Investment advisors could become portals to private market investments for their retail clients under legislation being championed by the Investment Adviser Association.
The chairman of the House Financial Services Committee, Republican Rep. Patrick McHenry of North Carolina, has made capital formation legislation a top priority. One of the ways the GOP wants to increase funding for startup companies is to allow more investors to buy unregistered securities.
Members of the panel’s capital markets subcommittee last month discussed several draft bills to change the definition of an accredited investor who is deemed sophisticated enough to purchase so-called private placements.
As a bill works its way through the committee, the IAA is pushing to add a provision that would allow clients of investment advisors to qualify as accredited investors. The idea is that advisors, who owe a fiduciary duty to their clients, would serve as a proxy for sophistication. Under current rules, investors must meet certain income and net worth thresholds to qualify for accreditation.
If an advisor believes that a private securities investment is in the best interest of her client, she can make that investment on the client’s behalf using her discretionary authority, said IAA CEO Karen Barr.
“It’s just an opportunity to broaden the access to private investments for investors for whom the investment advisor thinks [it] right for them,” Barr said Tuesday on the sidelines of the IAA Compliance Conference in Washington.
The IAA last week met with Rep. French Hill, R-Ark. and a House financial services subcommittee chairman, about the accredited investor definition. Hill likely will play a role in putting together a capital -formation bill.
“We have developed some language and hope for it to become part of the package,” Neil Simon, IAA vice president for government relations, said during a conference panel.
A bill is likely to get through the committee and perhaps the full Republican-majority House, too. But its viability in the Democratic-controlled Senate is less clear.
Some Democrats, such as Reps. Jim Himes of Connecticut and Brad Sherman of California, have expressed willingness to consider legislation. But it will take more than a handful of Democrats to get the bill through Congress.
“The question is where do you find bipartisan agreement,” Langston Emerson, a partner at Mindset, a government relations firm, said during the conference panel. “It’s just a very toxic political environment.”
Simon is searching for Democratic backers.
“This should not be a partisan issue,” he said on the sidelines of the conference. “We’d love to get some Democratic support and we are trying to achieve that.”
Some advisors blanch at the notion of being the conduit to private placements for their clients. They worry about possible liability.
Barr stressed that an advisor wouldn't be compelled to open the door to the private markets for a client who wanted to enter them.
“It’s voluntary,” she said. “It’s an opportunity rather than a requirement.”
The SEC-registered RIA advises on more than $1 billion in client assets, with no advisory fee through 2027 and no human financial advisors.
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