The Securities and Exchange Commission shook up the advi- sory industry in late August byallowing investors to qualify as “accredited investors” based on defined measuresof professional knowledge, experienceor certifications — including holdingcertain Financial Industry RegulatoryAuthority licenses — in addition to theexisting tests for income or net worth.
In the case of individuals, “the previous rule used wealth — in the form of acertain level of income or net worth — asa proxy for financial sophistication,” theSEC stated in its 166-page plan. However,“we do not believe wealth should bethe sole means of establishing financialsophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of aninvestor contemplated by the definitioncan be demonstrated in a variety of ways.”Individuals holding FINRA’s GeneralSecurities Representative license, orSeries 7; Private Securities OfferingsRepresentative license, Series 82; andInvestment Adviser Representative(state-registered advisors) license,Series 65 now qualify.
The securities regulator has said thatit will reevaluate or add certifications,designations or credentials in the futureby order.
“For years, the accredited investor definition was a combination net worth and/or annual income,” Nick Morgan, partnerat Paul Hastings in Los Angeles, told meduring 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 receivedmuch criticism for failing to update the38-year-old wealth threshold and indcx-ing it to inflation.
Changes by order, Morgan said, “are
much simpler procedurally than rule
changes, which require comment peri-
ods 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 includ-
ing 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 certi-
fications make sense, such as Chartered
Financial Analyst, CPA as well as lawyer.
DO NOT INCLUDE MBA
James Allen, head of Capital MarketsPolicy at CFA Institute, told the agencyin a comment letter that additional credentials should be limited strictly tothose that display uniformly high standards, and focus specifically on investment decision-making and analysis, andshould not include, for instance, generalbusiness degrees such as an MBA.
“A business degree may offer a broadunderstanding of business functions suchas marketing, management, or strategy,or may allow students to specialize in anyone of those topics,” but “such an education, in our view, would provide an insufficient understanding of the investment
THE PLAYING FIELD
By Melanie Waddell
“We do not believewealth should be the solemeans of establishingfinancial sophisticationof an individualfor purposes of theaccredited investordefinition. Rather,the characteristicsof an investor … canbe demonstrated in avariety of ways.” —SEC
Sizing Up the SEC Accredited Investor
With certifications now a qualifying measure, debate ensues on which
ones should be included.