February 5, 2007
The commission should seriously reconsider the proposed rulemaking on hedge fund "suitability." Similar to its rule requiring fund registration under the 40 act, this is another example of the wrong tool for the job.
The proposed rule is at best a blut tool for determining suitability. Additionally, it will significantly shrink the pool of potential investors for early fund managers - which will have a chilling effect on the competition necessary to support innovation and competition for fees in the hedge fund industry. The rule would include excluding large numbers of people employed in the finance, legal and accounting industries - some with NASD licenses - under the erroneous assumption that wealth equals investment sophistication.
That there is a exemption for private equity funds is absurd as those funds generally represent significantly more risk than a hedge fund with higher concentration/less diversity of investments and less liquidity (both at the fund and investment level). This alone points to the wrongheaded nature of why the SEC feels it should be "doing something" about hedge funds.
Where the SEC should be focussing its energies is better oversight of fund performance reporting and fund accounting. Most of the high profile examples of hedge fund difficulties have stemmed from fraudulent behavior of rogue managers that went undiscovered for too long. Consistent reporting standards and required third party accounting of fund assets would go a long way toward making those kinds of problems a rarity.