February 24, 2007
The Committee Members of the SEC,
I sincerely appreciate the opportunity to comment on S7-25-06 and note my opposition to the rule change. My opposition arises from fundamental disagreements with the arguments put forth in the proposed rule changes including 1) Only an arbitrary percentage of investors, in line with the arbitrary percentage chosen in the 70s should be allowed to invest in private placements, 2) Private placements have inherently higher risk than other investment vehicles, 3) Real-estate should not be considered an asset for these purposes, and 4) Access to private placements increase risk for the average investor.
1) The investor landscape and education has changed since the 70s. Prior to the 70s, only the rich were considered investors, and the percentage of US citizens who bought stocks was relatively modest. Since the advent of rules allowing 401Ks and IRAs, and also since many corporate pensions are closing or have collapsed, individuals in the US have been forced to plan more for their retirement and actively invest. Growth in the US economy and small business has also allowed many Americans to invest beyond the scope of their retirement. As a consequence, the percentage of Americans who now hold and actively trade securities is high. Accompanying this, there has been a wash of new rules on transparency and compliance protecting investors and a wealth of new education available to investors, all of which has made todays average American a much more sophisticated investor than in the 70s. Because of this, the percentage of Americans who have access to alternate investment vehicles should naturally be higher than, not the same as in the 70s.
2) Many investment vehicles available to the typical small investor have about the same risk profile as hedge funds. Lots of risk exists with options, futures, and buying on margin. I have many friends who lost a lot of money buying on margin during the crash of the NASDAQ in 2001 and 2002. Although neither making nor loosing money in a market with options, futures, or on margin by itself measures an investors sophistication, these are the same tools used by most hedge funds, and traders in these vehicles should understand hedge fund strategies and the risks that are included.
3) Both personal and investment real-estate should be considered part of an individuals assets for determination purposes for two reasons. 1) Real-estate has become a monetized asset. An abundance of loan vehicle and types, first and second mortgages and refinance options available, has made real-estate mush more available as, and realized as an investment vehicle. 2) Real-estate is illiquid, is usually leveraged, and can also loose value. This also has similar risk profile to some hedge fund strategies.
4) Long only investments are risky. A long only investment in the NASDAQ in 2001 would have lost 70% and still not recovered. Long only investments in Enron lost everything. Unfortunately, retirement investments can only be invested in long only positions, and a significant market correction will, once again, demonstrate that risk. Having access to both long and short investment vehicles will balance risk in an actively managed portfolio. Currently, aside from hedge funds, there are a limited number of these available to the average investor, and almost none available for retirement funds.
The reality is that all investments have substantial risk, and applying arbitrary standards will not mitigate that risk, but rather, it will reduce the options available to the average investor to manage that risk. For these reasons, I recommend as follows:
1) Keep the current definitions for what is considered an accredited investor
2) Allow for investors who have 5 years experience trading options, futures or on margin
3) Do not discount real-estate as an asset for investment purposes
4) Allow access to private placements through actively managed accounts for both retirements and non-retirement investments
Once again, I appreciate the opportunity to provide feedback on these proposed rule changes.
Patrick Cherniawski
Bethesda Maryland