SEC's private-market draft hands advisers two levers

The SEC's private-markets plan, now sitting at the White House budget office, is best read as a two-part gift to advisers: a registered-fund route that would let retail clients reach private-market exposure, and a performance-fee framework that would let more separately managed accounts charge for returns above a hurdle. According to AdvisorHub, the regulator sent its draft proposal to the Office of Management and Budget on Monday, with a rulemaking notice describing the goal plainly: amend the Investment Advisers Act and the Investment Company Act by "modernizing" the performance-fee framework and allowing retail exposure to private markets through registered funds.

The agency's own language is broader than the mechanics: "Exposure to the full dynamism of our markets – both public and private – should not be reserved for wealthy insiders," the SEC said in a statement, a sentence that could have been written by a private-fund marketer but is being written by the regulator.

Under current rules, performance fees are available only to qualified clients, said Thoreau Bartmann, a partner at K&L Gates and a former attorney in the SEC's investment management division: "Through limiting performance fees, you're limiting access to that asset class. Whether that's a good or bad thing, that's debatable." The qualified-client threshold has long served as a proxy for sophistication, and the SEC's plan treats that proxy as too blunt.

The access gap has been a running grievance for SEC Chairman Paul Atkins, who has repeatedly pushed against limits that keep fast-growing private companies out of reach for most investors, calling broader access a matter of "freedom and fairness" at an SEC event in March. The plan arrives as the SEC has already asked FINRA to design an accredited-investor exam that tests know-how, a path this publication covered in August.

Valuation is the counterweight: private investments offer fewer disclosures than public markets and are harder to mark to market, which is why groups like Better Markets have warned about the risk to less sophisticated buyers. The SEC's answer, for now, is to route private-market exposure through registered funds.

A rule has a long way to go before it changes a client's account: once the White House completes its review, the current three-member commission is expected to release the proposal for public comment, after which the agency incorporates the comments into a final version that must be voted on again by the commission. That sequence gives advisers time to shape what the final framework requires of fund sponsors and of themselves.

Those comment letters will be worth reading, because the difference between a registered fund that works and one that merely files is in the details: the liquidity terms, the valuation policy, the fee disclosure. The SEC's notice leaves those details out, and the industry will spend the next few months arguing about them.

For advisers, the two changes arrive together but need different responses: the registered-fund route gives a retail book a way to own private-market assets without crossing the accredited-investor line, while the performance-fee change gives separately managed accounts a way to align compensation with outcomes — if the hurdle is written honestly. A wider performance-fee regime starts and ends with that "if."

The risk is that a registered wrapper manages the eligibility problem without managing the valuation problem: fewer disclosures and harder marks do not become easier because a fund files a registration statement. The adviser's job — questioning the price on the account statement, comparing it to any secondary evidence, and stress-testing the liquidity terms — does not shrink just because a fund adds a ticker. The SEC's plan does not change that burden; it extends it to more clients.

The performance-fee half of the proposal is the sharper test, because more clients eligible to pay for outperformance means more clients who will notice when the fee model is one-sided. The advisers who will win under this regime are the ones who can show a client, in writing, exactly what the performance fee pays for — and what it does not. The comment letters, once the proposal opens, will separate the advisers who can explain their valuation and liquidity terms from those who cannot.