SEC proposes exam route to accredited investor status

Her CPA keeps raising private credit, and the client has decided she wants some: she is 57, owns a specialty contracting business, has $850,000 in investable assets and $1.3 million in net worth with the house set aside — and today she does not clear the accredited-investor definition that decides who may buy into a private fund. That is the file.

On Sept. 30 the Securities and Exchange Commission weighed three proposals in a single meeting: performance fees for advisers, repurchase offers at closed-end funds, and the credentials that make an individual an accredited investor. The three active commissioners voted unanimously to open the accredited-investor change to public comment, and each proposal carries a 60-day comment window.

As separate rulemakings, they are a fee rule, a redemption rule and an eligibility rule; from her side of the desk, they are one decision with three moving parts: who gets in, what the advice costs when the strategy works, and how the money comes back out. An advisor who can answer only the first has answered the easy part.

Accredited status today turns on what a client has, but the proposal the commission opened to comment would add a second route through what a client knows: an individual could qualify by passing a test administered by FINRA, or by holding one of several professional credentials the commission would add to the definition that governs private-market investing. PWD's coverage of the vote names two of those credentials: the CPA and the chartered financial analyst designations.

Nothing about the client's eligibility changes while comment runs, and the proposal would add the knowledge route rather than replace the existing tests, which means her file will eventually carry a line naming the route she used — advisors planning around a rule that has not been adopted are planning around a shape, not a syllabus. The public documents do not say how a FINRA test would be structured, what a passing result would require a client to demonstrate, how long it would remain valid, or which credentials beyond the CPA and the chartered financial analyst designations would qualify.

Notice who lands on that list. The CPA who keeps steering her toward private credit would, as the proposal reads, be an accredited investor herself — the credential qualifies the individual who holds it, not the clients that individual advises. For an advisory firm, that is the difference between an accountant who can explain a fund and an accountant who can buy it.

The second proposal would let advisers to regulated funds take a share of a strategy's returns at a rate the commission proposes to cap at up to 20%, a different conversation than an asset-based fee because the cost arrives only in years the strategy earns something — read literally, a year with no return gives the adviser nothing to share, while an asset-based fee does not behave that way.

Run the numbers on her sleeve: if she takes the allocation her advisor is likely to recommend — 10% of the $850,000, or $85,000 — and the strategy returns 8% in a year, the gain is $6,800, and a performance fee at the top of the proposed range would take $1,360 of it. The comparison that matters at the desk is not 20% against a stated advisory rate but what the client keeps in a flat year against what she keeps in a strong one, and whether she understands that trade before she signs.

Two cautions belong in the same paragraph as the pitch: the amendment as described applies to advisers to regulated funds, not to every private-market position an RIA might place, and it is proposed rather than adopted. The published details also do not describe the disclosure terms or performance hurdles the commission would attach, which is where a client's expectations are most likely to outrun the paperwork.

The third proposal loosens repurchase offers at closed-end funds, and for this client it is the piece that determines whether the allocation is 5% of her assets or 15%: the case her CPA has been making depends on her leaving the money alone for a while, and the repurchase question is how much she has to leave alone, and for how long.

The sizing logic that follows is unglamorous, but a client with $850,000 investable can hold a 10% sleeve inside a structure where a limited repurchase window is an inconvenience rather than a planning failure. The looser the repurchase terms the commission ultimately adopts, the larger the sleeve an advisor can defend; while the rule is still a proposal, the defensible number is the one that works under the terms in force today, and the client's file should say plainly which number that is.

Advisors who write 'private markets: up to 10%' into an investment policy statement without naming the qualification route, the fund wrapper and the fee arrangement will be rewriting that language, because the three proposals land in the same document for exactly this reason: a private-credit allocation a client can enter through a new credential, hold in a regulated wrapper, and exit through a repurchase offer is a different line item than a percentage with no mechanics behind it.

What she can do between now and the close of comment is narrow but real: read the proposal, because it is public; ask her CPA whether the credential route is one she would hold if the rule is adopted and whether she wants to be the reason her client qualifies; sit with her advisor and settle how much of the $850,000 she would genuinely leave untouched for years. What she cannot do is buy a private credit fund on the strength of a proposal.

If the change is adopted, her file needs three lines it does not have today: the route she qualified under, the sleeve size that route supports, and the fee she agreed to when the strategy works. Start the list of clients who will need those lines now, beginning with the ones who have already been told no.