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Hedge funds for all? SEC ponders letting in the not-so-rich

Hedge funds and private equity firms may be inching closer to getting their hands on a big pot of money that U.S. regulators have mostly kept out of reach: cash from mom-and-pop investors.

Such an opportunity would be significant for industries that have largely had to restrict their clients to investors like the superrich, sovereign wealth funds and state pensions. But allowing retail money in also poses risks, including the danger of exposing financial neophytes with relatively limited savings to investments they don’t understand.

The prospect of such a major change was raised Tuesday by the SEC, which said it would seek public comment on whether it should ease long-standing restrictions that prevent regular Americans from investing like the wealthy can.

Jay Clayton, SEC chair nominee for Trump, side profile Bloomberg News
Jay Clayton, chairman of U.S. Securities and Exchange Commission (SEC) nominee for President Donald Trump, testifies during a Senate Banking Committee confirmation hearing in Washington, D.C., U.S., on Thursday, March 23, 2017. Trump tapped Clayton to lead the SEC in January, saying the Sullivan & Cromwell partner would ensure that financial companies thrive and create jobs, while still playing by the rules. Photographer: Zach Gibson/Bloomberg

Advocates for expanding the pool say current rules prevent mom-and-pop from investing in companies like Uber Technologies and Facebook at the most lucrative stage when such firms are fast-growing startups. Yet skeptics say they’re worried about unsophisticated investors getting fleeced.

SEC Chairman Jay Clayton, who was appointed by President Trump, hinted at the tension in April, while making clear that he thought retail investors were missing out.

"Our retail investors, people who aren’t qualified investors, aren’t having access to those investment opportunities and over some periods of time those investment opportunities perform better," he said in April. "We want to make sure retail isn’t left behind."

The existing SEC rules that the agency asked questions about changing generally prevent anyone who earns less than $200,000 annually or those with a net worth below $1 million from investing in hedge funds or private equity. The regulator has also been hesitant to allow mutual funds and other vehicles that manage retail money to invest in private funds.

Nearly all of the outflows came from mutual funds and ETFs that posted losses.
January 15

Any revisions would likely be years off if they happen at all. Still, the regulator’s consideration marks headway for the hedge fund and private equity industries, which have been pushing for more access to retail money.

Private equity firms in particular are looking for new growth areas as they raise record amounts of cash. Blackstone for years has been targeting retail clients, creating funds that accept minimum investments that are as small as $2,500. The firm is focusing on clients with as little as $1 million to $5 million, who wouldn’t otherwise have access to its platform.

In what’s known as a concept release, the SEC detailed its research on investing rules and asked dozens of questions. Here are some of the queries included in the 211-page document:
Should the SEC change how it defines an "accredited investor" and alter the financial thresholds that now limit investing in private funds?

  • Should current rules for crowd funding be revised?
  • What restrictions should there be, if any, to limit funds with retail money from investing in private equity and hedge funds?
  • What restrictions should business development companies, whose shares typically trade on public stock exchanges, face in investing in hedge funds and private equity?
  • What restrictions, if any, should BDCs face in offering shares to retail investors?
  • Should the SEC make it easier for companies to raise money from investors? —Additional reporting by Heather Perlberg