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SEC Plans More Changes to Accredited Investor Definition

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What You Need to Know

  • The agency wants to update the financial thresholds, which was not done when the SEC expanded the definition in August.
  • The Republican commissioners said they were disappointed with the plan.
  • Money market funds, ESG, gamification, a shortened settlement cycle and advisor custody are also on the agenda.

The Securities and Exchange Commission plans to further amend rules pertaining to the accredited investor definition as well as the agency’s whistleblower rules, according to its just-released Regulatory Flexibility Agenda filed with the Office of Management and Budget’s Office of Information and Regulatory Affairs.

Republican SEC Commissioners Hester Peirce and Elad Roisman issued a joint statement Monday voicing their disappointment with the agency’s plan.

The SEC’s agenda states under “Exempt Offerings” that it plans to update the financial thresholds in the accredited investor definition.

In August 2020, the agency expanded the definition to allow investors to qualify based on defined measures of professional knowledge, experience or certifications, in addition to the existing thresholds for income or net worth.

Those thresholds remained unchanged: a net worth of at least $1 million excluding the value of primary residence, or income at least $200,000 each year for the last two years (or $300,000 combined income if married).

Sara Crovitz, partner at Stradley Ronon in Washington, told ThinkAdvisor Monday that the SEC’s “Exempt Offerings” plan is a “pre-rule” — i.e. not on agenda to be proposed but rather the SEC will ask for comment before issuing a proposal.

The SEC’s consideration is not “at all surprising,” Crovitz said. Democratic Commissioners Allison Herren Lee and Caroline Crenshaw “noted strong opposition to amending the definition of accredited investor without also amending numbers for inflation” when the commission adopted changes last year, Crovitz said.

Republicans ‘Disappointed’

“Not only are the Commission’s most recent amendments to each of these rules less than a year old, they have only been effective for a range of three to seven months,” Peirce and Roisman wrote.

“As far as we can tell,” Peirce and Roisman continued in their Monday statement, “the agency has received no new information which would warrant opening up any of these rules for further changes at this time. We are disappointed that the Commission would dedicate our scarce resources to rehashing newly completed rules.”

The two commissioners added that “a change in administration naturally brings changes in policy, and the Agenda reflects that shift in the form of new rulemakings, but reopening large swathes of work that was just completed without new evidence to warrant reopening is not normal practice. Past Commissions have generally refrained from engaging in a game of seesaw with our rulebook.”

Peirce said in late May during the agency’s meeting of the SEC Small Business Capital Formation Advisory Committee 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.”

The SEC, Peirce continued, “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.’”

Money Market, ESG, Custody Rules Also in Play

The SEC’s Reg Flex agenda also states the agency plans to tackle new rules on money market funds, ESG, gamification, a shortened settlement cycle and advisor custody, but not Regulation Best Interest.

SEC Chairman Gary Gensler has been clear in public statements “that he does not plan at this time to revisit Reg BI with rulemaking, but he does plan that the [SEC] staff under his leadership will examine for it and enforce Reg BI expansively,” said Jim Lundy, partner at Faegre Drinker in Chicago.

The SEC “is not keen to reopen that [Reg BI] can of worms if they don’t have to,” Crovitz told ThinkAdvisor. The SEC wants to see how Reg BI works “because from the SEC’s point of view, and probably even the Democrats’ point of view [Reg BI] has more teeth” than the suitability standard.

The SEC has already warned that “they’re looking at Reg BI in their exams.”

Gensler’s “got a full agenda,” Crovitz said.

With Reg BI “passed and effective, examiners already prioritizing it and probably seeking enforcement referrals, in a way it is not surprising that new Chair Gensler is being more forward looking with his regulatory agenda,” added Lundy.

DOL Fiduciary Rule

The SEC and Labor, however, will coordinate “to some degree” regarding any fiduciary interpretation put forth by Labor.

Labor said Friday in releasing its Reg Flex agenda that it plans to issue a proposed rulemaking to update the definition of “fiduciary,” likely by December.

According to Labor, its planned rulemaking would amend the regulatory definition of the term fiduciary “to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code.”

The SEC and Labor “will have technical conversations. The SEC can’t tell DOL what to do, and it wouldn’t tell DOL what to do, but they will have conversations about how what the DOL does [with its new fiduciary rule] may impact the SEC’s Reg BI,” Crovitz said.

As to the custody rule, the SEC says that it plans to recommend by next April that the Commission propose amendments to existing rules and/or propose new rules under the Investment Advisers Act of 1940 to improve and modernize the regulations around the custody of funds or investments of clients by advisors.

The custody rule does address custody of digital assets, Crovitz said.

(Photo: Andrew Harrer/Bloomberg)