Advisors Comment on Federal Rule Redefining “Accredited Investor”

Financial Advisors


Both Congress and state legislatures are trying to get more investors into the private markets, but advisers are divided on whether that’s a good thing.

The Securities and Exchange Commission, which regulates both the advisory industry and the securities market, defines an accredited investor as someone with a net worth of $1 million or more and an annual income of $200,000 or more ($300,000 if married). Current law allows investors to invest in private equity, private hedge funds, unregistered securities, and certain types of crowdfunding, whether or not they are working with financial advisors. Must be certified. according to the estimatethere are about 13.7 million accredited investor households, accounting for about 10.6% of all households.

On April 26, the House Financial Services Committee voted 28 to 21 in favor of a bill that would allow advisers holding certain securities licenses to keep their clients’ money in unregistered securities, regardless of their net worth or income. passed.

Meanwhile, Nevada legislators promote legislation This will allow investors making more than $100,000 a year to qualify as “accredited” investors who can similarly tap into private markets. The bill, which was approved by the Nevada legislature on April 24 and is currently before the Senate, applies strictly to investment opportunities within the state, requiring investors to give up 10% or more of their net worth in a single transaction. is prohibited.

Such proposals regularly attract opposition from groups such as: Public Investor Arbitration Lawyers Association, representing the profit of the investor. Hugh Barkson, president of PIABA and investor advocate for Cleveland-based McCarthy Levitt Crystal & Liffman, said private investment is like stocks, bonds and other publicly traded securities. said it is inherently risky because it is not subject to the regulatory oversight of market.

Because of that ambiguity, people interested in private investing often rely on the expertise of their advisors.

“And there are common themes for the wealthy,” Mr. Burkson said. “In many cases, the more educated you are, the more likely you are to understand the limits of your own knowledge and be more likely to delegate decisions to others to fill gaps in your own knowledge.”

Burkson said he was concerned about federal legislation Formally known as the Expanded Access to Capital Act — could pass the U.S. House of Representatives. But the prospects for the Democratic-controlled Senate look bleak.

Advisors may or may not welcome the opportunity to direct more clients into private placements. Jarrod Sandra, owner of Chisholm Wealth Management in Crawley, Texas, said just having a securities license isn’t as indicative of expertise as some lawmakers think.

The federal bill would allow advisers with Series 7, Series 65 and Series 82 licenses to deposit their clients’ funds in the private market. Of these three, only Series 82 deals primarily with private investment.

Changes to SEC Rules in August 2020 Holders of these three licenses were able to invest their funds in the private market. Still, Sandra said she doesn’t believe any of them bring the necessary expertise to take similar risks to client funds.

“People taking this are being taught how to pass the exam,” Sandra said. “And then they go out on the other side and start talking to people in the real world and find that what they’ve learned barely reflects what’s actually going on.”

Private deals are on the rise in the US According to a JPMorgan Chase reportAnnual investment in private equity increased from $166 billion in 2019 to $268 billion in 2022.

The deal is also subject to regulatory scrutiny. financial industry regulators, broker-dealer self-regulatory bodies, Notification was sent on May 9th. Remind members of additional precautions required for private investment. The report cited an SEC finding that 69% of new money raised in the United States in 2019, worth $2.7 trillion, came from unregistered offerings.

Nicholas Daniel, founder of Columbus Wealth Management in Columbus, Ohio, said the firm has taken on many clients who have already built individual investments into their portfolios.

“These investments rarely outperformed the public market, especially after fees and taxes,” Daniel said in an email. “Almost every client I’ve worked with with these investments has expressed significant dissatisfaction with their performance and their funds being locked up for much longer than originally reported. I did.”

Regarding concerns that investors could be misused, some advisers were quick to point out that fiduciary duty applies to private investments as much as public ones. Tiran Kiridena, founder and CEO of New York-based firm Capital Elements, said wealth managers have a duty to look after their clients’ best interests, regardless of the type of security they recommend. said there is.

“Investment agents already comply with a great many laws and regulations,” said Kiridena. “Regardless of the asset class, we are always expected to do proper due diligence.”

Tom Balcomb, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla., said the big question is who decides what’s safe for investors. Is it the government, or the investor himself with the help of qualified advisors?

“Now it’s a bit like going to a restaurant and being told you can’t order something on the left side of the menu,” Balcombe said.

Jeff Sailing, founder and executive director of business incubator StartupNV, made a similar point when speaking about Nevada’s accredited investor bill. He said Nevada is not a high-net-worth state that meets the SEC’s criteria for certification. This makes it difficult for private startups to raise capital in the state.

Sailing has urged federal regulators to better consider the fact that income and net worth levels vary widely in different parts of the United States and move away from uniform rules.

“If you’re in San Francisco or Los Angeles or New York, the highways will be jammed with accredited investors,” Sailing said. “But they are less than 3% of our population.”

Sandra said she has some sympathy with the argument that governments should not dictate how investors spend their money. But he wondered if customers were losing a lot by being kept away from private placements.

“Show me 30 years when the public market didn’t work,” Sandra said. “If you were investing for the long term, you probably did well unless you were trying to time the market, but then you probably did badly.”



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