GAO Wants SEC to Look At Other Criteria for Who Qualifies As An Accredited Investor

The Government Accountability Office is recommending that the SEC look at eight other criteria for who should qualify as an accredited investor for purposes of the 1933 Securities Act Regulation D Rule 506. The criteria is divided into two categories: understanding financial risk and financial resources. The independent, nonpartisan agency that works for Congress put out its recommendations to the regulator on July 18.

Under the 1933 Act, accredited investors can take part in certain private and limited exempt offerings. To qualify as an accredited investor a person needs to have at least $200,000 for each of the last two years or a net worth of $1 million without factoring in his/her main residence. While market participants that were surveyed agreed that net worth was the most essential criterion, they indicated that having an investment advisor and liquid investments could balance capital formation interests and investor protection.

Investor advocates and state securities regulators consider this criteria to be outdated and they are calling for substantive changes. Even SEC Commissioner Elisse Walter told broker-dealers at a recent gathering that the agency “desperately” must modify the definition of an accredited-investor.

Also on July 18 the GAO issued a report criticizing the Commission for having an organizational culture that wasn’t “constructive,” saying this could hurt the latter’s ability to execute its mission. The GAO pointed to a structure that was “siloed,” morale that was “low” and an aversion to risk. Its findings were compiled with information from ex-and current SEC employees, interviews, surveys, and other research over the past year.

Unsatisfactory communication and leadership, dissatisfaction with promotional opportunities, and inadequate collaborations among divisions were among the problems mentioned. There was concern by some SEC staff that the agency’s senior officials are too risk averse due to fear of public scandal. They believe that this has led to managers becoming reluctant to end cases or make decisions because senior officers want to lower the risk of future criticism. There also was worry that this could mean that the Commission might not go after cases involving “evolving market practices” or other matters that don’t have much precedent.

The GEO is offering a number of recommendations, including that the SEC come up with a strategic plan to hire and keep staff and come up with incentive for staff to get behind a workplace environment that promotes collaboration and communication.

It was the Dodd-Frank Wall Street Reform and Consumer Protection Act that mandated the GAO come up with this report.

Referred to the “congressional watchdog,” the GAO looks at the way the US government spends the money of taxpayers. It is its mission to help Congress fulfill its constitutional duties and assist in enhancing the performance of the government and ensuring the latter’s accountability to the American people.

The SSEK Partners Group represents institutional and high net worth individuals with FINRA arbitration and securities fraud lawsuits against negligent financial firms and/or their representatives. Your case consultation with us is free.

SEC: Alternative Criteria for Qualifying As An Accredited Investor Should Be Considered, GAO, July 2013 (PDF)

SEC: Improving Personnel Management Is Critical for Agency’s Effectiveness, GAO, July 2013 (PDF)

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