State regulators concerned about impact of COVID19 on private markets


Every day investors can watch the stock market plummet in response to the havoc wreaked by the COVID-19 outbreak. State securities regulators are worried that the situation in private markets may be just as bad or worse, but that no one knows about it.

Christopher Gerold, chief of the New Jersey Bureau of Securities and president of the North American Securities Administrators Association, raised the issue Thursday at a meeting of the Securities and Exchange Commission’s Investor Advisory Committee.

“While we have a very clear understanding of the market volatility and the impact of COVID-19 on the public markets, NASAA members are deeply concerned that we have no insight on the impact of COVID-19 on the private markets, especially those private companies that have retail investors,” Gerold said. “We hope that the commission shares these concerns.”

John Harrison, executive director of the Alternative and Direct Investment Securities Association, said that because private markets don’t participate in daily secondary market trading, they are likely more stable during times of market volatility.

There are no data to indicate investors in private markets are doing worse than those in public markets, he said.

“One of the aspects of non-correlated investments that many investors find attractive is that they are professionally managed and largely illiquid assets that can be held during volatile periods through to a better point in the market cycle,” Harrison said in a statement. 

Sales of unregistered securities, known as private placements, are typically a source of investor harm, according to annual NASAA enforcement statistics. State regulators are anticipating similar problems related to the coronavirus outbreak as scamsters use private offerings to promote fraudulent stocks of companies that purportedly make vaccines and protective equipment.

“We are also particularly concerned that people will be pitched on private placements because they appear more stable because there is no secondary market, and they are not being repriced on a daily basis, the same way public securities are,” Gerold said.

Advocates for private securities promote them as alternative investments that can balance a portfolio and augment returns. They can be sold only to investors who meet certain income and wealth thresholds.

Seth Hertlein, executive director of public policy at FS Investments, an asset manager specializing in alternative investments, said Gerold raised good points.

“It is an unfortunate fact that cheats and scammers step up their nefarious activities in times of peril, making investor education and regulatory vigilance all the more critical in such times,” Hertlein said in a statement. “We also agree that transparency into asset valuations is important for investors interested in private investment strategies, which is why we offer state registered offerings that provide routine transparency into portfolio valuations such as our credit REIT.”

The SEC has embarked on rule-making that would open more of the private market to ordinary investors. In a comment letter last month, NASAA urged the agency not to move ahead with new regulations unless they’re accompanied by additional investor protections.

Barbara Roper, director of investor protection at the Consumer Federation of America and a member of the SEC committee, said the SEC should revisit investor protections surrounding the sales of unregistered securities.

“We’ve made it too hard to police those markets and we’ve underinvested in supervision of those markets,” Roper said during the meeting.

In 2018, $2.9 trillion in capital was raised in the private market, compared to $1.4 trillion in the public market, according to the SEC.

Finra: Investors complain about broker operations

Despite the market volatility caused by the pandemic, Finra has not noticed a significant increase in complaints from retail investors about possible rip-off schemes or specific investment products.

Instead, investors who have contacted the Financial Industry Regulatory Authority Inc. through its senior investor hotline have expressed frustration with brokerage operations, Finra senior vice president Gerri Walsh told the SEC committee.

“For example, some retail investors have found it difficult to reach their investment professionals by phone or to access the firm’s website during periods of heavy market activity,” Walsh said. “Such challenges likely stem from system bandwidth issues.”

Other investors have complained about order execution.

Gerold said state regulators have also heard from investorscriticism of their brokers for not returning their calls and for delays in trade executions and fund transfers.

The SEC Investor Advisory Committee represents the viewpoint of retail investors to the agency and makes policy recommendations. The special meeting of the group Thursday centered on how the coronavirus pandemic is affecting those investors.

Written by Investors Wallets

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