Reuters: Regulatory News: U.S. SEC should raise bar for investing in risky products -study

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U.S. SEC should raise bar for investing in risky products -study Jul 18th 2013, 22:25 By Sarah N. Lynch WASHINGTON, July 18 | Thu Jul 18, 2013 6:25pm EDT WASHINGTON, July 18 (Reuters) - U.S. securities regulators should consider raising the bar for who qualifies to invest in certain riskier financial products, a U.S. government watchdog said in a report released on Thursday. The U.S. Securities and Exchange Commission uses the so-called "accredited investor" definition as a standard for determining who is sophisticated enough to participate in private offerings. To qualify as an accredited investor, an individual must have a net worth of $1 million, excluding the value of a primary residence, or an individual annual income over $200,000. The SEC moved to exclude the home value in the net worth calculation in late 2011. The change was mandated by the Dodd-Frank law as a response to the 2007-2009 financial crisis, during which home values plunged. However, the Government Accountability Office's report said that, even with this recent change, the definition does not reflect the current marketplace. "The intended purposes of the accredited investor standard are to protect investors and streamline capital formation for small businesses," the GAO wrote. "However, beyond excluding an investor's primary residence in the calculation of net worth in 2011, the standards for qualifying as an individual accredited investor have remained unchanged since the 1980s." The GAO said the SEC should consider alternative criteria, including a minimum level of "liquid assets" when considering a potential investor's net worth, and the use of a registered investment adviser. The report comes as the SEC eases some longstanding investor protections, as required by law. Last week, the SEC adopted new rules to lift a longtime ban that prohibited hedge funds, private equity funds and others from broadly advertising for private securities deals. The rule was required by the 2012 Jumpstart Our Business Startups Act, a law that relaxes securities regulations to help spur small business growth. Although the rule permits television and Internet ads by hedge funds, only accredited investors are allowed to invest in private placements. Proponents of the rule say the accredited investor restrictions will protect less sophisticated investors. But many critics, including consumer advocacy groups and state securities regulators, have said the rule falls short because the definition of "accredited investor" is outdated and captures investors who are not truly sophisticated. Under Dodd-Frank, the SEC can only make tweaks to the accredited definition every four years, which ties the agency's hands on this issue until 2014. Nevertheless, the GAO study, which was also required by Dodd-Frank, will likely help as the SEC weighs the impact of the new advertising rule. In its study, the GAO said that, based on a survey of market participants, most believed the net worth standard and not income marks the best criteria for determining who can be "accredited." Raising those standards would be feasible, although some of those surveyed also had concerns that too large an increase might shrink the pool of potential investors. Increasing the net worth standard to account for inflation to $2.3 million from $1 million would decrease qualified accredited investor households to around 3.7 million from about 8.5 million. However, the GAO said the SEC should consider some alternatives, such as the liquid assets measure and the presence of an adviser. The report also surveyed market players about other potential alternatives such as an education standard or a "investor sophistication test." In a letter responding to the GAO's report, the SEC's new Corporation Finance Division Director, Keith Higgins, said the agency would "in particular" weigh the liquid investments and use of an adviser as it reviews the accredited investor definition. Link this Share this Digg this Email Reprints

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