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.