SEC Chairman Gary Gensler is pushing Commission staff to come up with new rule proposals that would change the definitions of accredited investors and shareholder of record, affiliate publication Regulatory Compliance Watch has learned.
Gensler put the matters on his fall regulatory agenda last year. They’re part of a broader effort to reform Regulation D under The JOBS Act, Gensler’s top priority. Sources close to the Chairman tell RCW that the would-be rule proposals are still in the Commission’s executive offices, not in the Commissioners’ offices. That suggests a rule proposal won’t be ready until this fall, the sources said. The sources spoke to RCW on condition of anonymity because these deliberations are supposed to be secret.
Under Gensler’s chairmanship, the SEC has proposed the most radical changes to private fund regulations since the Dodd-Frank era began. Combined, new definitions of accreditation and shareholder of record might be the mother of all reforms. Advocates have made clear they want new definitions of both terms so they can drag more private funds into the public company regulatory regime (RCW, May 7, 2021).
“The accredited investor definition plays a central role in our regulations,” Gensler himself told the Commission’s Small Business Capital Formation Advisory Committee in February. “It is essential, not just for investor protection, but also for the health of our markets, that we continue to think about this definition.”
What’s being weighed
That there will be some changes is all but assured. Gensler and his fellow Democrats have called repeatedly for them. The question is how far the other Democrats on the Commission will go, the sources said. Among the ideas being canvassed, sources tell RCW:
- Forcing firms to file a Form D before they raise any cash. Critics—especially state regulators—have complained for years that Reg D is too vague. It’s not clear whether firms must file a Form D at all, and if so, when. New or stricter filing deadlines might help industry focus, the argument goes. The question there is how tough the SEC would want to be with such new mandates. Some in the Commission are urging Gensler to declare any deals without a Form D a prohibited transaction.
- Raising the wealth thresholds for accredited investors and pegging them to inflation. This has been a shibboleth of the Democrats for years (RCW, Aug. 27, 2020). If the Commission does adopt something like that, regulators will also have to decide how to index inflation. Do they peg the definition to inflation since 1982, when the phrase first entered the regulatory lexicon? Or later? The number of accredited investors has grown by 550% since 1982, merely as a function of inflation.
- Conditioning accreditation on disclosure. One option is to rewrite the definition of the phrase so that no one can be accredited until fund advisers have shared certain information about their ownership, fees and expenses, operations and so on.
- Redefining “shareholder of record” to mean anyone who puts money into a fund, directly or indirectly. Under Sec. 12(g) of the JOBS Act, funds with 2,000 or more shareholders of record are subject to public disclosure rules. Private funds have gotten around the requirement by pooling investors in a “street name”—a broker-dealer or other investment vehicle—and counting street name as shareholder. Reform advocates have been clear that their goal is to push so-called “unicorns” to the verge of extinction (RCW, May 7, 2022).
Pros and cons
One advocate for drastic changes at the Commission is Gensler’s close adviser, Barbara Roper, the sources say. A former top lobbyist for the Consumers Federation of America, Roper is a longtime critic of private funds. The other is Gensler himself. The pair believe the very idea of an accredited investor is absurd, the sources said.
They might get some symbolic help from the Hill. Sources tell RCW that Zach Baum, a top adviser to Sen. Jack Reed, D-R.I., is drafting legislation that would eliminate the street name loophole. It’s a vintage issue for Reed. When the JOBS Act passed in 2012, he fought against the shareholder of record language in 12(g).
There are two wild cards in the deck here. One of them is Democratic Commissioner Caroline Crenshaw. She has called for regulators to hike the wealth thresholds for accredited investors and to peg them to inflation. She’s been more skeptical about redefining shareholders of record (RCW, April 22, 2022). The other wild card is newly confirmed Democratic Commissioner Jaime Lizzarraga. A long-time aide House Speaker Nancy Pelosi, D-Calif, Lizzarraga helped draft and pass the JOBS Act back in 2012.
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