Investors protest SEC hedge fund threshold

Date: Thursday, February 1, 2007
Author: Neal Lipschutz, Dow Jones Newswire

 Some individual investors want the Securities and Exchange Commission to know that they can take care of themselves.

Accusing the watchdog agency of sins ranging from paternalism to outright discrimination against the less-than-fabulously wealthy, dozens of investors have written to protest an SEC proposal that would sharply raise financial minimums for anyone who wants to invest in hedge funds in the United States.

"I believe that limiting any type of investment based on how much money a person owns is unfair and discriminatory," wrote one correspondent in what was a fairly typical salvo. "The amount of money a person has to lose should not be used as a measure of that person's sophistication as an investor."

The SEC on Dec. 13 proposed limiting participation in hedge funds to people with at least $2.5 million in financial investments, up from the current minimum of $1 million in net worth, a figure that includes the value of a home.

In explaining that decision, SEC Chairman Christopher Cox has stated that high-risk, relatively lightly regulated hedge funds are no place for mom and pop investors. Now the agency is hearing from those moms and pops.

It is early days in the public comment period, which runs until March 9, and the number of responses and their overall tenor may well change. But it's clear the SEC hit a nerve.

"It does not make sense to raise the minimum assets for investors in hedge funds and thereby [eliminate] more middle-class Americans from potential opportunities," another e-mail to the SEC reads in part. "Our society is already stacked unfairly in favor of the rich and wealthy."

A third correspondent said his job requires him to put together business deals worth tens of millions of dollars, "and yet, my government is regulating my ability to invest in hedge funds--why?"

Many people of ordinary means already are exposed to hedge funds through pension investments.

Moreover, many mutual funds open to individuals of restricted means already are mimicking some of the broad investment strategies pursued by hedge funds, including selling stocks short.

"We have enough nanny government now," wrote a fourth investor. "The SEC should be investigating the criminal element and leave the investing qualifications to others. If you want to control the hedge funds, get Congress to require their regulation." Public comments are posted on the SEC's Web site.

At least one commissioner has taken notice of these comments.

"I share these commenters' concerns about the potential unintended effects of raising the accredited investor threshold," SEC Commissioner Paul Atkins said in a recent speech. "It is difficult to draw appropriate lines."

Atkins was one of two dissenting votes when the SEC under prior Chairman William Donaldson decided to expand regulation of the booming hedge fund industry, which now has some $1.2 trillion in worldwide assets under management.

The SEC's initial idea was to require hedge fund managers to register with the agency. When a court threw out that rule, it was back to the drawing board. The greater restriction on who can invest was one plan to emerge from the rethinking.