From: Michael S. Faino
Sent: February 7, 2007
Subject: File No. S7-25-06
File Number S7-25-06
Nancy M. Morris
Securities and Exchange Commission
100 F St., NE
Washington, DC 20549-1090
Dear Ms. Morris:
The purpose of this email is to provide comments on File Number S7-25-06. Great Oak Investment Management is an investment advisor that manages two private vehicles (“funds”), totaling approximately $20mm in assets. Our funds invest only in small and medium sized U.S. stocks, with market capitalizations up to $5 billion and are long-only funds, not hedge funds. Per our offering documents, we can not use leverage, sell stocks short, buy or sell options, futures or any other derivative security. Thus, we avoid many of the risky strategies employed by hedge funds or other private vehicles and offer no more risk than the average small-cap mutual fund. We created our private funds as they are the most efficient and cost effective way to manage assets for high net worth individuals.
We are strongly opposed to the proposed rule changes for the following reasons:
- The new definition of accredited natural person essentially eliminates the target market for our funds. The SEC has made it cost prohibitive for small investment advisors to create mutual funds, and running separate accounts for each individual client would require additional staff and overhead costs that we could only recoup by charging higher fees. To the best of my knowledge, those are the only alternatives for a small investment advisor trying to develop its business.
- We are not a hedge fund, and indeed our funds have much less risk, based on my description above, than funds the SEC is targeting with this rule change.
- The exclusion of venture capital funds under the guise that they are business development companies is disingenuous. Venture capital funds by their very definition are the riskiest investment vehicles available. The notion that long-only private vehicles such as ours represent greater risks for the high net worth individual is preposterous.
- The proposed rule change to exclude knowledgeable employees from investing in private vehicles unless they meet the accredited natural person definition is also damaging to our business. Like many small advisors, having our employees invest in our funds is an important way to demonstrate to our prospective clients that we believe in what we do. Unfortunately, not all key professionals meet the proposed accredited natural person definition, and requiring such standards will eliminate everyone except the ultra-wealthy from working in such a capacity for a private investment firm. Most advisors to institutional clients require that the key professionals have a significant amount of their net worth invested in their funds. Again, since we take far less risk than the average hedge fund, a knowledgeable employee is fully capable of understanding the few risks inherent in our funds.
We believe that the SEC should target specific types of funds for this rule change: funds that use leverage, sell short and/or those that can buy derivative securities. The broad brush approach to this proposed rule change does tremendous damage to our business and those of other small investment advisors. Finally, the rule changes make it even more difficult to create, build and operate investment management firms profitably, which goes against the entrepreneurial history for which our industry is known.
Michael S. Faino
President and Portfolio Manager
Michael S. Faino
President & Portfolio Manager
Great Oak Investment Management LLC
3101 Wilson Blvd., Suite 210
Arlington, VA 22201
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