Mauldin Issues Call to Arms, or Keyboards |
Date: Thursday, February 1, 2007
Author: Christopher Faille, Senior Financial Correspondent, Hedgeworld.com
WASHINGTON (HedgeWorld.com)—Since columnist John Mauldin issued a call to arms in his newsletter Friday [Jan. 26], the Securities and Exchange Commission has received a flood of comments on its proposed rule to increase the minimum net worth requiremed for investment in hedge funds. Further, the new rule (created largely out of a sense that inflation has made the old standard obsolete) provides for a readjustment of that $2.5 million figure every five years, so this one too doesn't fall behind over coming decades. In his weekly emailed newsletter, Mr. Mauldin said that this would reduce the percentage of U.S. households eligible to invest in hedge funds to just 1.29%, whereas it is now more than 8%. He said that it is "philosophically wrong to limit the choices of investors based simply on assets. The rich have advantage enough without limiting the choices of those with less assets." He asked his readers to forward his email to friends and associates, and warned that the new standard for net worth is likely "to become law in the not too distant future unless there is significant public comment." Before Mr. Mauldin wrote those words, the flow of comments to the SEC on S7-25-06 (which ran in the Federal Register on Jan. 4) had been a mere trickle. The agency received one comment on Jan. 12, for example, a Friday. No comments on Monday or Tuesday, and another one, only one, on Wednesday, Jan. 17. It is no longer thus. On Jan. 26, the SEC received more than 40 comments, many of which specifically quoted or referenced Mr. Mauldin. Over the weekend of Jan. 27 and 28, it received more than 60 comments. With the return of the work week, the flood gained momentum. The tone of a comment from Jerry P. Hewitt, a retired naval officer, seems fairly typical. "With an MBA … and undergraduate degrees in physics [and] math," he wrote, "I may not be ‘sophisticated' by your definition of $2.5 million in assets, but by having great wealth does not guarantee any more ‘sophistication.' Your SEC proposal of $2.5 million is in error and prohibits my opportunity." Nathan Kowalski, who described himself as a Bermudan portfolio manager, was one of those who specifically directed the attention of the SEC to Mr. Mauldin's letter, and asked the agency to bring its "vision into focus."
The proposal with which Mr. Mauldin is concerned, S7-25-06, comes in two parts. The first portion (which has provoked little controversy) would change anti-fraud provisions under the Investment Advisers Act, to preempt any creative legal defenses based on the distinction between "clients" and "investors" Previous HedgeWorld Story.
The second part of the proposal would raise the minimum requirements for individual investors in hedge funds. The existing rules define an accredited investor as a natural person with individual income of $200,000 per year for each of the two most recent years or joint income with a spouse of $300,000, and owning assets—individually or jointly—of at least $1 million, which may include the family home.
The revised rule would say that the accredited investor must own at least $2.5 million in investments, excluding real estate.