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.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The SEC should consider alternative criteria for its accredited investor standard, including the use of more liquid investments inside any Reg D private offerings, or require the guidance of a registered investment advisor, according to a just-released report by the Government Accountability Office.
In addition to research with regulators and associations here and abroad, GAO surveyed 27 "market participants" in its study — including RIAs, broker-dealers, securities attorneys and accredited investors themselves — to determine what would be most effective in protecting investors while also encouraging capital formation in private vehicles. Among the options presented to study participants but rejected as unworkable by the GAO were a "self-certification investor designation," an "investor sophistication test" and an investor education requirement.
However, what would be effective, the study found, would be the use of an RIA, suggesting that an accredited investor "who wishes to invest in a private placement offer" be required "to use the services of a registered investment adviser to manage their investment accounts."
The report was delivered yesterday to the Senate Banking, Housing and Urban Affairs Committee and its chairman, Tim Johnson (D-S.D.), and the House Financial services Committee and its chairman, Jeb Hensarling (R-Texas).
As it stands now, to meet the accredited investor standard the SEC requires an investor to have an annual income of more than $200,000 ($300,000 for a married couple) or a net worth of more than $1 million, excluding the investor's primary residence. The thresholds were set in the 1980s and 2010, but the Dodd-Frank Act mandated that GAO study the criteria for qualifying individual investors as accredited.
GAO analysis of federal data on household net worth showed that adjusting the $1 million minimum threshold to approximately $2.3 million, to account for inflation, would decrease the number of households qualifying as accredited from approximately 8.5 million to 3.7 million.
Beginning in 2014, GAO argued that the SEC must review the accredited investor definition every four years to determine whether it should be adjusted, and GAO says its report provides “a reasonable starting point for SEC’s review.”
Such a review by the SEC will be particularly important now, as the agency recently lifted the ban on hedge fund advertising under Rule 506 of Reg D, allowing hedge funds and private equity firms to market their offerings to a wide swath of such accredited investors.
While the market participants in the survey cited net worth as the most important criterion, GAO said among the “financial resources criteria,” market participants with whom GAO spoke most often identified a liquid investments requirement—a minimum dollar amount of investments in assets that can be easily sold, are marketable and the value of which can be verified—as most important for balancing investor protection and capital formation.
The report states that the SEC agreed with GAO’s recommendation.
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