Securities and Exchange Commission (SEC)

SEC Issues Staff Report on Accredited Investor Definition

On December 18, the Securities and Exchange Commission issued a staff report (the “Report”) on the definition of “accredited investor” set forth in Rule 501(a) of Regulation D under the Securities Act of 1933. The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Commission to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted. Staff from the Divisions of Corporation Finance and Economic and Risk Analysis prepared the Report in connection with the first review of the definition.

The Report examines the history of the accredited investor definition and considers comments on the definition received from a variety of sources, including public commenters, the SEC’s Investor Advisory Committee and its Advisory Committee on Small and Emerging Companies. The Report considers alternative approaches to defining “accredited investor,” provides staff recommendations for potential updates and modifications to the existing definition and analyzes the impact potential approaches may have on the pool of accredited investors.

The primary recommendations of the Report are:

  • The Commission should revise the financial thresholds, requirements for natural persons to qualify as accredited investors and the list-based approach for entities to qualify as accredited investors.
  • The Commission should revise the accredited investor definition to allow individuals to qualify  as accredited investors based on other measures of sophistication besides their net worth and income.

The Report suggests detailed alternate approaches to implementing these recommendations.

The Commission is inviting members of the public to provide comments on the accredited investor definition, generally, and specifically on the staff recommendations contained in the Report, although a deadline for submitting comments has not been set.

SEC Approves Pilot to Assess Tick Size Impact for Smaller Companies

On May 6, 2015, the Securities and Exchange Commission approved a proposal by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) for a two-year pilot program that would widen the minimum quoting and trading increments–or tick sizes–for stocks of some smaller companies.  The SEC plans to use the pilot program to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors.

The tick size pilot will begin by May 6, 2016.  It will include stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less, and a volume weighted average price of at least $2.00 for every trading day.

The pilot will consist of a control group of approximately 1,400 securities and three test groups with 400 securities in each selected by a stratified sampling.  During the pilot:

  • Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share and will trade at the currently permitted increments.
  • Pilot securities in the first test group will be quoted in $0.05 minimum increments but will continue to trade at any price increment that is currently permitted.
  • Pilot securities in the second test group will be quoted in $0.05 minimum increments and will trade at $0.05 minimum increments subject to a midpoint exception, a retail investor exception, and a negotiated trade exception.
  • Pilot securities in the third test group will be subject to the same terms as the second test group and also will be subject to the “trade-at” requirement to prevent price matching by a person not displaying at a price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies. In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions that mirror those under Rule 611 of Regulation NMS will apply.

A variety of data generated during the tick size pilot will be released publicly on an aggregated basis to assist in analyzing the impact of wider tick sizes on smaller capitalization stocks.  The exchanges and FINRA will submit their initial assessments on the tick size pilot’s impact 18 months after the pilot begins.  Order.