Industry observers weighed in quickly Wednesday with both applause and criticism after the Securities and Exchange Commission released its long-awaited revised accredited investor definition.
While not expanding the 38-year-old wealth thresholds, the agency did allow investors to qualify based on defined measures of professional knowledge, experience or certifications — including certain Financial Industry Regulatory Authority licenses — in addition to the existing tests for income or net worth.
(Please take our Twitter poll on which designation you’d add to the SEC’s new accredited investor definition.)
“The SEC contemplates being able to add other designations or credentials — like the CFA, other FINRA exams, or other educational credentials — by order rather than by rulemaking,” Jennifer Schulp, director of Financial Regulation Studies at the Cato Institute, told ThinkAdvisor in an email.
“That streamlines the process to a degree, but I would not expect to see any additions in the near term,” Schulp said.
“By the SEC’s logic, individuals holding certain securities licenses are sophisticated enough to invest, but the SEC continues to lock out clients who rely on the advice of those professionals from the same investment opportunities,” Schulp added.
The Investment Adviser Association lodged the same complaint in an emailed statement.
IAA said it was “disappointed” that the commission failed to act on the group’s recommendation “to allow discretionary clients of fiduciary investment advisers access to those markets.”
The association will continue to work with the SEC “to identify categories of sophisticated individual investors who, with appropriate investor protections in place, can also participate in private capital markets,” it said.
IAA said it is pleased, though, that the SEC “has expanded the ‘accredited investor’ and ‘qualified institutional buyer’ categories to include those institutional investors that have been previously left out.”
Exponential ETFs founder Phil Bak tweeted a similar complaint: “Series 7, 65 or 82 qualify as accredited but CFA or CAIA do not?”
Anya Coverman, senior vice president for government affairs at the Institute for Portfolio Alternatives, says the SEC’s final rule is “an important first step to updating the definition, which has not been significantly updated since its inception in 1982.”
The commission, Coverman added, “could have gone farther in updating a definition that is a cornerstone of Regulation D,” which governs unregistered securities offerings, but the IPA “supports the Commission’s invitation for further public feedback and comment.”
Christopher Gerold, president of the North American Securities Administrators Association and chief of the New Jersey Bureau of Securities, said the SEC’s rule “continues its deregulatory campaign to expand private markets, while showing little regard for the potential adverse effects on investors and the public markets.”
The SEC, he maintained in a statement, “should focus on growing and promoting the public markets rather than incentivizing issuers to raise capital in the private markets. Further expansion of private markets comes at the expense of the public markets, which are essential to the health of our economy.”
The agency also “squandered an opportunity to fulfill its mandate to protect investors by failing to address long overdue changes to the wealth and income standards defining accredited investors,” Gerold said.
For the past 38 years, the SEC’s “failure to index these standards to account for inflation has eroded the investor protections they were designed to provide. Each year the Commission fails to address these standards only expands the pool of accredited investors, including investors who only meet the wealth standard based on their accumulated retirement savings.”
John Bowman, senior managing director with the CAIA Association, which provides alternative investment education, said “shifting from the dated binary wealth and income test to a multi-factor approach centered on education is right on.”
Also, “Capital formation and diversification benefits are building blocks of solid long-term wealth creation that all investors should have access to,” Bowman said.
That said, “throwing the unsophisticated retail investor into a wide dispersion, opaque, high fee, idiosyncratic bullpen without proper education is derelict and at odds with true fiduciary duty,” he added.
CAIA will “therefore continue to implore the SEC to raise the standard of care above the newly minted ambiguous and porous Reg BI and add professional designations like CAIA to the list of educational paths,” according to Bowman.