January 29, 2020
I would like to start by thanking the Commission for allowing me the opportunity to voice my views on the proposed rule #S7-24-15. It goes with out saying that these freedoms are not afforded by many of the worlds largest capital markets. It is a freedom I value personally, and professionally.
The proposed rules, as it has been presented to me by ProShares, will make it more difficult for average retail investors to access risky leveraged and inverse investment instruments (LAIIIs). This concept, on the surface, appears consistent with the SECs objective to protect non-sophisticated investors. For reference, I consider myself a non-sophisticated investor, though it is likely I would qualify to transact in LAIIIs given my net worth and income characteristics.
Why do I invest in LAIIIs? LAIIIs have become a critical component in my investment strategy for a number of key reasons. 1) Bond and government securities are no longer a viable diversification within a rational portfolio. When 10- 20- 30-year treasury yields return less than forecasted inflation, the traditional diversified portfolio model becomes broken. No longer can an investor reasonably invest in bonds of any grade, but especially government and speculative debt. 2) The rise of passive fund strategies and structures in many 401(k) administrator offerings, Vanguard is perhaps the best and most specific example, has eliminated ALL of the effective hedging and diversification tools historically employed by active managed funds. Because a larger segment of our net worth has become isolated within a passive investment manager I need access to rational diversification instruments (LAIIIs) in my free ranging accounts. I CANNOT stress enough how critical this is to our overall diversification strategy.
Why is the SEC proposing this rule, now? This question is perhaps the most important. SEC actions and decisions are carefully watched by market participants. In recent years, the SEC has focused on expanding access to capital markets for non-sophisticated investors. This has been true for streamlining mini public companies as well as relaxed restrictions on private offerings and crowdfunding. So it leave the investment community with one big question, why, and why now?
I could speculate freely about both of those, but I really dont need to. We now why. And we know why those reasons will likely change in the future.
As a non-sophisticated investor, I am well aware of the costs (in all their forms) I pay to entities like ProShare in order to have access to LAIIIs. These costs can be very steep. At times they can overwhelm my unrealized positions. But NEVER until a few moments ago when ProShare emailed me, have I ever felt these instruments, specifically the 1x, 1.5x and 2x long and inverse instruments that I use daily, would need to be restricted by the SEC. The message that would be sent to global markets by implementing a prohibition on LAIIIs is one of outright capital control and market manipulation. I shutter at the thought of what will come if such a draconian, and nefarious action is taken by the government of the United States of America.