At a time when alternative investment access is all the rage – not always without skeptical reactions – lawmakers in Congress have pushed to widen the definition. Here are industry reactions.

The US House of Representatives has passed a bill this week that directs the Securities and Exchange Commission to expand the eligibility requirements for participating directly in private investments. 

At present, “accredited investors” must have $1 million in net worth, excluding their primary residence or an annual income of $200,000, and $300,000 in income for joint spousal investors. To broaden access to private markets, the new legislation would expand the definition of an accredited investor under what is known as Regulation D to include people with professional-level knowledge through either their work experience or education, which would explicitly include registered brokers and investment advisors.

“Expanding the accredited investor definition to include demonstrable education or experience is a long-overdue recognition that sophistication is not solely a function of wealth and is a positive step toward democratizing access to private markets,” John Bowman, CEO, CAIA Association, said of the change. (CAIA stands for Chartered Alternative Investment Analyst.)

“This is an evolution for which CAIA Association has advocated for almost a decade. However, these new thresholds must be comprehensive and rigorous and explicitly designed to teach private markets vs generalist programs. Private markets are inherently complex and opaque, and any new educational criteria must ensure that investors are equipped with the tools to assess risk and investment managers properly, align with long-term objectives, and uphold the fiduciary standards this space demands.”

The change comes at a time when a host of wealth and asset managers have been calling for wider access by HNW, mass-affluent and even retail investors into sectors that typically are less liquid than listed equities and bonds, but with the promise of higher long-term returns. This is not uncontroversial, as US correspondent Charles Paikert writes in this separate feature article today.

“Whatever your views on the current accredited investor rules, they exist for a reason. Private investments come with levels of complexity that require due diligence far different from that needed to navigate the public markets and 40-Act world. When it comes to alternative investments, access does not always equal quality. Research and the guidance of trusted partners will be even more crucial as more doors to alts are opened,” Martin Gross, founder and president, Sandalwood Securities, a family office-affiliated platform, said in a note.

FWR asked Aaron Filbeck, managing director, global content strategy at the CAIA Association, why this change – if it enters law – matters.

“It's important because it broadens the cohort of investors able to access a growing area of our capital markets. While wealth may be a good proxy for an investor's ability to take on risk, it doesn't always mean they are well-equipped to understand the complexities of private investments. Additionally, by putting an educational requirement in place, it has the potential to ensure these new investors are informed about what they're investing in. Now, it still remains to be seen what kind of educational requirements will be put in place, but this is a good start,” Filbeck said. 

“Most likely, this [change] will lead to increased inquiries and questions from clients – wealth managers will need to become more informed on private markets and be able to articulate the benefits, risks, and appropriateness for client situations. In some cases, these investments may not be appropriate at all, and wealth managers will need to clearly explain why that's the case,” he added.

(If you wish to comment on this article or contact the editor, email tom.burroughes@wealthbriefing.com.)