February 4, 2007
I am offering comment on the portion of File No. S7-25-06 that proposes redefining what constitutes an 'accredited investor'.
I would like to begin by reviewing what 'investment' choices that are currently available to non-accredited investors. As a non-accredited investor I currently am able to enjoy the safety of the following investment options:
-I can buy or sell short individual stocks. Earlier this decade I had the opportunity to buy any number of dot-com stocks that eventually and quickly evaporated. I enjoyed this luxury without any oversight from federal regulators.
-I can invest in mutual funds run by kids right out of college that will underperform any index.
-I can (and have) watched as the company match portion of my wife's 401(k) nose dived to zero because it was invested in company stock. The underlying corporation sought government protection. This happened in a goverment regulated plan, strange
-I can get 100:1 leverage in Forex trades for a minimum $2000 investment. This is about a ludicrous as it gets.
-I can buy (or sell) futures or future options on any number of agricultural, energy, metal or financial contracts. I am certain to have little expertise in the fundamental aspects of these
-I can buy or sell put or call options on just about anything. Additionally, because I have a little experience with these I can apply more complex strategies like Butterfly Spreads, Iron Condors, etc.
-I can (as an aside) play any number of poker games for money from my home computer.
I think that you get the picture. There are numerous options for me to go financial cliff diving. Uniquely, I can do all of this with all of the equity that I have built up in my home. Even better yet, I can get an interest only loan in order to put more of my income in these instruments.
Clearly, investing involves risk. Investing also involves a degree of responsibility on the investor, brokerage and government to assess, provide and regulate risk appropriate investment choices for EVERYONE. A threshold of net worth may have been an appropriate metric at one time. Today, I believe, not only does a net worth test fall short but it is also discriminatory.
An acceptable solution would be to continue with the change to the 'accredited investor' status. Make this indexed to inflation at a prescribed interval. Additionally, there is a need to provide the means for an investor that is not a high net worth investor to have access to managed vehicles that provide a higher level of risk and return.
I would propose a plan under which a non-accredited investor could access pools that are currently private. The first step would be to create a class of fund that would be regulated as 'high-risk' under suitable guidelines. The second step would be to provide a qualification test whereby a financial institution or accredited financial advisor could serve as gate-keepers and allow (or deny) access to these pools. This test could be set up to be based upon experience, income and the percent of assests under management that was to be placed in any high-risk pool.
There is truly no way to protect every investor from themselves. As you can tell, the average investor can blindly 'invest' in just about anything that a hedge fund can. I believe that it makes much more sense to open the access to hedge funds (professionally managed) in a regulated fashion than it does to allow relatively inexperienced investors access to the futures and forex markets with their high degree of leverage.
Thank you for your consideration.