Hedge fund industry welcomes new accredited investor definition
After years of considering the issue, the U.S. Securities and Exchange Commission has adopted amendments to the “accredited investor” definition to include individual’s professional knowledge, experience or certifications in addition to the existing test based on income or net worth.
“Today’s amendments are the product of years of effort by the Commission and its staff to consider and analyze approaches to revising the accredited investor definition,” said SEC Chairman Jay Clayton. “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication. I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations, that may qualify to participate in certain private offerings.”
Modernization of the rule was long overdue.
According to the regulatory agency, the amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify.
“Modernization of the rule was long overdue and shifting from the dated binary wealth and income test to a multi-factor approach centered on education is right on,” said John Bowman, senior managing director with the CAIA Association. “Capital formation and diversification benefits are building blocks of solid long-term wealth creation that all investors should have access to.”
Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets. The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets, the SEC said in a statement released on August 26.
Still, CAIA’s Bowman said that throwing an unsophisticated retail investor into a wide dispersion, opaque, high fee idiosyncratic bullpen without proper education is at odds with true fiduciary duty. The CAIA Association with 10,000 members worldwide is urging the SEC to raise the standard of care above the newly minted ambiguous and porous REG BI and add professional designations like CAIA to the list of educational paths.
Another industry lobbying group welcomed the amendments. The Hedge Fund Association said the changes are inline with recommendations it has made over the years to include ‘verifiable knowledge-based standards to expand the universe of accredited investors and enable greater access to alternative investment funds based on financial sophistication.
“We applaud the SEC’s amendments to the accredited investor definition and we concur with SEC commissioner Hester M. Peirce’s view that Series 7, 65, and 82 license holders and well-informed employees of private funds clearly have the knowledge and expertise to evaluate the merits and risks of an investment,” said Mitch Ackles, HFA’s global president.
The SEC amendment widens the definition of accredited investors to included knowledgeable fund employees, LLCs with $5 million in assets, family offices with at least $5 million in AUM, and spouses who may pool their finances for the purpose of qualifying as accredited investors.
