The SEC recently redefined the accredited investor standard that is used to determine whether individuals are permitted to purchase insurance products such as Variable Universal Life policies and Variable Annuities that permit investment in exotic, high-risk products such as hedge funds and private equity. The new definition effectively increases the net worth at which an investor may qualify to purchase these riskier products.
Under the amended rule, as reported by AdvisorOne, an investor’s principal residence is excluded from the net worth calculation. Individuals (or married couples) are qualified as accredited investors under the rule if they have a net worth of at least $1 million, excluding the value of the investors’ principal residence. The rule was motivated in part by inappropriate marketing efforts that may have targeted families that, due to the inflated housing market, were “house rich” but who lacked the investing sophistication to fully understand the exotic products that they were purchasing.
What does the rule mean for your clients and prospects? For starters, the rule will re-establish the cache of private placement insurance products and help move them back into the exclusive realm of the advanced markets producer.
Who Are Accredited Investors?
Accredited investors are permitted by the Securities and Exchange Commission to invest in higher risk investments that are off-limits to the average investor. These investments require fewer public disclosures and generally don’t require registration, thereby increasing investor risk. Individuals are qualified as accredited investors if they satisfy either an annual income standard or a net worth standard.
The Wall Street Reform Act of 2010 amended the net-worth standard, mandating that the SEC amend its rules respecting the net worth component of the standard; yet left the income standard alone.
Under the income standard an individual with an annual income of $200,000 in each of the two most recent years, or a married couple with an annual income of $300,000 in each of the two most recent years, is an accredited investor.
Prior to the recent rule change, individual investors could also be qualified as accredited investors if they had a net worth, or joint net worth with their spouse, of more than $1 million, including the value of the investor’s principal home. As mentioned, the new rule excludes the investor’s principal home from the calculation.