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SEC’s Peirce Pushes for More Accredited Investor Rule Changes

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What You Need to Know

  • Commissioner Hester Peirce wants the SEC to give greater flexibility in determining who qualifies as an accredited investor.
  • The agency expanded the definition in August 2020.
  • Meanwhile, FINRA wants BDs to weigh in by June 28 on whether it creates “unintended barriers to greater diversity and inclusion.”

SEC Commissioner Hester Peirce, a Republican, wants new SEC Chairman Gary Gensler to prioritize this year giving greater flexibility in determining who qualifies as an accredited investor.

During the agency’s recent meeting of the SEC Small Business Capital Formation Advisory Committee, Peirce stated that “an entrepreneur who is plugged in to a network of financially sophisticated people should be able to go to those people for funding, even if they are not wealthy enough to meet our financial thresholds. We need to open additional doors to accredited investor status, such as educational credentials.”

Peirce said the SEC “laid the groundwork for such an opening in our most recent accredited investor rulemaking,” passed last August. “Now we need to act on it, and the Commission specifically invited this Committee to ‘make further recommendations, including additional certifications, designations, or credentials that further the purpose of the accredited investor definition.’”

The agency expanded its accredited investor definition on Aug. 26, 2020, to 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.

Last September, Peirce vowed to advocate within the agency for more designations to be added as accredited investors.

“My view is we really ought to try to move away from these not completely arbitrary distinctions of, ‘you can invest and you can’t invest,’” Peirce said then during a Zoom event held by the Competitive Enterprise Institute.

Peirce added that it was “incumbent upon all of us to know ourselves and to know what our limits are but also to know when we need to get professional financial advice, which can help us make decisions, too.”

Gensler Weighs In

SEC Chairman Gary Gensler noted that the work of the Small Business Capital Formation Advisory Committee resonated with him as his father “started and ran a small vending machine business in Baltimore.”

A critical part of the SEC’s mission is to facilitate capital formation, Gensler said, and “American entrepreneurs and business owners rely on a diverse array of sources to fund their companies.”

In his dad’s case, “he used his mustering-out pay from World War II to buy used vending machines, fix them up, and build our family business. Today, who knows? He might have used equity crowdfunding platforms, though my daughters would’ve had to set up his account and do all his marketing for him,” Gensler said.

“The third part of the SEC’s mission — ‘facilitate capital formation’ — doesn’t pick winners and losers,” he continued.

“All companies, from small businesses to high-growth startups to corporations, deserve access to our capital markets to fund their entrepreneurial ideas and innovations, regardless of their race, gender, geography, or any other factor,” Gensler said.

“As a society, we still have a lot of work to do to correct unequal access to capital for underrepresented groups.”

Impact Of Rulemaking On Minority Groups

Indeed, SEC Commissioner Allison Herren Lee, a Democrat, stated in the meeting that the Commission “needs to confront how we go about assessing the effects of our rulemaking on these communities. Are there likely to be disproportionate costs to certain segments of our population from our policymaking? How can we best ensure that the benefits of our rules will indeed flow through to these communities?”

She added: “If we do undertake specific policy initiatives, for instance, to increase access to capital for women- and minority-owned businesses, how do we analyze whether our policy choices will have the intended effect?”

Noting her previous comments about the steps the SEC should take to “better incorporate diversity considerations into its policymaking,” Lee added that the first “is incorporating our Office of Minority and Women Inclusion into our rulemaking process to help ensure that we’re leveraging all of our expertise on these topics.”

The second: incorporate into the SEC’s economic analysis “an assessment of the costs and benefits of our rules on different segments of the population, Lee said.

FINRA Seeks Feedback on Diversity, Inclusion Barriers

The Financial Industry Regulatory Authority wants broker-dealers to weigh in by June 28 on FINRA rules, operations and administrative processes that may create “unintended barriers to greater diversity and inclusion” in the industry or that might have “unintended disparate impacts” on those within the industry.

In Regulatory Notice 21-17, FINRA asks broker-dealers to provide feedback on five areas of its rules or market practices that could impact the BD industry on the basis of national origin, language, age, gender, race, color, ethnicity, socioeconomic status, religion or spiritual practice, disability, sexual orientation, gender identity, family structure or veteran status or discourage participation in the industry.

One question requests feedback on whether the current collection and publication of registered representative background data, including that which relates to education, employment status, tenure, and complaints and grievances, create an unintended barrier to greater diversity in the industry.

More Changes Under Gensler

Peirce noted during a separate speech recently that she’s anxiously awaiting Gensler setting out his priorities for the coming months.

“Market events, of course, will dictate some of the agenda,” Peirce stated.

She added that the SEC staff is working on a report about the events “related to meme stock trading earlier this year, and some regulatory initiatives may come out of that work.”

Gensler testified on May 6 during the House Financial Services Committee third hearing on market volatility related to the GameStop trading incident.

Peirce also said that as the agency understands more about the failure of Archegos Capital Management, “discussion about regulatory changes might be appropriate.”

She opined that “commentators have gotten a head start and have identified a number of regulatory responses, including possible regulation of family offices and enhanced disclosure requirements for synthetic stock positions created through the use of total return swaps and possibly other derivative instruments.”

Preventing family offices “from losing their fortunes is not in the category of problems that the SEC needs to step in to solve,” Peirce stated. “I am much more interested in expanding access to our capital markets so that less well-heeled families can build their fortunes.”

Financial regulators, she added, “do have a legitimate interest in risk management at regulated entities, and it may be worth exploring whether there were problems in this area that need to be addressed. But even here, such events inevitably serve as lessons for risk managers (underscored by the demotions and firings that followed the Archegos failure), but they need not serve as justifications for more regulation.”

Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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