Accredited Investor Definition, Custody Rule on SEC's 2020 Reg Agenda

The Securities and Exchange Commission is readying to issue rule proposals next year on a new accredited investor definition as well as an updated custody rule, according to the agency's just-released fall Reg Flex agenda.

The agency's Division of Investment Management states in the agenda that it's considering recommending that the commission propose amendments to expand the definition of accredited investor under Regulation D of the Securities Act of 1933.

Such an expansion, however, is garnering mixed reviews.

Gail Bernstein, general counsel for the Investment Adviser Association, noted Thursday that IAA is "pleased to see that the SEC plans to propose changes to the types of investors that will be able to invest in the private securities markets."

The trade group representing RIAs "has long asked" the SEC to revisit its 'accredited investor' definition "to allow all investors that are represented by SEC-registered advisors acting in a discretionary capacity to invest in private funds where that is consistent with the investors' best interest," Berstein said.

The Reg Flex agenda puts an accredited investor proposal out by September. However, those are projected dates that are not set in stone.

Barbara Roper, director of investor protection for the Consumer Federation of America, told ThinkAdvisor on Thursday that the SEC's concept release on harmonization of private offering exemptions, which centered on expanding the accredited investor definition, "made clear" that the SEC "doesn't currently have the data necessary to make informed policy regarding the accredited investor definition, certainly not to justify any expansion of that definition."

What the agency does know "suggests that only a tiny percentage of current accredited investors actually choose to invest in private offerings. And there's no evidence of demand from non-accredited investors."

The SEC's plan is "more evidence of an SEC that is acutely attentive to the demands of industry groups — in this case, private issuers who want expanded access to a broader population of investors — and is absolutely tone deaf when it comes to the needs of typical retail investors."

More worrying still: "this is an SEC that seems to be prepared to ignore evidence of the harmful impact on our public markets of a continued expansion of private markets," Roper contends. "Instead of pausing to study that issue, they seem to be intent on forging ahead with an agenda that will put investors and our markets at risk."

SEC Chairman Jay Clayton noted in a Nov. 14 speech that by paring down its Reg Flex list and focusing on the actions the agency believes "were important and achievable," the SEC achieved the following results so far in 2019:

The number of items on the SEC's near-term agenda "increased to a, perhaps aspirational, 39″ rulemakings, Clayton said.

The commission has advanced 33 of those 39, or nearly 85% of the items — "even though our rulemaking efforts were stalled for more than a month as a result of the lapse in appropriations earlier this year."

Of those 39 rulemakings, "18 were scheduled for adoption by this year and we completed 16 of the 18, or 89%. In addition to the 39, the commission also advanced more quickly than expected on several other proposed rulemakings," Clayton said.

Since the SEC has issued well over 50 FAQs on its custody rule, Cipperman Compliance Services has opined that "perhaps the SEC will acknowledge that it needs to rewrite the rule" rather than continue to issue FAQs.

Larry Stadulis, a partner at Stradley Ronon in Washington, told ThinkAdvisor on Thursday "presumably it [an SEC custody rule proposal] would consider and address one or [several] of the issues that the industry has been dialoguing with the SEC about in recent years. For example, crypto-assets, non-DVP [delivery versus payment] securities and certain types of arrangements that arguably confer custody on advisers."

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