March 8, 2007
March 8, 2007
Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, N.W., Washington, DC20549-0609
Subject: Proposed Rule S7-25-06
Dear Ms. Morris:
While I support the need to revise the definition for an Accredited Investor, I do not support the proposed definition. The proposed rule change assumes that investor education is tied to net worth. What is the basis of this conclusion? Since the first Accredited Investor definition was developed the capital markets have fundamentally changed. Technology has facilitated the flow of information, and independent bodies have established widely recognized professional designations such as the CFA designation. How can the definition of a sophisticated investor overlook education, whether it is a graduate degree in finance or a professional designation?
The proposed revision of the Accredited Investor definition calls for an abrupt regulatory change that will effectively wipe out an important regulatory safe harbor for emerging firms. Removing 6 out 7 potential investors in the Accredited Investor space without grandfathering is dramatic. The cost of Sarbanes Oxley compliance and paperwork associated have already created unfavorable dynamics for smaller financial service firms, since the breakeven point for firms has dramatically increased. The paperwork associated with the Patriot Act layers on another disadvantage, which favors the entrenched provider by making accounts stickier.
The proposed rule not only increases the net worth threshold, but also excludes real estate in the tabulation net worth. Completely excluding real estate as an asset class does goes against the principles of diversification. Perhaps the rise in real estate values can be addressed by using 2000 as the base year with the five year adjustment formula described in the rule change proposal. Another important consideration is giving market participants adequate time to adjust accordingly.
The global application of the fraud provisions under the Investment Advisors Act of 1940 is a positive fraud deterrent. I hope the Securities and Exchange Commissions final rule will recommend a less abrupt change in the Accredited Investor definition, while integrating investor education into the definition.
Niall H. OMalley
Blue Point Investment Management, LLC