Highlights
Innovation has made the U.S. capital markets the best in the world. Private assets are no exception. Today, private markets amount to over $13 trillion. However, retail investors are prohibited by the Securities and Exchange Commission (SEC) from being allowed to access private markets because of paternalistic rules designed to protect Americans from themselves. These outdated rules only allow “accredited investors” or wealthy individuals to access private equity, private credit, hedge funds, and similar alternative asset classes.
Redefining Accredited Investors
Why should only a select few Americans that make more than $200,000 or have a net worth of more than $1 million (not including a primary residence) be the only individuals allowed to invest in private assets?
The Trump administration has a unique opportunity to fix the definition of an accredited investor and allow all Americans access to private assets. Fortunately, strong leaders in Congress, such as Rep. Mike Flood (R-Neb.) and Rep. French Hill (R-Ark.) have previously introduced legislation to expand the number of Americans allowed to participate in private markets and further democratize investment.
Concerns about individual investment in private markets are misplaced. Existing rules would compel private fund managers to provide adequate disclosures with material information to individual investors. Features of private assets, such as relative illiquidity, accord with a well-diversified portfolio. These assets can offer an illiquidity premium with higher returns. Additionally, private assets are less volatile, so when the public stock and bond markets start to deteriorate, as is the case at the moment, private assets offer a valuable hedge. Individual investors of all income levels should have access to an asset class that can provide better returns and hedge against certain risks.
BIS Weighs In
The Bank for International Settlements (BIS), which has no supranational authority in any country across the globe, recently issued a misleading new report that admonishes private credit, particularly publicly traded business development companies (BDCs). BDCs are already heavily regulated by the SEC and must distribute 90% of their taxable income to investors. BDCs can also outperform public equity markets. The Switzerland-based BIS does not want Americans to have access to private assets. The Trump administration should reject the BIS and instead continue to pursue policies that offer greater opportunity for investors of all stripes to benefit from the investing strategies to which wealthy individuals already have access.
President Trump’s SEC should continue to follow its mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. But regulators should also embrace the potential of allowing more access to private markets and ignore histrionics from foreign entities keen to shackle U.S. exceptionalism to the benefit of other nations.