March 7, 2007
Nancy M. Morris, Secretary
Securities and Exchange Commission
100F. Street, NW
Re: File no. S7-25-06
Dear Ms. Morris:
The following addresses the Commission's proposal (the "Proposal") to change the definition of "accredited natural person" (the "Definition").
There is scant doubt that hedge funds have grown more complex since Regulation D was adopted in 1982. Yet the Proposal does not provide adequate reasoning for why the investor pool suggested by the Proposal's census figures would decrease from 8.5% of households to 1.3% by virtue of the new Definition -- below the 1.9% of households that qualified in 1982. This is in spite of today's level of investor education, knowledge, and sophistication far surpassing the level that existed in 1982, something the Proposal does not appear to acknowledge.
Changing the Definition does nothing to address the biggest problem: hedge fund fraud.
It has been estimated that approximately 80% of hedge fund "blow-ups" occur due to the hedge fund manager perpetrating fraud via misrepresentation of net asset values on investor account statements, recent examples being Bayou, International Management Associates, and Oracle Evolution.
Instead of limiting the investor base as the Proposal would dictate, a far more direct and effective solution to the risks of hedge fund investing would be to:
1) Require all hedge funds to employ an independent, third-party administrator to produce monthly or quarterly financial statements for the fund as well as account statements for the investors, the latter being distributed by the administrator DIRECTLY to the investor, whether by mail, electronic mail, or a secure, password-protected Web site.
2) Require the independent, third-party administrator listed above to approve a) the payment of a fund's management fees to the hedge fund manager, and b) any withdrawal of a hedge fund manager's investment in the fund.
3) Require the independent, third-party administrator to annually send each investor a letter stating the administrator's willingness to field any questions an investor may have in the future regarding the hedge fund's accounting.
A statistical analysis of each year's hedge fund blow-ups would clearly point to fraud as the leading cause. The above steps might potentially lead to a dramatic decline in the number of blow-ups each year, simultaneously targeting the largest source of risk to the investor.