.
With that, I would like to once again thank all of you for having me, and open the floor for discussion.
