March 2, 2007
We respectfully submit our views on the proposed regulation:
We feel that the rule would deprive a great many currently accredited and sophisticated investors of the ability to invest in a sector of the market that often outperforms standard indexes. It limits the ability of the investor to build a strong portfolio by restricting the number of available choices.
The Commission rationalizes the increase in accreditation standards because the percentage of US households meeting the current standards has increased from 1.87% in 1982 to 8.47% in 2003. It notes that the increase is due to inflation and sustained growth in wealth and income in the 1990s. However, it fails to note that the investor sophistication has grown to unprecedented levels in that period due to the internet and other media outlets as well as the number of investment professionals guiding individual investors.
The proposed standard is arbitrary and has no basis in any objective measure. It does not correlate with the 1982 accreditation standards adjusted for inflation.
It is illogical to apply the proposed standard to hedge funds and not venture capital funds, which can carry considerably higher risks.
The Proposal argues that reducing the pool of potential investors will increase competition and possibly lower fees. It seems more likely that fewer new hedge funds would be started when there is a smaller number of investors to draw from, thus limiting competition.
Many professionals who may have a true level of sophistication regarding investments (accountants, investment advisors, attorneys and many others) may be prohibited from participating because they will not have the high level of assets required under the proposed regulation.
Existing investors in hedge funds will not be grandfathered under the proposed rules. This prevents them from making additional capital contributions to a fund about which they already possess sophisticated knowledge and limits their investment options.
The current net worth and income standards for accreditation are sufficient for pooled funds managed by an SEC registered investment advisory firm, already regulated and audited by the SEC. Unregistered advisors should be held to the new proposed standard.