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

The House Committee on Financial Services advanced a bill that would allow RIA clients to invest in unregulated offerings such as private placement stock shares.


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.

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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.

 

JPMorgan’s First Republic Takeover Brings Chance of Keeping 150 Wealth Advisers

JPMorgan CFO Jeremy Barnum cites wealth management division as positive amid a deal the bank “did not seek out.”


JPMorgan Chase & Co. announced Monday it has acquired the substantial majority of the assets of First Republic Bank from the Federal Deposit Insurance Corp., along with its vastly reduced wealth management advisory team with offices around the country.

JPMorgan will be taking on about 150 wealth advisers from First Republic, Jeremy Barnum, chief financial officer for JPMorgan, said during a conference call with analysts Monday morning. The CFO cited the positives of an expanded reach to high-net-worth clients, along with well-placed locations, while admitting the bank will need to woe some of the “high quality advisers.”

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“We did not seek out this deal, but it does have financial benefits, as well as enhancing our market positions and accelerating some of our key growth opportunities, particularly in wealth management,” Barnum said on the call.

San Francisco-based First Republic reported in its last earnings call for the first quarter of the year that it had $289.5 billion in wealth management assets. The beleaguered bank also noted it had been losing some advisers, who appear to have been reduced further from the more than 300 wealth managers still listed on First Republic’s website.

“We’ve had a number of adviser teams from First Republic reach out on an unsolicited basis over the past several weeks who are interested in joining JPMorgan, which as a starting point is encouraging,” Barnum said on the call. “We believe that our brand, the investment banking capabilities and our research will make us a firm of choice for many of these advisers.”

He added that the bank understands that “these are really good teams with high-quality advisers who have choices.”

New York-based JPMorgan has been public about its desire to recruit more financial advisers during annual investor days in recent years. The bank’s next investor day will be on May 22.

Pershing LLC, a division of the Bank of New York Mellon Corp., has acted as custodian for First Republic Bank’s wealth division. JPMorgan did not immediately respond to request for comment on the future of the wealth management setup.

The FDIC took control of First Republic on Monday after more than a month of uncertainty following increased scrutiny of the bank’s uninsured deposits and exposure to low-interest-rate loans in the wake of March banking failures at Silicon Valley Bank and Signature Bank. First Republic reported more than $100 billion in deposits flowing out of the bank in the year’s first quarter.

JPMorgan Chase is not assuming First Republic’s corporate debt or preferred stock, according to the announcement.

CFO Barnum said on the call that First Republic service platforms and technology, as well as some branches in key locations, will be moved over to JPMorgan’s infrastructure over time.

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