HFA concern over SEC changes to accredited investors
08 October 2014 Washington DC
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The Hedge Fund Association has outlined concerns over the US Securities and Exchange Commission’s (SEC) proposed change to the definition of an ‘accredited investor’ under Rule 501 of Regulation D.
In an open letter to the US Securities and Exchange Commission (SEC), the association urged the SEC to reject an increase in the current requirements to account for inflation, which would “fundamentally undermine” the private placement market that introduced an estimated $50 billion into the US economy in 2013.
The changes will also have a negative impact on small business growth, as it will reduce the number of accredited investors in the US “by more than half”, which will ultimately affect unemployment rates as businesses close, according to the Hedge Fund Association.
While the hedge fund industry has seen growth, this has been predominantly from a small number of large inflows that has widened the gap in assets under management between small and large funds.
The Hedge Fund Association stated that it “shares the SEC’s goal of protecting investors from making investments which are beyond their financial sophistication”, but the association believes that using net worth or income as a test for investor sophistication is “out-dated”.
In favour of updating the tests, the Hedge Fund Association suggested a number of alternatives, such as: “A knowledge or education-based standard; a requirement that a non-sophisticated investor engage an independent registered investment professional to review and approve the investment; or limiting the maximum percentage of net work that any investor may contribute.”
“We are in the process of a slow recovery from a global recession, and the SEC and Congress must be careful not to implement any rule that will stifle job growth and in fact lead to job losses in these precarious times,” concluded the Hedge Fund Association.
The SEC opened the floor to comments on the proposed change in July 2013, and has extended the comment period multiple times.
In an open letter to the US Securities and Exchange Commission (SEC), the association urged the SEC to reject an increase in the current requirements to account for inflation, which would “fundamentally undermine” the private placement market that introduced an estimated $50 billion into the US economy in 2013.
The changes will also have a negative impact on small business growth, as it will reduce the number of accredited investors in the US “by more than half”, which will ultimately affect unemployment rates as businesses close, according to the Hedge Fund Association.
While the hedge fund industry has seen growth, this has been predominantly from a small number of large inflows that has widened the gap in assets under management between small and large funds.
The Hedge Fund Association stated that it “shares the SEC’s goal of protecting investors from making investments which are beyond their financial sophistication”, but the association believes that using net worth or income as a test for investor sophistication is “out-dated”.
In favour of updating the tests, the Hedge Fund Association suggested a number of alternatives, such as: “A knowledge or education-based standard; a requirement that a non-sophisticated investor engage an independent registered investment professional to review and approve the investment; or limiting the maximum percentage of net work that any investor may contribute.”
“We are in the process of a slow recovery from a global recession, and the SEC and Congress must be careful not to implement any rule that will stifle job growth and in fact lead to job losses in these precarious times,” concluded the Hedge Fund Association.
The SEC opened the floor to comments on the proposed change in July 2013, and has extended the comment period multiple times.
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