Anyone who hires an investment adviser would qualify as a sophisticated investor eligible to purchase unregistered securities under a proposal by an adviser interest group.
In
a comment letter to the Securities and Exchange Commission this week, the Investment Adviser Association urged the agency to expand the definition of “accredited investor” to include the clients of registered investment advisers, even if they don't meet the mandatory income and net-worth levels.
The current accredited investor standard requires a person have a net worth of more than $1 million, not including the value of a home, or an annual income of $200,000.
Under the Dodd-Frank financial reform law, the SEC must review the accredited-investor standard every four years, and is authorized to revise it.
The limits were implemented in the early 1980s as a way to prevent ordinary investors from being harmed in the purchase of unregistered securities that often pose higher risk than investments offered to the public.
But the IAA argues in its letter that RIA advisers, who must act in a client's best interests, act as a kind of Sherpa and can help clients navigate private placements. This will allow them to “fend for themselves” as investors, a description applied to accredited investors.
“We continue to believe that investment advisers retained by investors to manage their assets on a discretionary basis, and pursuant to a fiduciary duty, provide precisely the type of protections intended by the definition,” wrote Robert Grohowski, IAA general counsel.
In an interview, Mr. Grohowski said IAA is promoting a “common-sense” change to the accredited investor definition that recognizes the role advisers play in helping clients.
“Fundamentally, it's what they do,” he said. “They are professionals at evaluating investments and making decisions.”
But some advisers have expressed reservations about being the gatekeeper for private placements, worrying about potential liability risk.
Mr. Grohowski counters that making clients accredited investors doesn't mean advisers have to recommend the more-risky or more-illiquid offerings.
“If advisers aren't comfortable making those kinds of investments on behalf of their clients, then they don't have to,” he said.
In
a December report, SEC staff did not recommend that the accredited-investor definition be expanded to include advisory clients. A limited number of ordinary investors can qualify for a private placement if they use a “purchaser representative.”
The IAA letter countered: “We believe that investment advisers are, in essence, the most effective type of purchaser representative.”
The House approved a bill earlier this year that would expand the definition of accredited investor to include people who have securities licenses. But it did not have a provision that addressed clients of advisers.
