From: Jeremy Nelson
Sent: April 2, 2016
Subject: File Number S7-24-15

To Whom It May Concern:

I am writing today on behalf of the clients and staff of Pinnacle Trust.  Pinnacle Trust is an independent trust company based out of Madison, MS.  Currently, we have approximately $650 million under management and a staff of 25.  Our client base consists of individual wealth management clients, trusts, non-profits and retirement plans.  We work tirelessly to help our clients align their financial resources with their life goals.  In order to achieve these goals we collaborate to create financial plans and investment strategies that meet their needs. 

In 2012, we recognized that we were nearing the end of a long-term cycle of declining interest rates.  Even if interest rates did not begin to rise, sub 2% 10-year Treasury yields would make it increasingly difficult  for our clients to achieve their financial goals. In order for their portfolios to achieve an adequate return we would need to increase exposure to equities or think differently.  Our concern with increasing long-term equity exposure for clients was subjecting them to more risk than they would be comfortable with.  During the Global Financial Crisis, many Americans made the behavioral mistake of acting on fear and selling all of their financial assets.  This locked in their losses and set their financial goals back for years to come.

Since the crisis , we have focused first on helping clients understand the short-term risks they are exposed to, and second, finding ways to better diversify their portfolios.  We have also eliminated account minimums to expand the number of people we are able to serve, and are working to lower our fees schedules. 

In order to better diversify client portfolios, we have begun deploying a “core satellite” investment approach.  The core, traditional stock and bond allocations, typically represents 70% of the portfolio.  10% of the portfolio is then dedicated as the “tactical allocation” and the remaining 20% uses liquid alternatives to achieve better risk-adjusted returns. 

During the Global Financial Crisis and the recent stock market volatility that began in late 2014, liquid alternative mutual funds generally declined less than the market or, in some cases, increased in value.  These funds provide new potential sources of return for our clients that were previously only available to the wealthiest people in our nation. 

As a firm, we are proud of our efforts to better serve our existing client base and expand the number of families we are able to serve.  I applaud the Commissions goals of providing investor protection as it aligns with our firms mission;  however, I am concerned that the SEC’s proposed rule may negatively affect clients. 

All derivatives are not the same.  As a fiduciary, our firm has evaluated dozens of liquid alternatives.  The derivatives used in the funds our clients invest in are not the kinds  of derivatives that were responsible for the Financial Crisis of 2008.  Those were structured fixed income products that aren’t even being regulated by the derivatives proposal.  The vast majority of derivatives used in liquid alternative mutual funds are simple derivatives such as index futures and currency forwards. 

Some funds, such as Leveraged ETFs, use derivatives to explicitly amplify risk, but most liquid alternative managers use them in a risk-controlled manner.  Additionally, the current proposal fails to recognize the different level of risk of derivatives from different asset classes.  Managers tend to apply the greatest amount of leverage to low-risk assets, such as low-duration bonds, in an effort to balance risk between bonds and equities. 

In conclusion, I firmly support investor-first regulation but the current proposal could negatively affect those same investors.  Liquid alternative mutual funds allow firms such as Pinnacle Trust to better diversify client portfolios.  Without liquid alternative mutual funds, clients will be forced to accept more risk from equities or time the market in order achieve their financial goals.  This will provide a less certain and more volatile path to achieving their financial goals.  Most derivatives used in liquid alternative mutual funds are simple and used in a risk-controlled and responsible manner.  I recommend re-examining the proposal to include some form of risk-rating for types of derivatives and risk-adjustment for leverage based on the risk of underlying asset class. 

Again, on behalf of Pinnacle Trust and our clients, I applaud the Commissions goals of providing investor protection.  As an industry we must come together to put clients first and protect their interests.



Jeremy Nelson
President & Chief Investment Officer, Pinnacle Trust
101 Port St., Ste 200
Madison, MS 39110