December 20, 2019
Greetings:
I wish to comment on the part of the proposal cited in sections 60 and 61 deeming a investor's financial advisor as sufficient to make that investor an accredited investor.
I base these comments on over 35 years of advising and investing for individuals and institutions as a FINRA licensed advisor in a firm using both fee and commissioned based products, a portfolio manager in three bank trust departments under OCC regulation and as an advisor in several fee-only firms.
60. If we were to permit an investor advised by a registered investment adviser or broker-dealer to be deemed an accredited investor, under what circumstances would that registered financial professional be likely to recommend investing in a Regulation D offering?
The professional would most likely recommend such an offering if the commission was sufficiently high enough to warrant the extra work in investing in a private placement. In the modern world, every advisory firm is enabled to invest through their custodian(s) in a diversified, auto-rebalancing, fiduciary standard acceptable portfolio with a few clicks of a button. It takes a lot of time to move off that path, time not available to turn the next prospect into a client. Granted, a few advisors will invest in the unusual for the cachet and marketing advantage. But commission dollars will be the primary motivator here. (See variable annuities, non-traded REITs, convoluted dividend capture strategies, etc.)
What types of investors would be likely to receive a recommendation from that registered financial professional to invest in a Regulation D offering?
All the ones with sufficient AUM. Once a firm decides to approve an investment it makes most economic and time sense to put the maximum number of clients in it. Only the clients who are too skittish will get passed over.
61. If an investor is to be considered an accredited investor by virtue of being advised by a registered investment adviser or broker-dealer, should we consider additional investor protections? For example, should such financial professionals have to eliminate any conflicts of interest related to such advice for its advice to render an investor an accredited investor or should such a financial professional have to mitigate such conflicts of interest in a particular way? Should such financial professionals have to conduct any different due diligence before advising the investor on such investments? Should there be limits on the types or amounts of investments that such an investor could make under these circumstances?
In answer to all these questions: The single best way to allow advisors to put currently non-accredited clients into Regulation D offerings is to only allow it if the client is in a 100% fee-based account. In other words, there would be no extra monetary incentive for the advisor to sell that product. If we look at the abuses in the investing world over the past several centuries, one factor emerges: the more commission money possible for the advisor the more client money gets stuffed into a product regardless of suitability. The temptation is just too great for many advisors. One can't write the rules well enough to prohibit the abuse.
The investor is of little help in protecting him or herself. My experience is that investors (even those with several million dollars) using an advisor typically want to hear at most 5 - 10 sentences about any investment. They have no natural curiosity about investments and the typical comment is, "Mark, that is why I hired you. If you think it is best then let's do it." Only the clients that have no appetite for risk will shun such investments and that is only because of a blanket requirement that an investment has "guarantees". At most, the investor will want to know if they can get their money out "at any time". Products like non-traded REITs are designed to have this feature but of course, they also have clauses, very reasonable, that prohibit everyone from redeeming at once. We have seen then products touted as liquid being anything but in times of general economic calamity. Meanwhile the commission check has already been cashed ...
Thank you for opportunity to comment. The general rationale and tenor of the proposal is good and the proposal should be adopted, absent my concerns above.