MFA urges SEC not to be overly prescriptive in accredited investor verification checks under JOBS Act

28 Jan, 2013

The Managed Funds Association (MFA) has advised the SEC not to be overly prescriptive in how it requires hedge fund managers to verify investors are accredited under the eagerly anticipated JOBS Act.

“Managers need to take reasonable steps and display good judgment to ensure that they reasonably believe that any potential investors that they accept are accredited. However, I do not believe that managers should be forced to take specific steps such as obtaining bank statements or tax returns from potential investors as investors may find it intrusive and may be reluctant to supply information,” said Stuart Kaswell, general counsel at the MFA, speaking in Washington DC.

Common sense also needs to be employed in determining a definitive “safe harbour” standard for verifying an investors’ status. “If an investor writes a $500,000 cheque or if the investment is substantial, it is more than likely to screen out the mom and pop investors. We would suggest that a large investment is a good indicator that the investor is accredited and this should be used as an indicator that the manager has taken reasonable steps,” said Kaswell.

There have been calls in some circles for managers to hire independent, third party service providers to ensure they target only accredited investors, currently defined to include individuals with more than $1 million in net worth or income greater than $200,000 in each of the two last calendar years. However, this is likely to add to managers’ costs and might not be worthwhile, particularly if the investments are not substantial.

Some lobby groups including the AFL-CIO and Consumer Federation of America, as well as several mutual funds, have criticised the JOBS Act as posing a threat  to unsophisticated investors. Others complain the $1 million threshold is far too low citing the threshold was first defined more than a quarter of a century ago and had not taken into account inflation.

Kaswell acknowledged the $1 million threshold was likely to be revisited. “Congress instructed the SEC to remove the value of a person’s primary residence from the calculation and retain the $1 million threshold initially and review and adjust the threshold beginning in 2014,” he said.

Most experts predict a final draft of the JOBS Act will be passed this year although the changing leadership at the SEC has raised questions as to whether it will be delayed further. Kaswell, however, said it was impossible to know if the appointment of Mary Jo White as SEC chairman would impact the implementation deadline.

Whether or not the JOBS Act will have much impact is open to debate. Successful managers will probably feel no obligation to advertise or market while some pessimists point out hedge funds whose returns are less than stellar might exploit the rules. Most managers, speaking at GAIM USA in Boca Raton, Florida last week, said they were unlikely to make changes to their marketing strategy in lieu of the JOBS Act.