SEC chair wants to roll back 'accredited investor' distinction

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WASHINGTON — If a client seeks to invest in private placements like a venture capital or hedge fund, advisers must apply a litmus test to determine the investor's eligibility.

The interim head of the SEC wants to change that.

Acting Chairman Michael Piwowar argues that the definition of an "accredited investor" is a needless distinction that perversely may harm the small-time investors it was meant to protect from losing money on risky bets.

"In my view there is a glaring need to move beyond the artificial distinction between so-called accredited and non-accredited investors," Piwowar said here at the annual SEC Speaks conference.

Under current rules, investors meet the accredited threshold with an individual income of $200,000 (or $300,000 household) or a net worth of $1 million, excluding their primary residence.

Piwowar argues that that cutoff puts high-risk/high-reward investments off-limits for smaller investors, meaning that a regulator whose core mission includes investor protection is actually blocking access to potentially lucrative opportunities.

Moreover, he cites the emphasis on diversification found in modern portfolio theory to argue that some of the investment vehicles that are available to accredited investors can actually help mitigate risk in a portfolio by spreading the assets around.

"We may have forgotten and, in fact, disadvantaged a set of investors," he says.

Defenders of the accredited investor threshold argue that it is a helpful safeguard to protect unsophisticated consumers from getting caught up in risky ventures that they might not fully understand.

But Piwowar sees a broader point in his critique of the accredited investor rules. Securities regulators, he argues, have frequently overlooked the "forgotten investor" that the commission "is meant to serve and protect but so often has not."

So well-intentioned rules like those governing accredited investors have created more harm than good in Piwowar's estimation, and that argument extends to a host of other SEC regulations that he opposes, including some that he has already moved to roll back as acting chair, such as the rules on corporate pay-ratio disclosure and conflict minerals.

The SEC, like the rest of official Washington, is in "a time of transition," Piwowar says, noting that presently only he and Democrat Kara Stein sit on the five-person panel.

With a permanent chairman awaiting Senate confirmation, Piwowar says he looks forward to a fully staffed commission. President Trump's nominee to head the SEC, Wall Street lawyer Jay Clayton, is widely expected to continue the administration's broad deregulatory agenda, leaving in limbo issues like a uniform fiduciary standard for brokers and advisers.

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Financial regulations Venture capital Hedge funds SEC