SEC panel punts on changing accredited investor criteria

An SEC panel declined to endorse any changes to financial criteria often used to determine who can invest in private equity, private credit, real estate and other alternative investments.

The Securities and Exchange Commission’s Investor Advisory Committee has long considered revisions to the federal income and asset standards governing who can invest in a wide swath of assets not traded on public markets. SEC rules limit many private investments to so-called accredited investors, defined as people with at least $1 million in assets (excluding homes) and an annual income of at least $200,000 for the past two years for single earners and $300,000 for married couples.

The committee, which has no policymaking power, at one time considered changes to those standards in response to a push to open private markets to regular investors. At its Sept. 18 meeting, however, it declined to call for changes, including a proposal to exclude money held in savers’ retirement accounts from total asset calculations.

Members of the committee instead said that if policymakers ever decide to revise the accredited investor standards, they should consider abandoning the net worth and income thresholds and instead try to gauge investor “sophistication.” They also broached the possibility of allowing investors to qualify as accredited by taking a test.

“One of the chief criticisms of the existing definition is the perception that it unfairly divides the U.S. population into segments that either get unlimited access to the private markets or none at all,” said Andrea Seidt, a committee member and the Ohio securities commissioner, during the meeting. “The subcommittees agree that this all-or-nothing approach is flawed, but do not recommend the SEC respond by shifting from no access to full access for unsophisticated, non-accredited investors.”

READ MORE:The risks of investing in private equityCerulli: Fee compression coming for financial advisorsAccredited investors: Who should be admitted to the fold?Once-exclusive ‘accredited investor’ tag on track to apply to half of U.S. householdsAdvisors weigh potential of ‘accredited investor’ law to open access to private markets

Prying private markets open for retail investors

Although it did not endorse changes to accredited investor standards, the Investor Advisory Committee voted in favor of a series of recommended policy changes designed to further open access to private markets without sacrificing basic safeguards. The vote came amid a push by large wealth and asset managers to allow regular savers the same opportunities in private markets that wealthy investors and institutions have long had.

That movement received a big boost from President Donald Trump in August when he signed an executive order calling on the Department of Labor to review its fiduciary guidelines governing the types of alternative investments that can be added to retirement savings plans. Many viewed the change as a step toward allowing savers to put money in their 401(k)s into private equity, private credit and similar investments.

That preference for opening private markets is shared by Trump’s handpicked head of the SEC. In remarks delivered Thursday, SEC Chair Paul Atkins said, “To its core, I believe that this conversation is about freedom and fairness. It is about the idea that exposure to the full dynamism of our markets should not be reserved for the wealthiest or for those deemed to be the most sophisticated.”

Members of the Investor Advisory Committee, though, have reservations. Paul Roye, for example, said that the sought-for “recalibration” “should not undermine any of the three pillars of the SEC’s mission: protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.”

Recommendations on ‘sophisticated’ investors, investment limits

Among other things, the Investor Advisory Committee’s recommendations concern:

• “Sophisticated” investors. If policymakers alter the criteria for accredited investors, the committee recommended they look for ways to tie access to private markets to investor “sophistication” rather than net worth. The committee suggested opening the markets to holders of certain professional credentials, including certified financial planners, chartered financial analysts, personal financial specialists and certified private wealth advisors. The committee also said that any test used to determine if investors should count as accredited should gauge “the examinee’s ability to understand the unique features and risks of making private market investments, including the importance of diversification.”
• Investment limits. For non-accredited investors, the committee recommended the SEC adopt limits restricting private market investments to 10% of their past year’s income, net worth or total value of their securities investments.
• Appraisals of fund assets holdings. Unlike publicly traded companies, private investments are often valued using third-party appraisals of underlying holdings, whether those be in real estate, loans or firms. The committee recommended that private funds should have to inform investors when these outside appraisers are rejected or replaced and that the public should have more information on how private investment valuations are calculated.
• Closed-end funds. These funds can provide exposure to private markets. They differ from open-ended funds, whose managers can issue and buy back their own shares as much as they want, in issuing shares only once. Last month, Atkins announced the end of a policy that for more than two decades had placed strict limits on closed-end funds’ ability to access private markets on behalf of retail investors. Since 2002, closed-end funds have been able to put no more than 15% of their total allocations into private investments, unless they were working with accredited investors who can put down at least $25,000. The Investor Advisory Committee expressed support for that policy.

Independent advisors have misgivings

Critics of private markets contend their promise of sometimes lucrative returns are often offset by high fees, poorly understood risks and barriers to taking out invested money. Those concerns are shared by many independent advisors. Mark Stancato, the founder of VIP Wealth Advisors in Atlanta, said in a phone interview that he thinks private equity, private credit and real estate do have a place in the portfolios of his clients, who tend to be high net worth. 

Their chief benefit, he said, is that they tend to be uncorrelated with traditional investments in stocks and bonds. When public markets tank, private markets will often hold their value and provide much-needed protection.

That said, he worries regular investors lack the expertise to determine which private investments are suitable. The private opportunities that reach retail investors tend to be ones that sophisticated and wealthy investors have already passed over.

“Typically, the really good deals are already oversubscribed,” Stancato said.

He said he has to spend hours going through disclosures provided by a given private fund before deciding if he should recommend it to an investor. One big consideration is how much a client can afford to lose should an investment not turn out as hoped.

“The key is to make sure: If this thing goes south, it’s not going to ruin you,” Stancato said.

Rich Arzaga, the founder of Real Estate Whisperer Financial Planning in Monument, Colorado, shared Stancato’s skepticism. He noted that criteria for accredited investors, which were established in 1982 and haven’t been adjusted for inflation, are steadily losing their ability to exclude all but wealthy and sophisticated investors from private markets. An SEC staff report released in 2023 predicted nearly half of all U.S. households would achieve accredited investor status in the next two decades.

“I really feel like the $1 million in assets and the $200,000 or $300,000 in annual income, these are fairly easy to achieve as compared to 20 years ago,” Arzaga said.

The red flag of private market growth

Despite the concerns, money has surged into private equity, private credit, private real estate funds and similar vehicles in recent years. The SEC committee’s proposal noted that private funds managed $28 trillion and private companies raised $623 billion last year. Much of the inflows have come as opportunities to invest in public firms have become scarcer; the number of publicly traded U.S. companies has fallen from 8,000 in 1996 to 3,700 in 2024, according to the SEC.

Gina-Gail Fletcher, a committee member and law professor at Duke University, said something is decidedly out of balance when the best opportunities seem to be in private investments rather than public.

“I believe, to the detriment of us all, the growth in the size of the private markets should signal to us that something is amiss in terms of the balance in the securities markets, when the exception becomes larger than the rule,” Fletcher said during the committee meeting. “I think it’s unsurprising, therefore, that the average investor thinks that they are missing out or being excluded from something that is better, when … the public markets are the gold standard.”