March 6, 2007
I am writing to express my concerns with the proposed restrictions to the definition of accredited investor. I believe that the new restrictions are unnecessary and may prove counterproductive.
1. The world is a different place than it was in 1982. There was no internet as we know it today. Investment information was the purview of professionals, academics, and librarians. Morningstar was just a twinkle in Joe Mansuetos eye. Today, the problem is not the lack of information but its overabundance. The average investor today has information resources that were unthinkable in 1982. The ability to make informed decisions today has never been greater. (It is another issue whether better decisions are actually being made.) Articles, due diligence materials, and research materials on hedge funds (and funds of funds) are abundantly available for anyone wanting to learn and make informed decisions about these private investment vehicles. The average investor of 2007 may be better informed than most professionals in 1982.
2. The average investor of 2007 has the ability to hire professional advisors that did not exist in 1982. Witness the spectacular growth of the numbers of CFP® (Certified Financial Planner®) and CIMA® (Certified Investment Management Analyst®) licensees, CFA (Chartered Financial Analyst) charter holders, PFS (Personal Financial Specialist) designees, and, of course, registered investment advisors, both SEC and state registered in the last 25 years. Many more investors of modest means now use the services of professional advisors who are qualified to evaluate private investment vehicles for their clients. Even a do-it-yourself investor can readily find advisors who work by the hour (e.g. Garrett Planning Network).
3. The perception of hedge fund investments as risky has been exacerbated by spectacular failures, such as Amaranth, Tiger, Bailey Coates Cromwell, Marin Capital and Long Term Capital Management. Yet the money lost on these notorious failures pales with the amounts lost and number of investors affected in the technology meltdown of 2000-2002. Millions of small (and large) investors lost multiple billions using widely available stocks and mutual funds. Diversification was the only reliable inoculation against the permanent loss of capital during this period. Properly utilized, alternative investment strategies as found in hedge funds (and funds of funds) could have prevented some of the carnage experienced by long-only equity strategies. Removing these strategies out of the reach of all but the most privileged elite of investors potentially removes a valuable source of portfolio diversification for the next bear market.
It is my opinion that the Commission should not restrict private investment vehicles to the wealthy gentry. The abundance of information, ready accessibility of professional advice, and the demonstrated diversification benefits of non-correlated asset classes commonly found in private investments substantially mitigate the other risks of these strategies and vehicles. The imposition of a higher accredited investor standard, while appealing on its face to the cause of investor protection, may actually lead to a contrary result: higher portfolio volatility and greater investor losses in the next market downturn.
If the Commission nevertheless feels that the bar must be raised, I would ask that it specifically consider and acknowledge the role a professional, fiduciary advisor can play in prudent portfolio management. The Commission could keep the existing rule in place for investors who are clients of advisors who possess a requisite professional designation (CPA/PFS, CFP®, CIMA®, or CFA), manage client assets under a written advisory agreement, and accept fiduciary responsibility in the client relationship. These advisors should be expected to perform the necessary investment due diligence and prudent portfolio diversification where the use of private investment vehicles is appropriate. It is difficult to justify why clients of such advisors should be prohibited from participating in private investments with a professional hired gun to protect them.
Investment risk will always exist and no amount or regulation can change this fact. The Commissions efforts in this area should continue to focus on protecting investors through full disclosure of relevant information, promoting the integrity of the markets, the vigorous discovery and prosecution of fraud, and enhancing the reasonable oversight of hedge funds. The new definition of accredited investor seeks to protect investors from – themselves. That protection is unnecessary and an interference in an investors right to make personal, reasonable investment choices.
Thank you for your consideration of these comments.