SEC vs. hedge funds: Anger management

Date: Monday, February 19, 2007
Author: Bethany McLean, Fortune editor-at-large

Readers reach for the pitchforks and torches over the proposals for widening investor regulations.

(Fortune) -- Are investors mad at the SEC - or are hedge funds mad at the SEC?

That's the question raised by several readers about the SEC's proposal to increase the amount of money you need to have to invest in a hedge fund to $2.5 million. It appears that the little guy is outraged.

But in sharply worded e-mails to me - why, oh why, can't some of you be civil? - people said that actually, the outrage has been generated by hedge funds. (While large hedge funds don't care about the proposed rule, small ones do, because it will make it harder for them to scrounge up the capital from family and friends that they need to get started.)

Readers say that some funds were even sending out form letters to encourage would-be investors to criticize the SEC's plan. "I recently received an e-mail from a small hedge-fund company with an attached Word document with 'exactly' the same comments in your article asking me to write to the SEC to complain about the requirements," says one reader.

Another says that a newsletter writer named John Mauldin - who is also a money manager - also urged his readers to write to the SEC. "I do respect the opinions expressed by the respondents on the SEC website for whatever reasons they believe in but I have to wonder what is your and your employer's interest in publishing an article like this?" (For the record, none that I can think of, even if I contort my brain to imagine what my bias might be. I simply thought this was an interesting phenomenon. Or as Freud might say, "Sometimes a cigar is just a cigar.")

But then, of course, there was also the reader who called me a "bubble brain" for even suggesting that people should have to pass a test. "If I don't know how to invest wisely, I hurt myself... It's called freedom. And there are few things more threatening to freedom than government determined to protect me from myself," wrote this person.

Probably the most accurate comment, though, was the following: "People are their own worst enemy and way overestimate their skills and judgment. So, the little guy wants the same opportunity to amputate his wealth same as the big guy? After there is great wailing and gnashing of teeth, after a big downturn, those same people will be saying, 'Where was the SEC?' Won't they?"

Yes indeed.