More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- The Custody Rule and its Ramifications When an RIA takes custody of a clients funds or securities, risk to that individual increases dramatically. Rule 206(4)-2 under the Investment Advisers Act (better known as the Custody Rule), was passed to protect clients from unscrupulous investors.
Taking another step toward meeting the requirements of Dodd-Frank, the Securities and Exchange Commission on Wednesday redefined its $1 million-in-net-worth “accredited investor” rule to exclude the value of an individual’s primary home from its net worth calculations. Only accredited investors are allowed to purchase Reg D securities under three rules of the Securities Act of 1933.
In addition, the SEC’s redefinition clarifies treatment of borrowing secured by an individual’s primary residence in calculating that individual’s net worth. Specifically, that indebtedness is not treated as a liability unless the borrowing occurs in the 60 days preceding the purchase of securities in an exempt offering in which only accredited investors can participate. If that debt is incurred in connection with the individual’s acquisition of a primary residence, the debt secured by the primary residence must be treated as a liability in the net worth calculation.
Furthermore, the redefinition allows, in certain circumstance, for an individual who previously qualified as an accredited investor pre-Dodd-Frank to use that prior net worth standard for certain follow-on investments.
In May of this year, the SEC proposed a rule under Dodd-Frank Section 418 to amend Rule 205-3 of the Investment Advisers Act that would raise the dollar amount thresholds for investment advisors to charge performance fees to $1 million in assets under management and $2 million in net worth. Those thresholds are what makes a prospective investor a “qualified investor” for many private investment vehicles.
The amended accredited investor net worth standard, the SEC said, will take effect 60 days after publication of the redefined rule in the Federal Register, and beginning in 2014 and every four years thereafter, the Dodd-Frank Act requires the SEC to further review the accredited investor definition in its entirety and to then take what it deems to be appropriate further rule-making steps.
The SEC boasted in its announcement of the redefinition that the agency has now proposed or adopted more than three-quarters of the rules that the Dodd-Frank Consumer Protection Act of 2010 required it to write.