Rules governing what kind of investor can put money into private securities offerings are up for review this year and could move away from a strict net worth and asset test.
The Dodd-Frank financial reform law requires the Securities and Exchange Commission to revisit the accredited investor standard every four years. This month marks the fourth anniversary of the law's enactment, which catalyzed a debate last week at a meeting of the
SEC Investor Advisory Committee.
The panel, created by Dodd-Frank to represent retail investors, did not issue formal recommendations. But among the ideas floated were increasing the income and net-worth thresholds, limiting the percentage of an investor's net worth that could be invested in private placements and developing a test to assess an investor's sophistication.
“The current definition does not effectively serve its intended purposes,” Barbara Roper, director of investor protection at the Consumer Federation of America, said at the IAC's July 10 meeting. “The commission needs to look beyond the existing approach. The way we got to the current definition is that it's easy to administer. The only problem is that it doesn't work.”
Under rules set in 1982, an accredited investor is defined as someone who has an annual income of $200,000 ($300,000 for couples) or a net worth of $1 million or more outside of a primary residence. About 8.5 million Americans are accredited investors under the standard.
Ms. Roper said the IAC subcommittee she heads will explore how to determine an investor's sophistication.
The full IAC likely will vote on an accredited-investor recommendation at its October meeting, she said.
The five SEC commissioners do not have to act on the IAC recommendation and, in fact, may choose not to change the definition.
A year ago, the Government Accountability Office issued a report suggesting alternative criteria for the accredited investor standard.
The challenge for the SEC is to balance investor protection when it comes to risky private placements and investor choice, said Neal Solomon, managing director of WealthPro.
“Testing sophistication is a difficult concept for me to get my arms around,” said Mr. Solomon, who works with some clients on private placements. “How do you judge that? It becomes subjective.”
The accredited investor definition already has changed once since Dodd-Frank was enacted, when the SEC removed primary homes from the net-worth calculation.
Kevin Hogan, president of the Investment Program Association, thinks that's enough adjustment for now.
“Just to arbitrarily focus on income or net worth seems somewhat limiting or myopic,” said Mr. Hogan, whose group includes the nontraded real estate investment trust sector. “Just raising the income level seems to be against job creation and capital formation.”
That sentiment was echoed at the IAC meeting by James Glassman, executive director of the George W. Bush Institute. He argued that there are no restrictions placed on the most costly activities people can undertake — buying a home and having children.
“People want to provide for their own retirements,” Mr. Glassman said. “They should be given the freedom — or assume the freedom — to do that.”
The definition should be expanded to encompass an investor's education, experience and training and whether he or she uses a financial adviser, Mr. Hogan asserted.
“Let's look for ways to be more inclusive, not exclusive,” Mr. Hogan said.
A broker's judgment about his or her client's ability to invest in a private placement also should be taken into consideration, according to Mr. Solomon.
“There should be an element of human judgment to be applied,” Mr. Solomon said.
