Subject: File No. S7-17-11
From: David Hale
Affiliation: Principal, DNH CAPITAL L.L.C.

May 20, 2011

I believe you should make and keep the performance fee standard the same as the accredited investor standard, or if anything eliminate the performance fee standard entirely. You cite inflation adjustment as the reason behind increasing the performance fee standard to a $2 Million liquid net worth. This is not the proper time to undertake such an adjustment. While the consumer price index is up approximately 33% since the year 2000 (source:, household net worth as a percentage of GDP is back to 2002 and 1996 levels (source:

This decline in net worth is due primarily to the credit and dot-com bubbles bursting. For many families in America, this has equated to being set back 5-10 years financially, which translates to postponing retirements by similar amounts of time. If we were to believe that the inflation figures in any way tracked household net worth or, more specifically, investment performance, then most families in America would be 33% richer than they were in the year 2000. In fact, the opposite is true - most American families are 33% poorer than they were in the year 2000. Inflation is not the proper unit of measure by which to gauge net worth requirements, household net worth as a % of GDP is a far better one.

Because of this decline in household net worth, these same families have begun to search for more competitive investment advisors who will actually take responsibility for managing their money and bear responsibility and accountability to its performance. These families want returns that are differentiated from the stock market and bond market indices and they can usually find that kind of performance from Registered Investment Advisors who charge an incentive or performance fee. This kind of fee structure generally means that the advisor is much more research intensive than his or her non-performance fee charging counterparts which raises the odds significantly that the clients accounts will perform well as both parties are on the same side of the table because they both profit when the account value rises. Raising the net worth standard and AUM standard now would cut off most of these families from the very kind of investment adviser they are seeking to do business with at a time when they need them the most.

Furthermore, raising the performance fee standard will perpetuate the conflict of interest that exists between the non-performance fee investment advisor and their clients. In this scenario, advisers usually charge a fee that is a percentage of assets under management. This means that for every new client an adviser takes on, their existing clients usually get marginally less service because of the additional demands on the advisers time. While retaining a new client increases the revenue and reduces the risk to the advisers practice, the existing clients are done no service whatsoever. A significant amount of time is spent prospecting for new business by advisers who do not charge performance fees. If this time could be spent on research and account management, it would most likely be better for their existing clients, but without performance fees as an incentive it is very often difficult for advisers to justify the effort. They feel their time is better spent on revenue raising activities such as prospecting for new clients.

It is time to truly start caring about individual investors again. To do this, it would be far better if you did away with dollar thresholds entirely and shifted your focus to intellectual sophistication. If there were an exam that investors had to take that verified their level of financial sophistication, the same way lawyers have to take the bar exam or doctors have to take medical boards, you would better match sophisticated investors with the managers they desire. Believe me, I've been practicing for over a decade and I have the pleasure of working with some of the most sophisticated investors in my area every day. However, I can tell you that there are plenty of wealthy individuals who are NOT sophisticated or wise when it comes to the way they treat their money and there are college freshman who have a strong grasp of financial concepts and theories. Having money does not necessarily correlate with being sophisticated, society would benefit if the SEC would legislate with this in mind.

I welcome the opportunity to discuss this with anyone who has an interest. My contact information is below.