Statement on Proposed Amendments to Adviser Performance-Based Compensation, Interval Fund Modernization, and Multiple Share Class Rules for Closed-End Funds and BDCs

Good morning and thank you to the staff for your presentations. Today, we consider two rulemaking proposals as well as several notices regarding accredited investor status under Regulation D. Together, these steps are part of an effort to allow more exposure to private investments as part of a retail investor's portfolio.

I. The Diversification Deficit and the Case for Retail Access

For the vast majority of Americans who work in the private sector, long-term retirement savings will be achieved through securities investments held in 401(k) accounts, IRAs, and - for the very youngest generation - Trump accounts. However, the investment portfolios underlying vehicles used by the average private sector worker are far different than the investment portfolios in pension plans for state and local employees.

If one were to look at the asset allocations of these government pension plans, such as CalPERS, CalSTRS, and New York State Common Retirement Fund, they have allocations to both public securities and private investments.[1] Why would these large, sophisticated institutional investors have a slice of their portfolio in private investments? In the words of the CalPERS' investment staff, "[private equity] is CalPERS' highest returning asset class over the long-term" and that "unlike public equity, [private equity] strategies provide CalPERS opportunity for substantial excess returns."[2]

Meanwhile, in the public equity space, over the past quarter-century, there has existed a growing challenge: the shrinking universe of public companies and the increasing concentration of returns among a handful of large-cap stocks. The number of publicly listed firms has declined significantly since its peak in the 1990s.[3] Further, achieving broad diversification among securities with uncorrelated returns has become even harder to achieve for ordinary Americans. For the holder of an S&P 500 index fund, the top 10 companies constitute 40% of the index's total market capitalization and the top 9 positions are in the same industry sector - technology.[4]

II. Refining the Path to Retail Access

Today's proposals are intended to provide additional paths for retail investors to obtain exposure to private investments.

The first proposal would amend the "qualified client" definition and other provisions[5] to expand the ability of investment advisers and their clients, including investors that meet the "accredited investor" definition in Regulation D under the Securities Act, to enter into performance-based compensation arrangements calculated based on capital gains or appreciation.[6]

The second proposal would enhance the flexibility for interval funds by extending the deferral of the first repurchase offer, permitting monthly repurchase intervals, enabling more frequent discretionary repurchases, providing for a principles-based liquidity framework, and simplifying other parts of the rule. The second proposal would also permit closed-end funds to issue multiple share classes under conditions similar to those available for open-end funds.[7]

These proposals refine how retail investors may access private market exposures under the discipline of the Investment Company Act and the Investment Advisers Act, board oversight, and additional disclosure. At the same time, progress should be measured against the central question for ordinary investors: does this framework provide access that will be readily understood, fairly priced, and subject to appropriate governance?

Critics will argue these proposals will not further investor choice and access but rather serve as a gift to shady financial product sponsors and risks placing retirement savings into opaque, high-fee, and poorly-performing products. We should address those concerns directly.

• Under this framework, access is optional, not compelled. Investors engage through registered vehicles with mandated disclosures, governance by independent boards, and ongoing Commission oversight. Moreover, these investors are often under the guidance of a financial advisor who is subject to a best interest obligation or a fiduciary duty. The aim is choice with accountability, not distribution at any cost.
• These proposals do not change the exit dynamics in private markets nor do they guarantee liquidity where it does not exist. Interval structures provide periodic liquidity; they are not a promise of frequent redemption. That design choice is transparent to investors and boards will need to consider the alignment of repurchase policies with portfolio cash flows. As with current closed-end funds and business development companies, there is no guarantee of liquidity which may be limited or not offered at times.
• 401(k) plan fiduciaries subject to the Employee Retirement Income Security Act (ERISA) remain responsible for any private investment products offered as plan investment options. ERISA fiduciaries must act in a manner that satisfies their duty of prudence under the laws and regulations set forth by the U.S. Department of Labor.[8]

III. Valuation Remains a Challenge

The proposals, if adopted, will remove some of the regulatory frictions to offering further retail access to private investments. However, one significant remaining challenge to broad adoption of registered investment companies that offer exposure to private investments is valuation. Illiquid assets are hard to price consistently and valuation practices must withstand stress, strategy drift, and conflicts. Liquidity management can constrain valuation-especially when boards must reconcile repurchase offers with portfolio marks. Funds offering exposure to underlying illiquid investments may need to consider their use of independent price verification, documented methodologies, audit discipline, and board review that focuses on how valuation affects fees, performance reporting, and repurchases - and there can be not insignificant additional costs associated with this process.

IV. Accredited Investor Notices

The Commission is also considering the issuance of notices concerning whether to designate additional professional certifications, designations, or credentials as qualifying individuals for accredited investor status. Qualifying as an accredited investor is important to many Americans because accredited investors may participate in investment opportunities that are generally not available to non-accredited investors, such as investments in private companies and potentially offerings by hedge funds, private equity funds and venture capital funds.[9] For too long, the accredited investor definition has focused on income and wealth as a stand-in for sophistication, and that choice has shut out many Americans who understand investing well but have not yet built a large personal balance sheet or income statement. The framework should recognize knowledge and experience as real measures of an investor's ability to assess transactional and investment risk. Investor protection is not served by denying capable people the chance to assess for themselves whether to invest in companies before they go public.

V. Closing

These proposals and the accredited investor notices are steps in the right direction towards expanding exposure to asset classes to all Americans. They expand avenues for exposure under a regulated framework, invite competition and innovation, and provide investor protection. Valuation discipline, board governance, and conduct standards that protect investors will happen subject to the Commission's oversight. For their efforts, I appreciate the work of the staff in the Divisions of Investment Management, Corporation Finance, and Economic and Risk Analysis as well as the Office of the General Counsel. I also greatly appreciate the support for this effort by the Financial Industry Regulatory Authority, Acting Secretary Keith Sonderling, Assistant Secretary Daniel Aronowitz, and the staff at the U.S. Department of Labor.

Thank you.