Picture of the SEC building Image: Diego Radzinschi/ALM)

“Not a good idea” is Morningstar’s conclusion on whether or not private investment products should be more available to the public, especially for retirement funds. Submitted to the Securities and Exchange Commission addressing the agency’s concept release on Harmonization of Securities Offering Exemptions, Morningstar’s comment letter, focusing on private investments, points out key factors that question the foundation of the plan.

The comment letter was one of roughly 100 the commission received by Wednesday’s deadline. The proposed release states that the SEC believes “our capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration. More specifically, we also believe that issuers and investors could benefit from a framework that is more consistent and addresses gaps and complexities. Therefore, we seek comment on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.”

(Related: SEC Wants to Ease Access to Private Placements)

Other comment letters addressed different areas of the wide-ranging concept release, from revising the accredited investor definition to pushing changes to crowdfunding, but Morningstar focused on private investments.

“Based on our experience analyzing PitchBook data as well as our role as fiduciaries for retirement plans,” the firm outlined these key issues:

  • There are several challenges to facilitating regular retirement investors’ access to private pooled investments through target date funds or robo-advisors in employer-sponsored plans, which is how most retirement money gets saved.

These include 1) lack of standardized reporting requirements for private investments that make comparing and verifying returns difficult, especially for TDFs and retirement plan sponsors in choosing a TDF, 2) infrequent pricing and illiquidity of private investments would mean operational changes for TDFs and robo-advisors, and 3) because of their high asset class variance, private funds are harder to benchmark as well as compare against other asset classes.

  • The proposed change would mean TDFs would end up largely in IRAs, rather than in employer-sponsored accounts, Morningstar noted, explaining that “There are fewer protections for investors outside employer-sponsored accounts, and rapid investor redemptions could lead to a target-date fund holding too much in illiquid assets, undermining confidence in the funds, and perhaps registered funds more broadly.”
  • Disclosure requirements should be enhanced if access to private investments increases. The firm states that it has found that information obtained through Form D is “usually incomplete and inconsistently provided,” noting that the SEC doesn’t provide specific “consequences” i.e., fines, for private investments that fail to file a Form D as it does for public companies.

Morningstar especially took to task the SEC’s Form D, noting in its letter that “We believe that the SEC should consider changing its requirements related to when Form D is amended.” For example, Form D doesn’t “trigger” an amendment if there’s a change in minimum investment amount, if the total offering amount decreases and the amount of securities sold in the offering or the amount remaining to be sold.

Morningstar notes that Form D as it stands does not inform investors when a fund closes or the if the value of the company’s equity offering is different than planned. “It is also important for companies to be aware of the availability of private capital,” it states.

There were some who took an opposite view, particularly on TDFs, such as the Institute for Portfolio Alternatives, which noted in its comment letter that “the current regulatory framework generally prevents funds from investing more than 15% of its assets in illiquid investments. We support allowing greater concentration to help design modern target date funds for retirement savers. We encourage the commission to allow both target date funds and other managed account products that are designed to provide a glide path similar to target date funds to have greater concentration of illiquid holdings.”

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