February 2, 2007
To Whom It May Concern,
I would like to thank the Commission for taking a moment to consider my commentary in consideration of potential changes to the issue of investor accreditation.
My understanding of current accreditation rules includes a stipulation that certain investment vehicles -- such as hedge funds -- require individual investors to have a liquid net worth of $1 million. The idea behind such a provision is to prevent investors of net worths below this threshold from catastrophic capital loss.
It is also my understanding that a proposal has been made to increase this liquid net worth threshold to $2.5 million. While this increase may help make up for differences in inflation and overall increased wealth and risks throughout the US population, this move would not address the entire scope of catastrophic capital losses. In fact, it would make markets indirectly less egalitarian and further reduce opportunities for the individual investor who chooses to partake in risk.
As an alternative, the Commission should instead establish a "maximum portfolio percentage" limit based on the proposed $2.5 million threshold. I shall demonstrate the details in the following illustration.
Let us say that the Commission establishes a new investor accreditation liquid net worth threshold of $2.5 million. Under my alternative, any individual who can open a brokerage account would be able to invest a maximum of 2.5% (an arbitrary percentage) of their entire portfolio value into "riskier" investments such as hedge funds. Once this investor's portfolio reaches the $2.5 million threshold, the "maximum percentage" rule could be waived.
It is quite possible that the market would react favorably to such a move by providing investment vehicles such as "funds of hedge funds" for those investors of limited capital. Hedge funds and similar equity instruments would continue to be free to continue requiring larger minimum investments, should they so choose.
Why would this alternative be advantageous to the Commission, the Congress, and to individual investors? For the following reasons:
- The Commission would fulfill its oversight duties by guarding against the public's risk and encouraging future investment opportunities
- The Congress would fulfill its Constitutional role of discouraging threats against the general welfare of US citizens and encouraging limited Federal interference in investment opportunities
- The individual investor would be free to take a measured risk with their investment dollars while also providing a boost to the nation's economy
It should be understood that I am addressing only logistical issues regarding individual investing. There continues to be a need for the Commission to further consider disclosure issues.
In conclusion, it is my view that the Commission should continue to hedge the individual investor against catastrophic capital loss, but not at the expense of limiting potential investment opportunity. The following question should always be asked when considering new rules changes: "Does this change protect the individual investor and provide a way for the individual investor to maximize their investment opportunities?"
I again thank the Commission for taking a moment to hear my commentary.