SEC proposes expanding definition of 'accredited investor'

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The range of clients able to invest in high-risk, high-return products like hedge funds and other private vehicles may be changing.

The SEC is proposing amendments to its definition of an accredited investor that would expand the qualification pool. Under the current definition, individuals must have a net worth of $1 million to qualify.

While the net worth requirement will remain unchanged, the new SEC plan would allow individuals with certain professional financial certifications — including Series 7, 65 and 82 licenses — to qualify.

The proposal also allows “knowledgeable employees” of private investment funds to become accredited investors, as well as family offices with at least $5 million in AUM. In addition, so-called “spousal equivalents” would be permitted to pool their finances to qualify.

The proposals will not impact financial advisors with high-net-worth clients, said MarketCounsel CEO Brian Hamburger.

“Those clients are already accredited investors, and this rule proposal doesn’t change their status,” he said.

But RIAs and broker-dealers may be affected after the SEC reviews public comments, noted Dan Bernstein, MarketCounsel’s chief regulatory counsel. The regulatory agency is soliciting public comments on whether investors advised by an RIA or broker-dealer should be considered accredited under the new rules, Bernstein said.

The amendments are part of SEC Chairman Jay Clayton’s attempts to open up private markets to a wider range of investors.

[Restrictive amendments] could limit investor access to investment opportunities where there may be adequate investor protection.
Securites and Exchange Commission

“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth,” Clayton said in a statement. “Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication.”

Annual salary restrictions for individuals and couples to qualify as accredited investors will remain at $200,000 and $300,000, respectively.

But entities such as Native American tribal governments and state and local governments with over $5 million in assets can become accredited as qualified institutional buyers under the SEC proposals.

The SEC said it sought a balance between amendments that were “overly broad” and “unnecessarily narrow.”

Expanding the qualifications too much “could potentially undermine important investor protections and reduce public confidence in this vital market,” the regulator said in its proposal.

Restrictive amendments, the SEC added, “could limit investor access to investment opportunities where there may be adequate investor protection given factors such as that investor’s financial sophistication, net worth, knowledge and experience in financial matters, or amount of assets under management.”

Public comment on the proposed amendments will be accepted for a 60-day period through mid-February.

The SEC’s internet comment form can be found at www.sec.gov/rules/proposed.shtml; comments can also be sent by email to rule-comments@sec.gov and should include File Number S7-25-19 on the subject line.

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SEC SEC regulations Regulatory reform SEC Jay Clayton
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