Jan. 9, 2020
Dear SEC,
In reference to the request for comment individual questions, I have responded to each in blue below
Request for Comment
1. Are professional certifications and designations or other credentials an
appropriate standard for determining whether a natural person is an accredited
investor?
Yes
Do the types of certifications and designations that the Commission is
considering indicate that an investor has the requisite level of financial
sophistication and abilities to render the protections of the Securities Act
unnecessary?
Yes
2. Are the professional certifications and designations we preliminarily expect to
designate as qualifying credentials in an initial Commission order accompanying
the final rule appropriate to recognize for this purpose? Should we include a
credential from an accredited educational institution, such as an MBA, in such
initial order?
That would dramatically open up the flood gates and not all MBAs have the requisite knowledge, as you can complete and MBA in management and know nothing about finance.
3. Should we consider other certifications, designations, or credentials as a means
for individuals to qualify as accredited investors? If so, which ones should we
consider? For example, there are several FINRA Representative-level and
Principal-level exams, as well as FINRA-administered NASAA exams, Municipal
Securities Rulemaking Body exams, and National Futures Association exams, that
cover a broad range of subjects relating to the markets, the securities industry and
its regulatory structure.99 Should we consider any other FINRA-developed
examinations or FINRA–administered examinations not discussed in this release?
The ones mentioned were good.
Should we consider designating any professional certifications or designations or
credentials issued outside of the United States?
Internationally recognized CFAs (you can earn it in a foreign jurisdiction)
Should we consider other certifications and designations administered by private organizations, such as the CFA Institute and the Certified Financial Planner Board of Standards?
Yes. CFA is much harder that FINRA exams.
Does the fact that these private organizations are not subject to Commission oversight or
regulation raise concerns with respect to the inclusion of certifications or
designations such as the CFA Charter or the CFP Certification as a means of
accredited investor qualification?
No. Only 9% of CFA applicants pass all 3 exams in consecutive order, and the exams are much harder than the FINRA exams mentioned.
A FINRA introductory-level examination, the “Securities Industry Essentials”
(SIE) examination, is a co-requisite to the Series 7 and Series 82 examinations
and assesses a candidate’s knowledge of basic securities industry information.100
The SIE examination is open to any individual aged 18 or over, and association
with a firm is not required. Passing the SIE examination alone does not qualify an
individual for registration with a FINRA member firm or to engage in securities
business. We have not included the SIE examination among those we expect
initially to designate as qualifying credentials because the SIE examination is
relatively new and evaluates introductory-level comprehension of the securities
industry. Should we consider the SIE examination as a means for individuals to
qualify as accredited investors?
No
Should we consider the SIE examination, in addition to the completion of an investing-related course at an accredited college or university, as a means for individuals to qualify as accredited investors?
No. They can take the Series 65 (RIA) without an employer. Leave it at that.
5. FINRA’s Series 86 and 87 examinations assess the ability of an entry-level
registered representative to perform their job as a research analyst.101 As with the
Series 7 and Series 82 examinations, an individual must be associated with and
sponsored by a FINRA member firm or other applicable self-regulatory
organization member firm to be eligible to take the Series 86 and 87
examinations. The SIE examination is also co-requisite to the Series 86 and 87
examinations. Should we consider the Series 86 and 87 examinations as a means
for individuals to qualify as accredited investors?
No. See above.
The Series 66 NASAA Uniform Combined State Law Examination (Series 66) is
designed to qualify candidates as investment adviser representatives and as
broker-dealer representatives.102 NASAA developed the Series 66 examination,
and FINRA administers it. An individual does not need to be sponsored by a
member firm to take the exam,103 and successful completion of the exam does not
convey the right to transact business prior to being granted a license or
registration by a state. Should we consider the Series 66 examination and
registration as an investment adviser representative as a means for individuals to
qualify as accredited investors?
Yes
7. Several types of certifications and designations, including the Series 7, Series 82,
Series 86, and 87 licenses, require that an individual be sponsored by a FINRA
member firm to take the exam. Other certifications and designations, including
the Series 65, Series 66, and the SIE, do not have such a requirement. With
respect to certifications and designations for which an individual does not need to
be sponsored by a member firm, should we consider imposing a waiting period
following an individual’s attainment of the credential or designation before the
individual can invest in an offering as an accredited investor? If so, would a 30-
day waiting period, or some other period of time be appropriate?
Yes and yes.
8. Should we, as proposed, designate certain certifications, designations, or
credentials as qualifying credentials by order, or should we instead includes
specific certifications, designations, or credentials in the rule itself? The proposed
provision specifies various attributes that the Commission would consider in
making this determination. Is the proposed list of attributes appropriate or are
there other criteria that we should consider in determining whether certain
professional certifications or designations or other credentials should be
recognized as qualifying for accredited investor status?
One missing is the JD credential. However, not all JDs are corporate lawyers. Perhaps a JD with financial experience should be added. And yes, make it a list of credentials and black and white tests – too much gray will lead to abuse.
One proposed attribute that may be considered is that an indication that an individual holds the
certification or designation is made publicly available by the relevant self
regulatory organization or other industry body. Would such a publicly available
indication be necessary if the individual can demonstrate to the issuer that he or
she has actually obtained the certification, or designation?
Yes, FINRA, RIAs, CPAs, CFPs, and JDs are all publicly available. It should be public.
9. Should the individuals who obtain the designated professional credentials be
required to maintain these certifications or designations in good standing in order
to qualify as accredited investors, as proposed?
Yes
Should they also be required to practice in the fields related to the certifications or designations, or to have practiced for a minimum number of years?
Yes, but keep the years reasonable – something like the CFA work requirement. 4 years.
Certain of the professionalcertifications or designations we are considering require an individual to beassociated with a FINRA member firm or other applicable self-regulatory
organization member firm, or require a certain amount of work experience in
order to qualify for the certification or designation, while others do not. Is it
appropriate to recognize professional certifications or designations that require
employment at certain firms, state registration or licensure, or a minimum amount
of work experience, as proposed?
No, because this excludes those that are self-employed, and those that take the Series 65.
If work experience is a requirement for a certification but not a prerequisite to taking the relevant exam, should successful completion of the exam be sufficient to qualify for accredited investor status, instead of requiring certification?
For certain degrees, like CPA and CFA, yes. For less rigorous degrees, perhaps a work requirement should be added.
10. Under the proposed approach, individuals with certain certifications, designations,
or credentials would qualify as accredited investors regardless of their net worth
or income. While having such a certification, designation, or credential may be a
measure of financial sophistication, which should encompass the investor’s
capacity to allocate their investments in a way to mitigate or avoid risks of
unsustainable loss, the impact of an investment loss on an investor that does not
meet the current net worth or income thresholds may be significant. Should we
consider additional conditions, such as investment limits, for individuals with
these certifications, designations, or credentials who do not meet the income test
or net worth test, in order to qualify as accredited investors? If so, what types of
investment limits or other conditions should we consider?
Perhaps, yes. Consider a newly minted CPA with a $100,000/year job. The CPA receives an inheritance of $75,000, and, being an accredited investor, puts it all in a highly illiquid speculative investment, that loses 90% of its value. This would not be good.
Now, consider that CPA has 10 years work experience, and has traded for more than 3 years, including 5% of his/her portfolio on speculative investments, which they have lost. This now grants enough experience.
Perhaps the cap should be a percentage of net worth – say, a 5-25% net worth limit for the first 3 years.
11. Should we consider educational backgrounds more generally, such as advanced
degrees in certain areas such as law, accounting, business, or finance, as a means
for qualifying as an accredited investor?
Generally speaking yes, but many of these degrees do not adequately prevent loss of 90% of principal on speculative investments. This should be a primary entry level requirement, plus a secondary requirement (see above).
If so, which degrees would be
appropriate? Should the individual also be required to demonstrate professional
experience in such areas?
See above
12. Should we consider professional experience in areas such as finance and
investing, apart from professional certifications and designations, as another
means for qualifying for accredited investor status?
Yes. Many drop outs from Ivy Leagues meet this category and are extremely sophisticated. However, there must be adequate guidance so as to no encompass too many people. There should be limitations as there currently are for options and futures trading.
If so, what factors should we
consider in evaluating whether an individual has the capability of evaluating the
merits and risks of a prospective investment based on his or her professional
experience? For example, should the focus be on specific types and levels of job
experience? Should we consider only professional experience related to the
securities industry? If so, would it be appropriate to include only those actively
involved in the buying and selling of securities, or should we consider other
professionals whose work experience may demonstrate an understanding of the
investment process?
Both. One or the other should be sufficient.
How should the Commission determine the appropriate level
of experience needed in order to qualify as an accredited investor under such a
test?
3+ years of trading complex products.
13. Should we consider developing an accredited investor examination as another
means for determining investor sophistication? What are the advantages and
disadvantages of such an approach? What should be considered in developing
and designing such an examination?
There is a group of highly sophisticated people that do not meet any of your requirements. Take Brex CEO Henrique Dubugras. He is a 19 year old drop out of Stanford Engineer who does not meet your requirements. Yet, he secured $60 million in funding from Silicon Valley VCs and disrupted the payment processor industry to become the fastest growing FinTech startup in 2018. So yes, there should be additional rules to accommodate these people.
14. Should we consider permitting individuals to self-certify that they have the
requisite financial sophistication to be an accredited investor as another means for
determining investor sophistication?
Well the $1 million, $300k is currently a self-certification process – so if you are asking if the SEC should change this to check everyone, no. But at the same time, an individual should not be allowed to “self-certify” that they are ready – because too many unprepared individuals will self-certify.
15. Should knowledgeable employees of private funds be added to the definition of
accredited investor as proposed?
Yes
16. Would adding “knowledgeable employees” as a category in the accredited
investor definition raise concerns that small private funds could qualify as
accredited investors under Rule 501(a)(8) when all or most of its equity owners
consist of knowledgeable employees? Do small private funds raise different
concerns than pooled investment funds such as registered investment companies,
business development companies, and small business investment companies that
qualify as accredited investors without satisfying any quantitative criteria such as
a total assets or investments threshold?
Yes it would. SEC needs to balance this.
17. Under the proposed definition of “accredited investor,” should a knowledgeable
employee’s accredited investor status be attributed to his or her spouse and/or
dependents when making joint investments in private funds?
No.
Is the answer to this
question the same for a family corporation or similar estate planning vehicle for
which the knowledgeable employee is responsible for investment decisions and
the source of the funds invested?
The answer is different.
18. Should the Commission consider including certain types of employees of a
non-fund issuer in the accredited investor definition for purposes of a securities
offering by that issuer?
No. This encourages the employee to trade on their own account based on inside information of the fund, which is prohibited under CFA rules and leads to insider trading.
If so, what are the job types or categories of employees
that should be considered to have the appropriate level of financial sophistication
and access to the information necessary to make informed investment decisions
about the issuer’s offerings?
Officers – e.g. CEO, CFO, CIO,
For example, would it be appropriate to consider
including officers of an issuer, or employees that serve a particular function such
as employees who oversee the issuer’s financial reporting or business operations?
No. That would be lawyers who write the prospectus. While they may think they are sophisticated, most are not, at least not enough to invest in highly risky products.
Similarly, should the Commission consider including other individuals with a
familial or similar relationship to an issuer in the definition for purposes of such
an issuer’s securities offering?
Definitely no.
If so, how should we determine the appropriate
individuals and types of relationships that would be covered by such a provision?
Only Family Offices, and Estate Planning for a family should count. Don’t make a non-sophisticated spouse an accredited investor just because their sophisticated spouse is. This will lead to problems down the line.
On Thu, Jan 9, 2020 at 3:10 PM Alex Naegele <alex@canlawcorp.com> wrote:
Dear SEC,
This is concerning comments to File No. S7-25-19 - proposed amendments to the "accredited investor" test.
By way of background, I am a corporate and tax attorney. I work with many high net worth individuals and entrepreneurs in Silicon Valley, and I also see many smart people who do not currently qualify for the "accredited investor" rule as it stands now.
I strongly support the proposed changes in the attachment, as I have seen first hand, people in Silicon Valley worth $13 million dollars that do not know anything about investing, while simultaneously seeing a very good many educated, up and coming individuals worth less than $1 million who know far more than those with substantial assets and income that "should" qualify.
This problem is particularly pronounced in the San Francisco Bay Area, where couples routinely make $500,000 joint taxable income, and people are worth more than $1 million, yet know very little about finances and investing.
Moreover, I think these changes are long overdue, as they should have been implemented 5, 10, or 15 years ago.
I sincerely hope that these rules pass.
Regards,
--
C. Alex Naegele, A Professional Law Corporation
19925 Stevens Creek Blvd, Suite 100 | Cupertino, CA, 95014
Tel: 408-883-8994
Fax: 408-490-3033
Email: [redacted]
Website: http://www.canlawcorp.com
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DISCLAIMER: The information contained herein is confidential. If you are not the intended recipient, please delete this e-mail from your computer system. General inquiries into the nature of legal services provided by this firm does not create an attorney-client relationship and should not be relied upon as creating an attorney-client relationship.
--
C. Alex Naegele, A Professional Law Corporation
19925 Stevens Creek Blvd, Suite 100 | Cupertino, CA, 95014
Tel: 408-883-8994
Fax: 408-490-3033
Email: alex@canlawcorp.com
Website: http://www.canlawcorp.com
~~~~~~~~~~~~~~~~~~~~
DISCLAIMER: The information contained herein is confidential. If you are not the intended recipient, please delete this e-mail from your computer system. General inquiries into the nature of legal services provided by this firm does not create an attorney-client relationship and should not be relied upon as creating an attorney-client relationship.