March 11, 2007
Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
RE: File Number S7-25-06
Dear Ms. Morris:
I am writing to register my opposition to the Commission's proposed rule change referenced in the above File Number. I do not support changing the definition of an Accredited Investor.
This proposed change is so ill-considered, so poorly conceived and so far afield from the prospect of achieving what it intends that I have to protest.
First, the questions: What, exactly, is Washington trying to prevent? Who, exactly, is it trying to protect? How MUCH is it trying to protect this group? Let me assume that the goals are to prevent fraud and misrepresentation, require better disclosure, and generally prevent people from making investment decisions that exceed some standard of reasonable risk relative to investing sophistication and wealth and/or income capacity.
As is so typical of everything Washington, a rule is proposed that (1) limits our liberties, (2) fixes the price of a service or product without understanding the possible unintended consequences and the value of free markets, and (3) all purportedly to protect us from ourselves. What on earth does net worth have to do with risk tolerance and capacity for risk. The rule proposed sets a bar that has virtually nothing to do with whatever is believed to be the problem.
Capacity for risk is relative to resources, so why would you limit the liberties of a sub-millionaire from investing, say, 5% or 10% of their net worth into a hedge fund? Is it just politically expedient to ignore the investment SIZE relative to net worth? Can some worth $1 million not easily lose all of a $20,000 hedge-fund investment. Who are proponents to decide in any case?
Why would the sponsors limit our freedom to make our own decisions regarding our net worths when the definition of a hedge fund, with respect to investment strategy, is nowhere to be seen in the proposed rule? There is no attempt to stratify types of hedge-fund strategies by risk profile, and is this not vastly more relevant to the perceived issue?
Do sponsors really regard a hedge fund that might be highly diversified across companies and sectors, concentrated in large-capitalization U.S. stocks to be on some kind of level playing field as a hedge fund that takes concentrated, leveraged, one-direction positions in currency futures? Do you regard the large-cap, diversified fund as riskier than any number of investment alternatives not addressed by the proposed rule change; therefore, why do we not protect the public from every other alternative with similar financial risk?
Why is the nature of the fund and its strategy excluded from the rule? Why is the size of the investment relative to a person's net worth not the baseline for protection, rather than net worth alone? Why is the background and investment sophistication of the investor not a component of the rule? I would bet that I personally have vastly more financial sophistication and understanding of risk than anyone involved in drafting this proposed rule change, yet this group proposes to limit my ability to invest as I please. Who is this group and what qualifies them to overrule my personal investment decisions by limiting my access to ANY financial services or products.
Simplistic net worth tests will do nothing to prevent investment fund fraud, nothing to improve disclosure, nothing to protect qualified investors from losing large percentages of their net worths, nothing to relate potential losses to the capacity to lose, nothing to link actual investment sophistication to qualifications, nothing to increase our freedoms or liberties, nothing to encourage the increase in liquidity of our capital markets (thereby lowering the cost capital to American companies), nothing to motivate more innovation in the financial markets (other than in ways to get around the rules). In short, this rule change will do nothing to prevent the problems perceived.
This, then, implies an ulterior agenda, because I cannot conceive of the level of ignorance behind any other explanation: the real intention of the proposed rule change must be to limit the growth of a particular industry and thereby favor other businesses that will be substitutions for hedge fund investments--because this will do nothing to protect investors. This change will not protect wealth or unsophisticated investors. This change will do nothing to protect risk-seeking, non-wealthy investors who will find hundreds of risk-similar alternatives elsewhere. This smacks of someone trying to gain an unfair advantage by limiting the development of an industry.
This rule change smacks not only of protectionism, but naivete and policy incompetence. At worse, it might indicate political favoritism or corruption because it is so far afield from addressing what is perceived to be the problem. The only other explanation is raw stupidity, and I just cannot bring myself to think that our representatives in Congress are that deficient.
Again, who are you really trying to protect with this rule change, because it is clearly NOT investors, wealthy or poor. And how do you square this kind of legislation with our Constitutional right to conduct our lives as we see fit? Disclosure, yes. Prosecution for mis-representation or undisclosed changes in strategies, yes. Limits to investing into different risk categories RELATIVE TO NET WORTH as opposed to the absolute level of network, maybe. But this?
This rule change proposal is embarrassing. Do proponents have any idea what made this country great? Free flow of capital, freedom to take risk and uncapped upside from doing so, absolute authority over one's private property, freedom to trade without restriction amongst each other--all simply limited by whether or not there is intention to do harm or dishonor contractual agreements. The complete lack of understanding of the value of capitalism and political freedom as contributors to the lives we lead today (compared to the rest of the world) in these kinds of rough-justice rule changes just astounds me.
Stay out of my wallet, stop trying to protect me from myself, stop presuming to know more than I do about my own life, risk-tolerance and financial sophistication. This policy will NOT increase wealth in this country. If anything it will concentrate it further. This policy will not increase liberty or freedom. This rule change will not advance capitalism, free-markets and the financial sophistication/education of our populace. It is profoundly, irretrievably cynical and counterproductive. It is, again, embarrassing.
If you want to get in the way of the development of this industry and if you want to do so with some kind of demogoguery for political cover, limit the percentage of one's TOTAL net worth that can be invested into CERTAIN CATEGORIES of hedge funds, rather than limiting access to only the wealthy. Think, for just 3 seconds about what really matters here.
Thanks for listening. I am so angry about this type of regulation in our country I could just scream. Proponents have no idea who we are as a nation, what made us great, and how limits on our freedoms from Washington NEVER accomplish what is intended, never increase wealth, and never increase the prospect of equality of opportunity. How dare you.
Mitchell Smith
San Francisco, CA
http://www.sec.gov/comments/s7-25-06/s72506typeb.htm