More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
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.