In a November 15, 2013 letter to Representative Scott Garrett (Chairman of the Subcommittee on Capital Markets and Government-Sponsored Enterprises for the House Financial Services Committee), SEC Chair Mary Jo White described potential changes to the accredited investor definition and factors that will be considered by the SEC in its comprehensive review of the accredited investor definition. Ms. White’s letter was in response to an October 30th letter from Mr. Garrett that had posed a number of questions relating to the SEC’s plans with respect to its review of the accredited investor definition, which is required by Section 413(b)(2)(A) of the Dodd-Frank Act. The Wall Street Journal has a good article up that provides some additional background and context for this letter and the ongoing back and forth between the SEC and Congress.
In responding to Mr. Garrett’s questions, Ms. White did not offer many specifics, but did indicate that the SEC is considering all aspects of the accredited investor definition. Ms. White’s letter states that the SEC is examining:
whether the existing net worth and income tests are appropriate measures that should continue to be used (presumably this also includes consideration of whether and how the net worth and income thresholds could or should be adjusted);
whether financial professionals, such as registered investment advisers, consultants, brokers, traders, portfolio managers, analysts, compliance staff, legal counsel, and regulators should be considered accredited investors without regard to net worth;
whether individuals with certain educational backgrounds focused on business, economics, and finance should be considered accredited investors without regard to net worth;
whether an expanded pool of accredited investors would help provide liquidity in private placement investments and thereby reduce the risk profile of those investments;
whether reliance on a qualified broker or registered investment adviser should enable ordinary investors to participate in private placements; and
whether reducing the pool of accredited investors would harm U.S. GDP.
It appears that Ms. White agrees in principle with several assertions underlying Mr. Garrett’s questions. For example, Ms. White agrees that the inclusion of more financially sophisticated investors in private offerings (regardless of whether the investors are “large or small”) would improve the extent to which private offerings are scrutinized by investors generally.
Ms. White is also open to the idea that certain professional certifications and educational backgrounds may be useful proxies for financial sophistication, such as CPA or CFA designations, securities licenses, and degrees in business, finance, accounting, or economics. Ms. White also noted, however, that the SEC has already received comments expressing concern as to whether academic background alone is an appropriate measure for determining accredited investor status.
Ms. White also cautioned that alteration of the accredited investor criteria may not necessarily result in a substantial increase in the pool of accredited investors due to overlap between those who meet the existing tests and those who might meet any new or changed tests.
The letter concludes by noting that the SEC is in the process of complying with Mr. Garrett’s request that it produce all communications between the SEC and the GAO relating to accredited investor matters over the last 18 months.