January 30, 2020
I am writing to comment on the SEC proposed rule #S7-24-15.
This rule would make it too burdensome to buy, or even prevent clients from buying, leveraged / inverse funds. Leveraged and inverse funds are important to our business and investment process, as they are to many advisory firms. They allow us to seek enhanced returns or help protect clients portfolios as part of an overall diversified strategy. As a fiduciary, a Certified Financial Planner Profession and a Master of Science in Financial Planning, I am quite capable of understanding the risks and characteristics of leveraged and inverse funds as are thousands of other qualified investment advisors. We do not want a third party evaluating our capability to do so and potentially preventing us from buying them. We want to preserve the long-standing public free markets where investors and their advisors have the freedom to buy public securities without additional government-imposed limitations on investor choice.
I urge you to reject this proposed rule for the following reasons:
1. These regulations are bad for investors because they will limit access and increase investor costs and expenses. If adopted, some investors who could benefit from the enhanced return and portfolio protection potential of these funds will be prevented from buying them. What exactly is the approval process or requirements that you will implement? Investors should not be restricted from access simply because they do not meet some minimal net worth requirement or other arbitrary rules. Why should they be penalized and prevented from accessing products that could help them achieve the growth they need? Investors with shorter time frames, such as those near or in retirement should not be restricted simply because of their time horizon. Leveraged / inverse funds can be beneficial for them too in a limited way as a part of an overall diversified portfolio. Furthermore, requiring funds to implement a written derivates risk management program would potentially invalidate the fund objective (which is often to achieve a particular multiple of a certain index), increase fund expenses and thereby increase costs to investors.
2. These regulations are unnecessary and create unnecessary burden for investors and advisors. The SEC has not shown there is a problem that needs to be solved with respect to leveraged and inverse funds. They fail to show why these funds should be treated differently than tens of thousands of other publicly traded securities, each with their own characteristics and risks. It is inconceivable that the SEC would seek to restrict access to publicly traded securities that are in many ways actually less risky than many other publicly traded securities. A leveraged SP 500 fund has less drawdown risk and less volatility than the publicly traded shares of most companies in the SP 500. Would you similarly restrict our ability to purchase shares of a publicly traded company such as Facebook for example? Furthermore, requiring additional sales practice rules and due diligence for investment advisers, or requiring approval for clients of investment advisors to use these funds would add undue burden to investment advisors who are already required to act in their clients best interests. Investment advisors, such as myself, already collect suitability information as part of our legal and fiduciary requirements. Many of us are highly qualified, such as myselfI am a Certified Financial Planner and hold a Master of Science degree in Financial Planning. The idea that a regulatory panel must approve my access to a publicly traded security is ludicrous. Are you similarly going to have such requirements for CFAs and CTAs and other highly qualified professionals? For some of us, the use of leveraged / inverse funds is integral to our investment process and business practices. We use these funds as part of a clients overall diversified portfolio to enhance returns and reduce overall risk by reducing the overall volatility of a diversified portfolio in combination with other assets and by reducing drawdown risk. These regulations threaten our ability to act in our clients best interests by threatening our access to use these instruments. Furthermore, most who use these funds will continue to use these strategies in other ways through the use of margin and short-selling. Access to these funds provides a much less expensive, less burdensome way of achieving the same investment objectives. Finally, requiring funds to comply with an outer limit on fund leverage risk based on value at risk is a poor way to manage risk. Value at risk measures are subjective to the extent they are based on inputs and assumptions and only as good as those inputs and assumptions. This is a completely unnecessary and subjective measure.
3. These regulations set a dangerous precedent. Requiring someone to qualify to purchase a security in the public markets would be an unjustified break with how the SECs regulation of the sale of securities in the public markets has worked for nearly 90 years. The proposal would be at odds with our long-standing system that gives investors and their advisors the freedom to make their own investment decisions.
Darren P. Wurz, MSFP, CFP