The SEC's Advisory Committee on Small and Emerging Companies wants the commission to expand the number of investors eligible to buy unregistered securities.
The advisory committee approved by voice vote Tuesday a recommendation that would broaden the Securities and Exchange Commission's definition of an accredited investor to include those who have passed the Series 7, 65 or 82 securities license exams or who have obtained a chartered financial analyst or similar credential.
Right now, an accredited investor is defined as someone who has earned $200,000 in each of the previous two years or has a net worth of more than $1 million, excluding the value of a primary residence.
Tim Steffen, director of financial planning at Robert W. Baird, said expanding the accredited-investor definition to include those with securities licenses or other credentials is a good route to deepening the capital pool.
“That's a better way to go about it than lowering the [financial] thresholds,” he said. “You're running less risk of picking up unsophisticated investors.”
Neil Waxman, managing director of Capital Advisors Ltd., agreed, but thinks a certified financial planner mark should be added to the list.
Advisers “should know whether they can take that risk,” he said.
Though the small-business panel's recommendation is non-binding, SEC Chairwoman Mary Jo White, who attended Tuesday's meeting, said revising the definition is an “issue of great importance” and that agency staff is working on a recommendation to the SEC members.
Ms. White asked whether there ought to be limits on the amount of money investors can put into Regulation D securities if more are able to buy them.
“I could see a reason for limits. I don't know what they might be,” said Stephen M. Graham, co-chair of the
committee, which was established to advise the SEC on policies related to firms with less than $250 million in public market capitalization.
The committee wants to increase the pool of accredited investors to allow small companies to raise more capital.
But that goal must be balanced with investor protection, SEC member Kara Stein said at the meeting.
It is “the tension we have to keep struggling with,” she said.
The Dodd-Frank financial reform law requires the SEC to review the accredited investor parameters periodically. The SEC staff released a report last December that has generated 40 comment letters.
In its letter, the Investment Adviser Association
recommended that advisory clients be deemed accredited investors. The small business panel did not raise this option during its discussion.
Mr. Steffen is opposed to automatic accreditation for clients of investment advisers.
“I'd like to see more emphasis on the actual investor rather than the qualifications of the adviser,” he said. “It's the investors who put their money at risk, not the advisers.”
Mr. Waxman also opposes making advisory clients accredited. He's leery of allowing ordinary investors to participate in private placements, which he said are often at the heart of fraud cases. Having an adviser as the safety valve to allow some clients in and keep others out wouldn't work, he said, if the adviser could benefit from putting more people into a private deal.
“It opens the gates for abuse,” Mr. Waxman said.
Advisers on the TD Ameritrade Institutional platform also have expressed misgivings about accrediting advisory clients, according to Skip Schweiss, managing director of adviser advocacy.
“Some felt qualified to be gatekeepers,” Mr. Schweiss said. “Others felt they didn't want any part of that liability.”
