Nov
16
SEC eyes private fund investing rules that will rule out some millionaires
November 16, 2007 | Leave a Comment
The “have mores” are about to have even more investment opportunities than the “haves.”
The Securities and Exchange Commission has proposed new rules for people who are eligible to invest in private funds such as hedge funds and private equity funds.
Under the SEC’s existing rules, any individual with either an annual income of $200,000 individually or $300,000 jointly with his or her spouse or a net worth of at least $1 million is eligible to invest in private funds as an “accredited investor.”
Under the proposed rules, only those individuals who meet the existing accredited investor standard (either by annual income or by net worth) and who have at least $2.5 million in investments will be eligible to invest in private funds. “Investments” would exclude non-investment real estate such as family homes.
The SEC adopted the existing “accredited investor” standard in 1981.
At adoption, there was no mechanism to adjust the definition for inflation. Under the existing definition, 8.5 percent of all U.S. households currently meet the definition of “accredited investor” and can invest in private funds, but under the new standard only 1.3 percent of U.S. households will qualify. The SEC notes in its release describing the proposed rule that in 1981, 1.9 percent of U.S. households qualified as “accredited investors.”
The result of the proposed SEC rules is that even less people will qualify as “accredited investors” than when the definition was first adopted in 1981. The SEC’s census figures estimate that the pool of potential investors in private funds will shrink by 80 percent under the proposed definition. The SEC justifies this restriction on the basis that private funds have gotten more complex over the last decade.
According to SEC Chairman Christopher Cox, the tighter standards would better limit the funds to people who have the “knowledge and sophistication” to invest in private funds.
Such reasoning, however, assumes that greater wealth equals greater sophistication, and this assumption has outraged many millionaires who will be excluded from investing under the new definition.
The proposed definition will not grandfather in current investors in private funds who will no longer qualify as an accredited investor. The SEC proposal suggests that any “existing old rule accredited persons” may remain in the fund but may not invest additional capital.
The SEC has received hundreds of comments from investors disgruntled about the proposed rules and how the rule limits these “rich” investors from alternative investments while allowing the “super-rich” to get even richer.
These changes will have a significant impact on those who are eligible to invest in private funds.
By shrinking the potential investor pool by 80 percent, these investors will have to find alternative investment sources. But all is not entirely lost for the “merely rich” investor. SEC rules still allow 35 or less “non-accredited” investors to invest in a private fund, though many investment managers will not let non-accredited investors into their funds because they cannot charge performance fees based upon the profits of the fund.
The real impact on the availability of alternative investment opportunities to those who will be excluded from private funds remains to be seen. The SEC plans to issue its final rules early next year.
Tonya Mitchem Grindon is a shareholder in the Nashville office of law firm Baker Donelson Bearman Caldwell & Berkowitz. 615-726-5600 tgrindon@bakerdonelson.com
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Nov
6
How the Affluent Manage Home Equity to Safely and Conservatively Build Wealth
November 6, 2007 | Leave a Comment
If you had enough money to pay off your mortgage right now, would you? Many people would. In fact, the ‘American Dream’ is to own your own home, and to own it outright, with no mortgage. If the American Dream is so wonderful, how can we explain the fact that thousands of financially successful people, who have more than enough money to pay off their mortgage, refuse to do so. The answer? Most of what we believe about mortgages and home equity, which we learned from our parents and grandparents, is wrong. They taught us to make a big down payment, get a fixed rate mortgage, and make extra principle payments in order to pay off your loan as early as you can. Mortgages, they said, are a necessary evil at best. The problem with this rationale is it has become outdated. The rules of money have changed. Unlike our grandparents, we will no longer have the same job for 30 years. In many cases people will switch careers five or six times. Also, unlike our grandparents, we will no longer live in the same home for 30 years. Statistics show that the average homeowner lives in their home for only seven years. And unlike our grandparents, we will no longer keep the same mortgage for 30 years. According to the Federal National Mortgage Association, or Fannie Mae, the average American mortgage lasts 4.2 years.
Given these statistics, more middle class homeowners are choosing to use their mortgage as a tool just like the wealthy — those with the ability to pay off their mortgage but refuse to do so. Will you be one of those who create a new, liquid, financially secure dream?
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