The Securities and Exchange Commission recently proposed a new rule to conform the definition of "accredited investor" to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  In addition, the SEC's proposed rules also clarify the treatment of debt secured by the property in the calculation of net worth.

Summary of Proposed Changes to Accredited Investor Definition

The SEC's proposed amendments would exclude the value of an individual's primary residence in calculating net worth for purposes of determining accredited investor status.  In addition, the amendments clarify that the "value" of an investor's primary residence is determined by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.

Specifically, the proposed amended definition of the term "accredited investor" is as follows:

Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.

As a result, under the proposed rule, an investor's net worth would be reduced by the amount of "value" that the primary residence would have contributed to net worth if the residence were not required to be excluded.

Practical Tip

Underwater Mortgage Would Not Increase Net Worth.  Under the SEC's proposed rule, the amount of secured debt subtracted from the value of the property is capped at the estimated fair market value of the property.  This means that if the value of the secured debt exceeds the value of the property (i.e., in the case of an underwater mortgage), it would not result in an increase to net worth.

 


The new net worth standard must remain in effect until July 21, 2014 (four years after enactment of the Financial Reform Act).  Beginning in 2014, the SEC is required to review the accredited investor definition in its entirety and is authorized to engage in further rulemaking as it deems appropriate.

Deadline for Comments

Public comments on the proposed rule may be submitted to the SEC on or before March 11, 2011.

Additional Information

This update is only intended to provide a summary of the SEC's proposed rule.  You can read the full text of the proposal at http://www.sec.gov/rules/proposed/2011/33-9177.pdf.  You can find our other Financial Reform Act updates at http://www.perkinscoie.com/thefinancialreformact/.  You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to financial institutions on our Web site.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.