Subject: File No. S7-30-04
From: Paul Allens

September 12, 2004


There is too much fear mongering happening among the commissioners in this discussion. Please stick to the issues and provide support for your statements. I propose some basic principles that the proposal abide by. At the very end, I also give options which are ten times more effective at a fraction of the cost of the SECs current proposal. I know some of the ideas sound radical, but if you think about them Im sure youll start agreeing with many.


Right now the SEC spends about 90 percent of its resources of mutual funds and 10 percent on hedge funds. Despite this, they still missed the mutual fund timing scandal which has been happening for decades. Now, the SEC wants to spend less time on mutual funds than before. How is this good for individual investors?

RULE 1: Put unsophisticated investors first. Make sure that 98 percent of SEC resources should always go to protect the 98 percent of people that make less than 200,000 per year.


When discussing hedge fund registration with Congress, Mr. Donaldson said: And it just seems to me, and it seems to our staff, that we ought to get a better idea of what theyre doing. This is a modest first step.


By law, the public has the right to comment on SEC proposals. However, by hiding critical details of the proposal, Mr. Donaldson is violating the legal process. The details are obviously significant if a modest first step costs the economy hundreds of millions of dollars.

RULE 2: Tell us the entire proposal do not try to fight fraud with fraud.


Mr. Donaldson constantly refers to hedge funds as being dangerous for the individual investor. Yet I dont see comments from any of these individual investors he is supposedly trying to protect - unless you want to consider the person who wants to establish a separate stock exchange for individuals rational.

Mr. Donaldson also says that a performance fee will make hedge funds take bigger risks. So far, several decades of history prove this statement wrong. Yet he doesnt provide any empirical evidence for his baseless statement. Plus, one losing year and youre out of business for life. With mutual funds, they can always blame the stock market.

Also, HEDGE FUNDS ARE BY FAR THE SAFEST INVESTMENTMENT FOR ONE VERY GOOD REASON - the managers put in a substantial amount of their own personal wealth into the fund. Therefore, they have just as much to lose, if not more, than the investors. Why doesnt the SECs study discuss this? For many investors, this is the No. 1 reason they choose to invest with a hedge fund.

I would love to see a study that calculates the average percentage of wealth of mutual fund managers versus hedge fund managers that are invested in their own funds.

Also, look at the years 2001 and 2002, when many investors lost half of their retirement money in mutual funds. Yet hedge funds were significantly more resistant to the downturn, with some even eking out gains.

Mr. Donaldson says that because hedge funds are growing so fast, they need more regulation. Shouldnt it be the other way around? The market obviously prefers these investment vehicles the way they are without the ridiculously expensive regulatory burdens that plague mutual funds. If hedge funds are working, why is the SEC trying to destroy the growth of an obviously superior product?

RULE 3: No unsubstantiated, biased statements. After all, the SEC is supposed to look out for investors, not to make a power grab. The Chairman has not even bothered to address the arguments proposed by Paul Roye. Instead the Chairman blames it on partisan politics, whatever that means.

RULE 4: If others bring up arguments to the proposal, do not counter by saying it is just partisan politics. Please respectfully consider other peoples viewpoints. Even though Mr. Donaldson was appointed by the President, he should not try to hurt hedge funds simply because George Soros, the worlds most famous hedge fund manager, is campaigning against his boss. This is the most egregious example of partisan politics I have ever seen.


Mr. Donaldson says that if investments are locked up for multi-year periods, they do not have to register.

How does this protect the individual investor that he supposedly is instituting this rule for? So you mean that if a mutual fund is losing over 20 percent a year for several years, it is safer if I keep my money in? Or if a venture capital fund in a crowded industry starts investing in Internet bubble companies, it is good for society? It is good for me as an investor when these speculative bubbles crash but Im not allowed to pull my money out? It is good for me if I find out I have cancer but I cant pull money out to save my life?

RULE 5: No special treatment to promote speculative bubbles. Even though it may help individual investors in the short run, in the long run it hurts our entire economy. Trust that theres enough intelligent people in this business that if a stock gets too undervalued, either an investor, the company, or a potential acquirer will buy the stock. The only time this doesnt happen immediately is if speculative bubbles are created and capital is going to what retail investors think is the hottest story.


When Greenspan discusses how hedge funds are good for liquidity, William Donaldson countered the SECs main objective is to protect investors.

Heres a riddle: When is good liquidity bad for the investor?
Answer: When youre trying to create another Internet bubble.

Liquidity means having some stocks actually go down when there is too much capital being allocated to the story stocks that individual investors love. By regulating hedge funds, Mr. Donaldson is trying to prevent shorting. If more shorting were allowed, we would not have had an Internet bubble. Without a bubble, we would not have had millions of people shift careers into the Internet industry in the late 90s. All of these Web designers are now unemployed, without relevant skills, thanks to the bubble not being able to be deflated by adequate liquidity. Its easy for money to flow into stocks, but hedge funds also help them flow out when there is too much money chasing too few stocks. Who else will bother to try to balance constantly positive news from companies with bad news, including potential fraud, other than shorts?

Since Mr. Donaldson has all of his own money in mutual funds, I propose that he not be allowed to own any. Otherwise it creates a conflict of interest by making him favor long-only funds and stock bubbles.

RULE 6: SEC members can either not own mutual of hedge funds, or must own equivalent amounts of both.


Mr. Donaldson once started and ran an investment bank. Now that hedge funds are the ones making money, he wants to find out their trade secrets and start his own after his stint is complete.

He continues to say that he needs more information from hedge funds. However, this argument fails on many extremely obvious points. First, 40 percent of hedge funds are already registered. What information can you not find out from these thousands? Second, all trades go through brokerages which the SEC already has access to. Third, if you want the information required on a registration form, why not just ask for it instead of asking investors to pay hundreds of millions in additional management fees to get the same information?

Arent there better uses of capital for our economy than to enforce regulations that no one wants or needs? How about letting professional investors place badly needed capital into companies that can both train and hire productive workers?

RULE 7: SEC members may not work in the mutual or hedge fund industry after voting in favor of hearing others trade secrets.


You want hedge funds to spend millions of dollars to fund your coffers and try to catch fraud. Yet Elliot Spitzers office is able to uncover fraud on a fraction of your budget.

Stop trying to find a scapegoat for your mistakes. Instead of choosing the most headline-grabbing option to help investors, choose the one with the highest ROI. For the investment bankers out there that are used to charging clients for expenses, that means return on investment. Or maybe youre trying to find an excuse to get Congress to provide you with a larger budget?

According to the book The Mystery of Capital, massive regulatory burdens are the primary creator and maintainer of poverty in the Third World.

Ill admit, its not just the SECs fault. Theres a lot of stupid investors out there too chasing Internet-type stocks with no earnings. Of course, according to the SEC, hedge fund registration will help curb this activity somehow. In reality, it will probably attract even more idiots since the SEC will try to cut down on shorting by hedge funds.

Here are some more effective and less expensive alternatives to the registration proposal which any high school kid could have figured out which the SEC somehow managed to gloss over:

SEC rationale: We need more info
SECS IDEA: Make funds and their investors hire more lawyers, auditors, compliance officers, and ex-SEC officials. Cost: Hundreds of millions of dollars and thousands of lost man hours spent by investors on answering stupid questions instead of picking better stocks.
MY IDEA: Ask the 40 percent of the funds that are already registered. Or just kindly ask the other 60 percent that arent. Or ask the Managed Funds Association? Cost: A few thousand.

SEC rationale: We want to catch fraud
SECS IDEA: Surprise investigations are a very poor way to catch fraud. Otherwise you would have never missed market timing, which apparently the very largest funds were able to get away with for decades. Cost: Millions to hire examiners who know a fraction of what hedge fund managers know and wont be able to catch anything. The effectiveness is nil.
MY IDEA: PROVIDE REWARDS TO TIPSTERS. Thats how market timing was caught. In fact, thats how 95 percent of all fraud is caught. Cost: Tens of thousands. The effectiveness is 10x that of investigations since these tips come from insiders who know the funds inside out.

SEC rationale: We want the press to say we did a lot to help investors
SECS IDEA: Make a lot of rules and keep accusing any opposition of the vague concept of partisan politics.
MY IDEA: SPEND MORE TIME CATCHING FRAUD instead of creating expensive and useless rules which show no thought behind them. Elliot Spitzer is an excellent role model for the SEC. He will probably get elected governor for doing instead of talking. The SEC should try following up on tips some time. The SEC had several tips about market timing before Elliot Spitzer did, but amazingly chose to completely disregard them. Were they too busy thinking up more regulations? To pass up on free tips and shirk their fiduciary duty to help investors is UNFORGIVEABLE. These fund insider employees are sacrificing their livelihoods to help the public retire without having to go on welfare. However, the SEC needs to justify their budget so they dont bother following up on tips which cost nothing to get.

In summary, the SEC should stop trying to play politics and consider all alternatives to protect investors, rather than just the most expensive, headline grabbing ones.