February 21, 2007
Re the proposed changes to the Accredited Investor definition:
The changes as proposed do a disservice to the average investor. Over the past few years, talented sell-side analysts have left in droves to join hedge funds. Rules now require that sell-side analyst compensation not be linked to investment banking business. Furthermore, trading charges at sell-side firms are just a penny or two per share.
This combination of de-linking pay and the very small trading charges has created an environment in which it is difficult for a sell-side firm to pay top talent appropriately. Although some excellent analysts remain at sell-side firms, their numbers are dwindling. Meanwhile, hedge fund firms, which receive management and performance fees, are in a much better position to compensate their talent. This situation creates a substantial incentive for the better sell-side analysts to move to hedge funds.
By driving the top investment talent to hedge funds, the average investor is no longer able to benefit from their knowledge and experience. Eventually, the average investor will have access to second-tier talent only, and this will create an even greater divide between the returns the average person realizes and the returns an Accredited Investor realizes. By toughening the Accredited Investor requirements, you are forcing more investors to remain with lesser talent.
Instead of raising the requirements, you should eliminate the income and net worth requirements and eliminate the 100-investor limit for those investment pools that choose to be exempt from section 3(c)(1) of the Company Act. This would allow more investors to tap into the knowledge and sophistication of some of the best investment talent. Instead, you should focus on having hedge funds provide better risk disclosure. This would allow all investors, regardless of income and/or net worth, the opportunity to participate in the decisions of some of the top investment talent, rather than the elitist structure that is currently in place.
Thank you for your attention to this matter.