State regulators oppose bill to allow private markets access through advisors

This idea may result in investors paying higher fees without requisite returns, argues state regulator.

State securities regulators oppose legislation that would increase the pool of investors who qualify to buy unregistered securities by making investment advisors their portal into the private markets.

In a letter last week to congressional leaders, the North American Securities Administrators Association warned that a bill designed to help startup companies secure financing, the Expanding Access to Capital Act, would put investors in jeopardy and undermine state regulators’ efforts to oversee capital formation activities.

“This legislation will only weaken investor protection and add to the explosive growth of unregulated private securities markets and private funds, thereby depriving the public securities markets and the investors that rely on them opportunities to build secure financial futures,” NASAA executive director Joseph Brady wrote in a Jan. 26 letter to House Speaker Mike Johnson, R-La., House Democratic Leader Hakeem Jeffries of New York and several other Republican and Democratic lawmakers.

The state regulators criticized several titles in the bill, including one that would revise the definition of an accredited investor to include clients of investment advisors. It’s one of the ways to expand the pool of so-called sophisticated investors who can buy private placements. Current rules restrict the accredited investor pool to people who meet certain income or net worth thresholds.

Advocates for allowing more ordinary investors into the private markets say that it would give them an opportunity to participate in high-growth private companies and other ventures that would diversify their portfolios. State regulators, however, have long warned that private placements, which lack the protections of public securities and tend to be opaque and risky, are often the cause of investor harm.

A NASAA official said the group agrees with an Securities and Exchange Commission staff assessment of the concept of ordinary investors becoming accredited through their relationship with an investment advisor. The SEC, which is considering a rule proposal on the accredited investor definition, said it’s incompatible with the current regulatory obligations of advisors and stock issuers.

“This idea may drive investors into relationships with financial advisers where the net result is that the investors are paying higher fees for investing without returns that compensate for the higher fees,” Leslie Van Buskirk, Wisconsin securities administrator and chair of the NASAA federal legislation committee, said in a statement.

Other problems with the accredited investor provision are that it could “pull significant amounts of capital away from the public securities markets and towards the private securities markets” and “would further undermine the existing income and net worth standards that have otherwise been watered down by a failure to adjust them for inflation.”

The House Financial Services Committee approved the bill earlier this year. It’s not clear if or when it will receive a vote on the House floor or whether it will get any support in the Senate.

The Institute for Portfolio Alternatives backs the legislation.

“Modernizing and expanding the definition of an accredited investor is long overdue,” IPA CEO Anya Coverman said in a statement. “IPA strongly endorses expanding the definition of accredited investor to allow retail investors more access to opportunities to diversify their portfolios.”

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To buy private placements, investors must have a net worth of more than $1 million, not including their homes, or an income of more than $200,000. If they meet those thresholds for accredited-investor status, they can buy private equity and hedge fund offerings or purchase non-traded real estate investment trusts and other complex products.

Jim Dew, CEO of Dew Wealth Management, said he welcomes the notion of advisors being a point of entry for their clients into private markets.

“If they’re working with advisors who know that they’re doing, then it opens up the opportunity to build better portfolios with more diversification and more risk/return performance over time,” said Dew, whose clients are almost all small business owners, founders and entrepreneurs who are accredited investors. “Some advisors are not capable or willing to be that conduit. We would.”

But even sophisticated investors often need help in the private markets.

“Often, I see wealthy people who don’t understand finance and investing, and need investment advisors at their side to protect them from themselves,” Dew said.