From: Jeff Baird
To whom it may concern:
Please consider this message a public comment for Rule number S7-25-06.
I urge the SEC to reconsider its proposed rule raising the minimum net worth necessary for participation in pooled-risk investment vehicles. While honorably intentioned, such a rule would further isolate retail (non-accredited) investors. The sophisticated investment vehicles that allow the richest of Americans to hedge against risk should be available to knowledgeable investors of lower net worth, provided that such investments are wrapped into the fold of the current regulatory structure of securities.
Please consider the following:
The process of analyzing any given U.S. stock is already beyond the capability of most retail investors; yet investors can buy U.S. stocks for less than $10 in commissions, with no restrictions on net worth. The entire realm of investing carries risk. It is ironic that pooled-risk investment vehicles, which allow for the smoothing over of this risk, are available only to those investors who need it least. Many retail investors can benefit from the risk-smoothing effect that pooled-risk investments would have on their overall portfolios. This is consistent with modern portfolio theory, the theoretical underpinning of modern finance.
Pooled risk investments are considered highly risky in today’s world because they are so secretive and not standardized. However, this is in large part due to problems of improper regulation, which the proposed rule would exacerbate. There is currently no industry of analysts and advisers on pooled-risk investment vehicles because there is a very small customer base. However, just like mutual funds at one point, pooled-risk investments can help smaller investors, who will seek assistance and advice on their application. Indeed, just like the mutual fund analysis industry at one point, such an industry of pooled-risk advisers and analysts must be built. Raising the net-worth limits for investments in pooled-risk investment vehicles would stymie any growth in analysis and advice on pooled-risk investments. The investment community would continue to suffer from a lack of analysis and information if this proposed rule goes into effect.
This rule would put small American investors at a global competitive disadvantage because there are no such net-worth restrictions in other countries. Notably in the U.K., investors of any net worth can diversify their portfolios and reduce their overall risk profile by using pooled-risk investments. As the pooled-risk industry matures and as globalization of securities marches forward, American investors would be legally restricted from participating in a beneficial investment vehicle that investors in other countries, including the U.K., would have access to. This would further damage the U.S. securities industry, and would provide a further impetus for capital to flow to London rather than New York. It is not in the interest of America’s economy at large to see capital flows gravitate toward London, Dubai, or Hong Kong, and away from New York.
The best protection for investors is readily-available information, an industry of professionals that can make proper recommendations, and the widest possible choices to reduce their risk profile. Especially in today’s economic environment when small investors must increasingly rely on their own savings for subsistence in retirement, middle-class American investors need all the tools and information possible. Proposed rule S7-25-06 would further handicap middle-class American investors. I urge the SEC to reconsider this rule in light of the points above.