SEC opens gates to accredited investor status — and draws rebuke
The SEC is loosening rules on private market access, expanding who can invest in a sector that has been criticized over lack of transparency.
Under the new order, SEC or state-registered advisors and certain brokerage license-holders, among other individuals and institutions, can now be considered accredited investors, giving them access to investments that include private company offerings and certain private equity funds. Previously, an investor’s wealth was the threshold for being considered an accredited investor.
The regulator’s order, issued Aug. 26, sparked harsh criticism from two SEC commissioners, who asserted that the agency is not addressing the risk and lack of data in the private markets sector.
The amendment to the accredited investor definition, approved Aug. 25 by three out of five commissioners, is part of a broader effort to encourage capital formation and increase investment opportunities, while “maintaining and enhancing appropriate investor protections,” according to the order.
The agency sought to eliminate the notion that merely having wealth indicates knowledge of the markets and “financial sophistication,” according to the order.
“The result of pretending that wealth is a good measure of sophistication is a standard that discriminates against financially sophisticated, lower-income and net-worth Americans,” Commissioner Hester Pierce wrote in a public statement.
Previously, to be considered an accredited investor one had to have at least $1 million in net worth or have an annual income exceeding $200,000 — or $300,000 in joint income — for two consecutive years and an expectation to meet it in the current year.
Under the amendment, individuals with Series 7, 65 and 85 licenses, as well as SEC or state-registered investment advisors, would also be able to invest in private markets, regardless of income.
Because financial advisor salaries can vary year-to-year due to bonus structures and incentives, the wealth requirement had prevented some advisors from investing in the private funds they were recommending to their wealthy clients, according to Christine Lombardo, an attorney representing investment managers and broker-dealers at law firm Morgan Lewis.
If an advisor can recommend to their client to invest in private equity, “it seems counterintuitive that they wouldn't themselves be able to assess the risks associated with investing in a pooled investment vehicle,” she says.
Commissioners Allison Herren Lee and Caroline Crenshaw, who voted against the amendment, argue that the SEC moved forward with the order despite lacking key analysis and data.
“We can’t say with confidence how many private offerings even take place,” they wrote. “We don’t know how many investors will be newly eligible for private offerings under these amendments.”
Consumer advocates criticized the amendment earlier this year. In a letter submitted to the regulator March 9, the Consumer Federation of America said the SEC “appears to be deliberately ignoring extensive evidence” that millions of investors already positioned as accredited investors don’t have access to information needed to evaluate private offerings.
In addition, some non-sophisticated investors meet the net worth requirement due to their retirement savings, according to the letter, savings “they can ill-afford to put at risk in illiquid, opaque and speculative private market investments.”
The SEC’s order follows guidance from the Labor Department earlier this year that allowed 401(k) plans to invest in private equity firms when they are included in diversified funds.
The SEC’s amendment also extends accredited investor status to certain private fund employees as well as family offices and LLCs with more than $5 million in assets, among other entities and individuals.