Investors Blast SEC Regarding Proposed Rule Limiting Investments in Hedge Funds
The SEC is currently accepting comments regarding a proposed rule change that would raise the minimum level of wealth required for natural persons to invest in most hedge funds. According to the SEC, the purpose of the rule is to provide an “objective and clear standard” for determining whether a purchaser has sufficient knowledge and financial sophistication to evaluate the merits and bear the economic risk of such an investment. The SEC is concerned that too many unsophisticated investors are risking too much of their money in high-risk, unregulated hedge funds.
Under the SEC’s proposed rule, an investor must not only have a net worth of $1 million (a requirement instituted in 1982), but in addition must have 2.5 million worth of “investable” assets to be considered an “accredited natural person” who can invest in most hedge funds. A house is not considered an “investable” asset and would not count for this new requirement.
To date, commentators have lambasted the proposed rule.[1] In particular, commentators have been critical of the rule’s equation of wealth with investor sophistication. Not only is this overgeneralization personally offensive to many investors, it seems an arbitrary and ineffective standard for determining whether a particular investor is knowledgeable and sophisticated. I have an even broader concern about the rule: by statutorily reserving a class of investments for the extremely rich, doesn’t the proposed rule perpetuate the conspiracy theory to which many outsiders already ascribe that there are two sets of rules governing the securities industry: one set for the extremely rich, and one set for everyone else?
[1] A few highlights from the comments include the following posts:
"You have to be rich to be smart?"
"I find the idea that the definition of an accredited investor is based solely on a net worth requirement to be repugnant to the principles of equality of all people. Why should the "rich" be allowed a wider array of investment options just because they are rich? This is often just as much an accident of birth as race or sex....I take this proposed change as a direct affront on my ability to take care of my and my family's future. The approach that you appear to be taking is short-sighted, mean-spirited and represents the easy way out."
"If I gave you $2.5 Million would it make you any smarter?"
"Please don't protect me from myself! I am quite capable of protecting myself! It's you that scares me."
"If I am smart enough to buy/sell stocks, bonds, options, futures, etc. I am smart enough to buy/sell hedge fund managers.”
