September 1, 2011
I am writing on behalf of myself and various family members and friends for whom I manage and advise on their investment portfolios.
I am shocked and angered that the SEC has decided to waste valuable manpower, time, and effort on an esoteric procedural investigation of the Mortgage REIT sector. These investment vehicles have been one of the few investments that have allowed small retail investors to invest with a semblance of stability and with some decent investment returns (mostly from dividends) over the last decade-plus. For some reason, some of your lawyers at the SEC decided that an 'investigation' and public comment on their structure was appropriate -- actions which have created fear, uncertainly, and unwarranted confusion among investors in the space.
Nobody who is an investor in Mortgage REITs could possibly believe they are in any way, shape, or structure akin to mutual funds. They trade like stocks and are purchased like stocks.
Nobody who is an investor in Mortgage REITs could possibly believe they are closed-end funds, open end funds, or ETFs.
They invest in MBS and leverage up their capital which is how the yields are produced. I have yet to meet a single investor who does not understand this basic Mortgage REIT business model.
The only 'confusion' in the sector surrounds individuals who do not do proper research and rely on a single article or a call-in to a popular investment program like Jim Cramer's "Mad Money" and use that as the basis for investing in a specific Mortgage REIT or a basket of the stocks, without knowing what it is they invested in.
Investors in these stocks understand that the underlying REITs are investing in pools of MBS, as well as financing these investments in the repo market, employing leverage, and also using derivatives (swaps, swaptions, etc) to hedge some of the interest rate and/or credit risk.
The transparency of the Mortgage REITs is light-years ahead of what the High Frequency Traders (HFT) are doing to cause 'Flash Crashes' or make stocks trading at $50 a share suddenly trade for a penny a share.
The people I invest for and speak to have invested in the markets for decades, and neither bear markets nor the October 1987 Crash nor the Tech/Internet Bubble Meltdown caused them to lose faith in the markets. Certainly, the disclosures of their investments in Mortgage REITs has not been a problem, either.
What has caused them to question the fairness of the markets is the whipsawing of the markets via HFT -- a result no doubt of the SEC's mandating and obsession with decimalization and trading in pennies -- and the number of investment manager frauds highlighted by Bernie Madoff. These are what 'scare' small retail investors, not whether or not a particular sector has an exemption dating back 71 years under the Investment Company Act of 1940, or whether the 1960's legislation creating REITs (designed to help small investors, not big institutions) needs updating.
Those are the items that your staff of lawyers and financial experts should be focusing on, not the alleged lack of transparency and disclosures from a sector that is covered by over a dozen analysts, files 10-K's and other SEC documents on time, and communicates with shareholders through conference calls and investment conferences.
I respectfully request that you rescind the investigation on the structure of these investment vehicles which are well-known and understood by the vast majority of their shareholders and concentrate your limited resources on more pressing matters affecting the financial markets and small retail investors.