FA-IQ reached out to top Financial Times-listed broker-dealer and RIA advisors to ask them:

The SEC has proposed expanding the definition of accredited investors. Are you in favor of this move and why?

Gerard Klingman of Klingman & Associates. New-York-based Klingman has been in the industry for 35 years and has $2.1 billion in client assets.

“The SEC’s proposed changes to the accredited investor designation are relatively minor, reflecting a continuation of their cautious and prudent approach to private offerings. The various changes focus on expanding the qualification process to incorporate the idea of financial sophistication. While there is no objective way to measure financial sophistication, the SEC proposes to incorporate professional certifications/designations, place of employment, as well as pooled investment firms (including family offices, RIAs, etc.).

Gerard Klingman

While we believe allowing more private market access to experienced investors is a good thing, the SEC must take a long-term approach to protecting smaller and less-knowledgeable investors. To our surprise, the SEC did not propose changes to the minimum threshold limits: over $200,000 income ($300,000 joint) or $1 million net worth. In fact, the SEC has not increased these thresholds since introducing them in 1982, ignoring nearly 40 years of inflation. We recently read that in 1982, around 0.5% of U.S. citizens met the income limit, while nearly 9% do today — an 18-fold increase.

The SEC is now at a crossroads as the rising number of eligible accredited investors is coinciding with the rising general interest in private markets. If we use history as a guide, investors will undoubtedly need to be protected from themselves, particularly in these less liquid and transparent markets. While these proposed rules move forward to ensuring investors understand the potential risks, they still need to ensure investors are financially equipped to withstand their potential fallout.”

Kevin Fitzwilson of Coldstream Holdings. Bellevue, Wash.-based Fitzwilson has been in the industry for 25 years and has $3.9 billion in client assets.

Kevin Fitzwilson

“A basic concept in securities law is that an offering of securities needs to be registered before it can be sold to the public, unless there is a specific exemption from the registration requirement. The purpose of the registration requirement is to ensure governmental review as a means of protecting investors. One of the exemptions from this rule is for ‘private offerings’ that are made to ‘accredited investors.’ The purpose of the accredited investor standard is to identify those investors that do not need the protection of the Securities Act in making an investment decision — in other words, investors who can fend for themselves. This requires an evaluation of investor sophistication.

The SEC developed the accredited investor standard as a way to measure whether an investor can fend for themselves. They used wealth as a proxy for this measurement, in part because wealth indicated that an investor could afford a loss if the investment did not work out.

The proposed regulation allows individuals with professional designations to serve as evidence of sophistication and includes them in the definition of accredited investors. So, if you hold a Finra series 7, 65, 66 license and/or CFA, CPA, and a few other designations, you may qualify as an accredited investor if the proposed amendment is approved.

In 2018 there were over 1.7 trillion in Section 506 transactions (the accredited-only section of Reg D). Many of these transactions are excellent investor opportunities that are now limited to the wealthy. We think people with these designations should be able to invest in these types of investments. The designations are a good indicator that these folks can fend for themselves, and they should be able to take part in these investment opportunities. In fact, they are probably a better indicator of sophistication than being wealthy. They can evaluate the risks of these investments and therefore should be allowed to participate; these investment opportunities should not be the exclusive domain of the wealthy when others can properly evaluate them.”

Peter Sargent of Sargent Wealth Management at Janney Montgomery Scott. Sargent, who splits his time between Yardley, Pa. and Raleigh, N.C., has been in the industry for 28 years and has $784 million in client assets.

Peter Sargent

“I am in favor of expanding the definition of accredited investors. Three points in particular come to mind:

The proposed new definition of an accredited investor will expand access to include those credentialed investment professionals that don’t meet the current net worth/income requirements.

The addition of 'spousal equivalent' to the accredited investor definition would have positive utility within Janney and with certain clients. This will allow spouses to pool their finances for the purpose of qualifying as accredited investors and provide greater access to a small subset of Janney clients.

People with certain credentials and designations would be included in the definition. This would allow younger, knowledgeable people to also participate. Ironically, under current rules, some younger knowledgeable experts who have not accumulated enough wealth are precluded from participating in investments that will help them build wealth.

It’s important to note, this is a proposal and these changes are loosely defined. The proposal remains in a 60-day public comment period that began on December 18th, 2019.”

This is part of an ongoing series wherein we ask Top Financial Times 400, 300, and 401 Advisors to answer pressing questions about the industry, their practice or their clients. Brokers and advisors make it to the respective Financial Times lists based on scores in six criteria: AUM, AUM growth rate, years in existence, advanced industry credentials, online accessibility and compliance records. Responses have been edited for clarity and concision.

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