Earlier this week, I spoke on a panel for the SEC’s Investor Advisory Committee. The was the agenda. Although the video is not yet up and available publicly, I put the draft of my remarks up on SSRN.

Other panelists included:

• Neal Newman from Texas A&M. A copy of his presentation is up on the SEC’s website.
• Rajib Chanda from Simpson Thatcher. His presentation is also available.
• Craig McCann from the Securities Litigation and Consulting Group.
• Melody Wang from Blackrock.
• Phil Bak from Armada ETFs.

If you’re interested in these issues, the panel may be worth listening to when the SEC makes it available.

One of the challenges with the discussion is how to zero in on what we mean by alternative investments. As conceived for the panel, the category includes the wide world of things beyond ordinary stocks, bonds, and public stock/bond mutual funds that may show up in a brokerage account.

This is an issue we’re going to have to navigate in the coming years. It’s not an easy one. There is a huge difference between the sorts of products issued by leading private equity firms and major institutional issuers and some of the other predatory alternative investments that have been sold to retail investors.

As I see it, the SEC faces a few challenges here. First, how do you inform retail investors about the kinds of uncertainty they may face with valuing alternative assets? Brokerage statements usually just give people a number. If they rely on that number with many alternatives, they may end up disappointed when they actually liquidate the product. In my view, it would be better to have account statements communicate a value range instead of a set figure so that investors see the uncertainty. Of course, this will probably be unpopular with financial advisers that sell the products. They’ll sell it at a fixed price and then have to discuss a range in their client meetings.

Second, the other major issue is how to protect retail investors from adverse selection in private markets? I understand why some retail investors will want to “get in” on private market investments on the theory that lots of hot firms like, say, Space-X, just won’t be available on public markets. Yet why would a promising startup or private company have any interest in courting a dispersed base of retail investors? My big fear here is that retail will get to take bets that institutional investors walk past.

There may be ways to mitigate these concerns by making more alternative investment access indirect through funds with sophisticated fiduciary management. One idea might be to only open some funds up to retail so long as there is some ratio between retail and sophisticated institutional capital. Now, CalPERS will see different opportunities than retail. But we might use CalPERS or other sophisticated defined-benefit pension plan participation in an offering as a way to minimize adverse selection risks.

Another major challenge in this space is that retail investors have needs that differ form institutional capital. Lots of alternative investments are illiquid and have a longer time horizon. Retail is much more likely to need sudden liquidity when life happens. Some fund structures may be better than others at balancing these objectives.

The one thing I think the Committee should avoid is focusing on voluminous issuer-disclosures. Retail investors don’t read them. If the goal is to protect retail, we’ll need to do something else.

I don’t know what the Committee will ultimately recommend here, but it’s focused on an important issue.