American Banker: Protect the Financial Industry by Protecting Investors
Protect the Financial Industry byProtecting InvestorsJennifer OpenshawAPR 5, 2013 9:00am ETFriday marks the first anniversary of the Jumpstart Our BusinessStartups Act. As the industry awaits overdue Securities andExchange Commission guidance on some of its provisions, consumeradvocates rightly worry individual investors will get burned again.You may know of someone – a relative, a neighbor, a colleague –who sold a house and now technically meets the "accreditedinvestor" rule with a net worth exceeding $1 million.But does that mean he or she is sophisticated – ready and able to make decisions about investing in privateplacements?Inexperienced and even unaccredited investors, including many clients of the wealth management andfinancial advisory arms of commercial banks, are likely to find themselves evaluating such choices as aresult of the JOBS Act. Among other things, it calls for the SEC to amend Regulation D to allow thealternative investment industry to market and communicate to the broader public about private placementsand other products.In todays world of low yields, the individual investor is hungry for alternatives. Rather than settle for 2percent on a long-term CD – or nothing if theyre among those still sitting on the sidelines of the stockmarket – he or she may jump at a new product, especially if its marketed by someone calling himself afinancial advisor.There are some benefits for investors, such as access to information that sectors of our industry have beenproviding for decades to the privileged few. Those who might not have had access to better-performingproducts could more easily find them now – even if those investors are not a part of the old boys network.But investors could also be hurt. Private placements are complicated products, but unlike mutual fundstheyve been exempt from regulation under the Securities Act of 1933.So private placements have often lured unwary investors whose portfolios suffered. In the past three yearsalone, a number of broker/dealers have folded as a result of ensuing litigation; some of those affected arewell-known names.