Wednesday, June 03, 2015

Piwowar Calls for Revisiting Accredited Investor Definition, Encourages Forward-Looking Statement Waivers

By Amanda Maine, J.D.

SEC Commissioner Michael S. Piwowar, citing concerns from private sector stakeholders, criticized certain government regulations as distracting from the real risks of operating businesses in a globally competitive market. Piwowar voiced his support for changing the income and wealth thresholds that are a prerequisite for obtaining accredited investor status. He also supported the Commission’s granting of waivers to ineligible issuers, particularly regarding the safe harbor for forward-looking statements. Piwowar made his remarks at the Cato Summit on Financial Regulation in New York City.

Accredited investors. Despite recent SEC rulemakings intended to improve the offering exemption under Regulation A, Piwowar said that he suspects Regulation D will continue to be favored by issuers for the foreseeable future. Under Regulation D, adopted in 1982, those who make more than $200,000 or more in annual income or have $1 million or more in net worth are part of a “privileged class” of accredited investors that have the opportunity to choose to invest in the “full panoply of investments,” both public and private, according to Piwowar. The government decided that those who did not meet this criteria were restricted access to private investments for their own protection, Piwowar said.

Piwowar noted that the $200,000 income test has not been updated since 1982 and that there is an obvious need to revisit accredited investor thresholds. However, he warned that simply adjusting the figures for inflation may not be the best way to proceed for a number of reasons. It is possible that the levels adopted in 1982 may have been too high or too low, he explained. He also pointed out that there is a geographical distinction to make regarding the $200,000 threshold, because that income in rural Iowa will go further than in New York City.

In addition, Piwowar observed that the income and net worth tests can create different results for investors with very similar figures depending on how they structure their personal balance sheets. Age is also an unnecessary determination into investor sophistication under the current levels, he advised, noting that older investors who have had a long time to accumulate wealth might not necessarily be more sophisticated than younger investors.

Piwowar described the distinction between accredited and non-accredited investors as artificial and voiced his support for challenging the notion that non-accredited investors need to be protected from investing in high-risk securities. By preventing these investors from investing in riskier securities, regulators restrict their ability to invest in high-return securities. These regulations also hinder those investors from reaping the benefits of portfolio diversification, according to Piwowar.

The disparate opportunities offered to accredited and non-accredited investors, Piwowar said, show that even a well-intentioned investor protection policy can harm the investors it was supposed to protect. He also suggested that this policy may actually exacerbate wealth inequality by allowing the “privileged class” to have access to investment opportunities with higher potential returns.

Waivers. Piwowar also expressed his support for granting waivers for the ability to rely on the statutory safe harbor for forward-looking statements. An issuer can lose its ability to rely on that safe harbor if it has faced criminal or civil sanctions for violating certain antifraud provisions of the federal securities laws. Piwowar pointed out that an issuer may be prevented from using the safe harbor even if the disqualifying enforcement matter was unrelated to the issuer’s corporate disclosure.

Piwowar pointed to academic research showing that investors strongly respond to both quantitative and qualitative forecasts. Investors use forward-looking statements to garner critical institutions from management to help them make informed decisions, Piwowar said. He disagreed with those who suggest that the Commission should refuse to grant waivers to issuers who have been subject to “too many” enforcement actions. The reduced use of forward-looking statements is concerning because a company’s value is best judged by future prospects, according to Piwowar.

Rejecting the idea of “too big to fail,” Piwowar made the case for large, complex financial instructions to disclose forward-looking statements. According to Piwowar, exposing banks to the disclosure-oriented focus of market regulation can provide better protection than relying on banking regulators. If banks did not make forward-looking statements, Piwowar said, the lack of information in the markets would be even more severe given the lack of disclosures made under the “flawed” bank regulatory framework.