Subject: File No. S7-17-11
From: Tom Irvin, CFP, CPA

May 18, 2011

I understand that the SEC has asked for comments (I also understand that Congress has a bigger responsibility for this, than does the SEC).

Comment(s) from Tom Irvin, CFP, CPA
The SEC Invested Assets (and Net Worth) rules - designed to prohibit investors from investing in managed investments, incentivized by management fees which are variable according to investment results - are using a poor proxy for investment risk appetite and investment knowledge and investment sophistication. (This is the kind of "quality" of "proxy" which in other fields of human endeavor may result in charges of racism, sexism and agism, etc. Net worth and investable assets may correlate, somewhat, with risk appetite, but they surely don't define or explain it.)

Increasing the asset thresholds makes the problem (of being poor proxy for "risk appetite") worse.

  1. As evidence for the above assertions, I point to the many RIA's, themselves, who are often 30 somethings, with less than that amount of investable funds of their own. These (employee) RIA's often have the knowledge and the (youthful) risk appetite to invest their own funds aggressively, if appointing an investment manager to manage their own, personal, investment account(s). Yet, the young RIA's, themselves, when evaluated as "clients", often fail the SEC asset based tests and are, thereby, "protected" from having their own funds invested under incentive based management fees. Their knowledge, their "other" income and their youth are not taken into account (by the SEC) in validating their personal appetite for investment risk.
  2. There are also retirees, who have a home (or are already in a nursing home) and have sufficient pension income and insurance (Life, Health and Long Term Care) and are merely investing their (un-needed) nest eggs with a view to providing a larger estate for their ultimate beneficiaries. If such a retiree had only $300,000 to invest, then that ($300k) retiree may still have good reason to be more aggressive in their investment risk appetite, contrasted with another retiree who had no pension and no insurance and who needed to live off their one and only ($2 million) portfolio throughout their future sickness and health. Risk appetite is not just about portfolio size or net worth.
  3. Taking incentive compensation off the menu for the majority of smaller investors, places them even more at the mercy of un-incentivised compensation plans. What are we thinking? Who's income and assets (and liability) are we really protecting?
  4. Finally, consider the hypothetical saver and investor for the long-term, who had only just met the SEC asset threshold in 2006 or 2007, then moved to an incentive compensation plan with an investment manager, then suffered severe losses, in the market downturn. Consider that the investor did not change his/her investment philosophy, or risk appetite, in 2008, but wanted to move to a different investment manager. Imagine that the investor was advised (by the potential new investment manager) that the investor did not now qualify to be an incentive fee client and must take his shrunken portfolio out of incentive management. Then the market bounced back in 2009 and 2010. Thanks a lot... SEC ! The SEC asset rule would have caused this hypothetical investor of moderate means to make a rookie mistake that he/she did not want to make (getting out of their long-term investment strategy, at the bottom of the market cycle).