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SEC Investor Advisory Committee Mulls ‘Accredited Investor’ Criteria

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The Securities and Exchange Commission’s Investor Advisory Committee met Thursday to discuss ways the SEC could update its decades-old definition of accredited investor.

During SEC opening remarks at the meeting, SEC Chairwoman Mary Jo White gave committee members an update on the SEC staff’s progress on previous Investor Advisory Committee recommendations — specifically the agency’s crowdfunding rules under the JOBS Act, a rule to put brokers under a fiduciary mandate, and target date funds.

Barbara Roper, director of investor protection for the Consumer Federation of America, who heads the committee’s Investor as Purchaser Subcommittee, said that her subcommittee is focused on drafting recommendations that apply to “natural persons” under the SEC’s accredited investor definition, not institutional investors.

The definition, written in 1982, hasn’t been updated for inflation, Roper said. As it stands now, a natural person who qualifies as an accredited investor is a person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years, or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value of the primary residence.

But Roper argued that when adjusted for inflation, the $200,000 and $300,000 would be $500,000 or $700,000 in income today.

J. Robert Brown, law professor at the University of Denver, opined that the $1 million net worth standard “should back out the retirement assets.”

The Dodd-Frank Act also required the commission to evaluate its accredited investor definition every four years. Roper noted that with the four-year anniversary of Dodd-Frank hitting this year, “SEC staff is looking at this [accredited investor definition], and we have the potential to make useful input on this issue.”

Roper said that the subcommittee’s draft regarding how to update the accredited investor definition states that “the current definition does not serve its purpose.” However, she stressed that the subcommittee doesn’t recommend simply “raising the [income] threshold,” because “there will never be a threshold that will serve as a good proxy for sophistication.”

In tackling how the definition should be modified, Roper said that the subcommittee “went back to basics” to ask the commission if the definition fulfills its intended goal.

“The thresholds set years ago should be revisited,” Roper said, adding that a “sophistication aspect” should be added to the definition.

Indeed, Steven Wallman, a former SEC commissioner who’s the founder and CEO of Foliofn, as well as the current chairman of the Investor Advisory Committee’s Market Structure Subcommittee, said that modifying the current accredited investor definition is “not an easy issue.” Roper told ThinkAdvisor after her comments that a formal recommendation regarding the SEC’s accredited investor definition would hopefully be available to present to the full committee at the Investor Advisory Committee’s Oct. 9 meeting.

“We have some significant work ahead of us at the subcommittee level,” Roper said.

In drafting its recommendation, Roper added that the subcommittee would likely consult with the SEC’s Division of Economic and Risk Analysis as well as with state securities regulators “to draw a clearer picture of harm” that occurs when investors lack sophistication to make informed decisions.

Updates on Fiduciary, Other Rules

As to whether a uniform fiduciary rule would surface this year, White told reporters after her remarks that “it’s a very important priority for the commission to … decide whether to adopt a fiduciary duty for broker-dealers; in terms of timing, we do have a very full plate, and that [uniform fiduciary rule] is among the more complex issues that we have to deal with… It’s very important that the commission address what its position is [on that rulemaking] in the near term.”

White told committee members that their recommendations regarding the agency’s crowdfunding rules were “being fully considered.” She said the SEC would consider comments received earlier this year on crowdfunding as it “develops recommendations for final rules.”

White has said final implementation of crowdfunding rules is a top priority for the agency this year.

For target date funds, the Investor Advisory Committee recommended earlier this year that the SEC develop a glide path illustration based on a standardized measure of fund risk as a replacement for, or supplement to, the SEC’s proposed asset allocation glide path illustration.

Since reopening in April the comment period on its target date fund proposal, White said that the commission has received 29 comment letters generally favoring appropriately tailored enhanced disclosure requirements for target date fund marketing materials.

A number of commenters, White said, “expressed concerns that standardized risk measures could potentially confuse or mislead investors, while others supported the proposal citing the potential usefulness of a standardized risk measure.”

The Department of Labor has also proposed to amend disclosures and require a glide path illustration for target date funds subject to the Employee Retirement Income Security Act; DOL’s comment period for that initiative closed earlier in July.

White said that SEC staff “is carefully considering the comment letters we received and will coordinate with the Department of Labor on our respective initiatives, as appropriate.”

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