A bill allowing Registered Investment Advisor (RIA) clients to invest in unregulated securities like private placement of shares has progressed in the House Committee on Financial Services.

Executive Summary

The Expanding Access to Capital Act was approved by the House Committee on Financial Services last Wednesday by a vote of 28–21, and the House will now consider it. The legislation, which was initially put out by Committee Chairman Patrick McHenry, R-North Carolina, would broaden the definition of an accredited investor, or someone who is permitted to invest in securities that are not registered with regulatory bodies.

In a statement sent through email, the Investment Adviser Association supported the Expanding Access to Capital Act. The IAA specifically supported the bill's wording that would expand the definition of “accredited investor” to include clients of investment advisers that are registered with the Securities and Exchange Commission.

The law would include clients of registered advisers in the group of accredited investors, as long as they do not invest more than 10% of their net worth or yearly income in private securities, according to Neil Simon, vice president for government relations at IAA.

Introduction

Accredited investors now have access to a greater range of alternative investment opportunities, including private placements, hedge funds, and venture capital, by investing in private securities that are not registered with the SEC. One must earn $200,000 or more annually or have a net worth of $1 million or more to be eligible. A few financial experts may also be eligible.

The bill's opponent and ranking committee member, Representative Maxine Waters, D-California, claimed that it would “significantly weaken investor protections by removing the very disclosures and legal protections investors rely on to hold businesses accountable.”

The income and wealth requirements under the existing definition have come under fire from some committee members who believe they unjustly provide the rich more access to private assets. Wealth, according to Massachusetts Democrat Stephen Lynch, is not a reliable indicator of financial or investment savvy. Rep. French Hill, R-Arkansas, responded that the idea behind the income criterion is so that the investor does not go bankrupt if the transaction goes south.

Lynch responded that since there is now no cap on investment losses, a wealthy person could gamble heavily on private assets and lose everything they have. Clients of licensed advisers are constrained under McHenry's bill to invest no more than 10% of their income or net worth in private securities.

The Act was backed by Representative Alexander Mooney, a Republican from West Virginia, on the grounds that it would make it easier for persons with lesser incomes to invest in private securities. Since West Virginia is a lower-income state with only 4.4% of its residents meeting the income and wealth requirements, he claimed that the state is disproportionately harmed by the income requirements.

Conclusion

The committee's initiative to broaden the definition of an accredited investor includes this legislation. On Wednesday, the committee also approved Hill's Fair Investment Opportunities for Professional Experts Act by voice vote. With regard to the definition of accredited investor, Hill's bill would require the SEC to include “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.”

Similar to McHenry's plan, Representative Sherman, D-California, suggested specifically including lawyers, MBAs, and CBAs in the bill as well as adding language capping private investments at 10% of the investor's income unless the investment is in the investor's own business. Sherman also recommended that any exception for adviser clients should stipulate that the adviser must be independent and unaffiliated with the issuer.

Hill agreed with Sherman's initial approach and also suggested to include CFPs in a subsequent draft of the legislation.