"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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