House Bills Would Expand Accredited Investor Pool to Include Clients of Advisers

The House Committee on Financial Services passed the Expanding Access to Capital Act last Wednesday by a vote of 28-21, to next go before the House. The bill, first proposed by Committee Chairman Patrick McHenry, R-North Carolina, would expand the definition of accredited investor, or someone who can invest in securities not registered by financial authorities.

The Investment Adviser Association endorsed the Expanding Access to Capital Act in an emailed statement. Specifically, the IAA endorsed language in the bill that would redefine accredited investor to include a client of an investment adviser registered by the Securities and Exchange Commission.

Neil Simon, the vice president for government relations at IAA, says the bill would add clients of registered advisers to the pool of accredited investors, provided they do not invest more than 10% of their net worth or annual income into private securities.

Currently, an accredited investor is someone who may invest in private securities that are not registered with the SEC, giving them access to a wider array of alternative investment options such as private placements, hedge funds, or venture capital. In order to qualify, one must have an income of $200,000 or more or a net worth of $1 million or more. Certain financial professionals can also qualify.

Representative Maxine Waters, D-California, the ranking member of the committee, opposed the bill and said it would “significantly weaken investor protections by removing the very disclosures and legal protections investors rely on to hold businesses accountable.”

Some members of the committee criticized the income and wealth requirements in the current definition for unfairly granting greater access to private assets to the wealthy. Representative Stephen Lynch, D-Massachusetts, said that wealth is not a predictor of financial or investment acumen. Representative French Hill, R-Arkansas, answered that the thinking behind the income requirement is so that if the investment goes bad, the investor does not go bankrupt. Lynch answered that current rules do not have a limit on investment losses, so a wealthy person could go all-in on private investments and end up losing all of their money. McHenry’s bill does have a requirement that clients of registered advisers not invest more than 10% of their income or net worth on private securities.

Representative Alexander Mooney, R-West Virginia, supported the legislation on the basis that it would make it possible for lower-income people to invest in private securities. He said West Virginia is disproportionately harmed by income requirements, since it is a lower-income state where only about 4.4% of its resident meet the income and wealth requirements, according to Mooney.

This legislation is part of a broader effort from the committee to expand the definition of accredited investor. Hill introduced the Fair Investment Opportunities for Professional Experts Act, which also passed the committee last Wednesday by voice vote. Hill’s bill would order the SEC to include in its definition of accredited investor “any natural person the Commission determines, by regulation, to have demonstrable education or job experience to qualify such person as having professional knowledge of a subject related to a particular investment.”

Representative Sherman, D-California, suggested adding attorneys, MBAs and CBAs explicitly to the bill and recommended adding language that caps private investments at 10% of the investor’s income, similar to McHenry’s bill, unless the investment is in the investor’s own company. Sherman also suggested that any carve-out for clients of advisers should require that the adviser be independent and receive no compensation from the issuer.

Hill was receptive to Sherman’s first suggestion and also suggested adding CFPs to a future version of the bill.