The Securities and Exchange Commission shook up the advisory industry in late August by allowing investors to qualify as “accredited investors” based on defined measures of professional knowledge, experience or certifications — including holding certain Financial Industry Regulatory Authority licenses — in addition to the existing tests for income or net worth.
In the case of individuals, “the previous rule used wealth — in the form of a certain level of income or net worth — as a proxy for financial sophistication,” the SEC stated in its 166-page plan. However, “we do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways.”
Individuals holding FINRA’s General Securities Representative license, or Series 7; Private Securities Offerings Representative license, Series 82; and Investment Adviser Representative (state-registered advisors) license, Series 65 now qualify.
The securities regulator has said that it will reevaluate or add certifications, designations or credentials in the future by order.
“For years, the accredited investor definition was a combination net worth and/or annual income,” Nick Morgan, partner at Paul Hastings in Los Angeles, told me during the latest Human Capital podcast.
Currently, that level is set at $1 million net worth, excluding primary residence, or an annual income of $200,000 or for a spousal couple, $300,000, Morgan explained. The agency received much criticism for failing to update the 38-year-old wealth threshold and indcxing it to inflation.
Changes by order, Morgan said, “are much simpler procedurally than rule changes, which require comment periods and so forth.” The agency likely “started with the Series, 7, 65 and 82 because that was just the simplest and most compelling place to start.”
Jennifer Schulp, director of Financial Regulation Studies at the Cato Institute in Washington, added that including other designations or credentials by order “streamlines the process to a degree, but I would not expect to see any additions in the near term.”
However, Morgan, a former SEC senior trial counsel, said that other certifications make sense, such as Chartered Financial Analyst, CPA as well as lawyer.
Do Not Include MBA
James Allen, head of Capital Markets Policy at CFA Institute, told the agency in a comment letter that additional credentials should be limited strictly to those that display uniformly high standards, and focus specifically on investment decision-making and analysis, and should not include, for instance, general business degrees such as an MBA.
“A business degree may offer a broad understanding of business functions such as marketing, management, or strategy, or may allow students to specialize in any one of those topics,” but “such an education, in our view, would provide an insufficient understanding of the investment process for the purposes of the accredited investor definition,” Allen said.
Likewise, Allen said, “we believe the definition should exclude credentials that relate to investing only incidentally or tangentially.”
As the law firm Ropes & Gray explained in a recent brief, “qualifying as an accredited investor is significant because [they] are eligible to participate in investment opportunities that are generally not available to non-accredited investors, such as many investments in private companies and offerings by certain hedge funds, private equity funds, venture capital funds and other private funds.”
The SEC plan also expanded the list of entities that may qualify, including those that meet an “investments test.”
(See related story: SEC’s Peirce Says She’ll Fight to Further Expand Accredited Investor Definition)
The newly revised definition also added: