It won't come as a surprise to DealBreaker readers that the SEC's proposed rule to drastically increase the SEC's net worth standard for hedge fund investors has been met with overwhelming disapproval from the investing public. Or at least the part of the investing public that is writing emails and letters to the SEC since it proposed the new rule in December.
Fortune's Bethany McLean was the first journalist (or, you know, the first one we noticed) to report on flood of negative comments. Now the Los Angeles Times is in on the game, noting that one commenter refers to the proposed rule as "communistic." Practically every other business news outfit has run similar stories. In fact, CNBC is promoting a segment discussing the reaction even as we write this item.
But far more interesting than this unsurprisingly negative reaction to the paternalistic regulation, is the rift in the hedge fund community that the new rules have revealed. As we've noted many times, regulations are hardly ever neutral. They tend to help some firms and hurt others. And the firms they tend to help are the ones with the most sway with lawmakers and regulators. In other words, those who are best at buying or otherwise obtaining influence in politics.
The proposed net worth increases would hurt smaller hedge funds—which often rely on less wealthy investors to obtain the funds they manage—while leaving the larger hedge funds—which often have minimum investment rules that rule out many of those whose net worth might pass even the higher standards under the proposed rule—untouched.
And this isn't something that is lost on either the large hedge funds or the small ones. Here's the Los Angels Times reporting on the rift:
The SEC's request for comments also demonstrated the split within the hedge fund industry over the agency's plan.
Proposal by SEC To Curb Hedge Funds Met With Ire
The Managed Funds Association, a trade group for hedge funds, is "supportive" of the SEC's goals with the proposed changes, John Gaine, the group's president, said in an interview.
He said the industry had to be careful "not to go down the food chain" to average investors who might not understand the risks involved.
But managers of some relatively small hedge funds said the proposal would make it difficult for them to grow, while favoring funds that have big-money clients.
"This rule mainly just punishes small managers like myself, increases barriers to entry ... and benefits the elite in our society," Rick Puglisi of Apprecia Capital Advisors in New York wrote.
Proposal by SEC To Curb Hedge Funds Met With Ire [LA Times in NY Sun]