Subject: File No. S7-24-15
From: Scott Watts

March 13, 2020

Scott Watts
Arlington Securities Inc.

RE: Proposed regulations on sale and use of leveraged and inverse funds.
Position: Against the regulations.

Use of leveraged and inverse funds (these funds) by our firm is limited to certain customers and certain situations.

For instance, currently there is a market correction occurring. While most of our clients investments are in cash as of 20 Feb, a small portion of some clients investments have been rotated in and out of an inverse fund in either Rydex or in Profunds.
These rotations are offered free of transaction costs.
Clients have enjoyed the additional return plus the alternative to the Stay the course, buy and hold, the market will raise again mantra. Indeed, this rule proposal seems to be aimed not at protecting clients interests but at keeping them dumb and passive.

These funds allow investors to participate in alternative investments to hedge their portfolios, obtain target exposure with less risk, enhance returns, and allow meaningful sector/subsector diversification.

If these funds are restricted or prohibited to investors, the other alternatives-like options and margins- I believe to be even riskier and certainly more complicated. Once again, these funds are alternatives for investors to participate more easily and with greater transparency in new ways in financial markets. Just as open-end mutual funds opened investing to most of America in the past, access to these funds opens new horizons to Americans today.

The SEC has presented no evidence or reason that these funds should be treated differently than other securities, other than they are different. Because is never a good reason for any regulation.
Investors get a prospectus which clearly disclose the risks.
Advisors use their skills and training to help clients select investments and then implement the selections for the clients best interest. Requiring the client to first be trained up on the internal workings of these funds is akin to requiring airline passengers be trained flight crew before they can fly to Disneyland.

Capability to understand these funds is a non-starter. What is capability? I would assume that the SEC already understands that I work with mentally capable clients to do otherwise would be unethical and unlawful. So exactly what is the additional mental capacity required by the SEC for a client to understand these funds vis-a-vis other open-end mutual funds? A high school diploma? One college degree? Two college degrees? Professional designation?

As to cost, I find it distressing that the SEC is asking if the compliance costs for these funds alone would cost more than $10,000 for IAs and more than $50,000 for BDs. This is a ridiculously high threshold for smaller BDs and IAs and appears to be a form of backdoor prohibition. If the IA or BD wants to comply with the proposed regulations, the SEC is setting out to make it too expensive to offer these funds.