SEC Gets Slammed By Public Comments Over Wealth Rule

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Fortune's Bethany McLean (pictured left) takes a look through the public comments on the SEC's proposal to raise the bar on the wealth requirements for investing in hedge funds. And what she finds isn't pretty. Despite lots of cries for greater restrictions from politicians and scare stories in the press, those offering comments to the SEC are up in arms against the proposal.
Of course higher 'net worth' requirements strike many as discriminatory and lots of folks aren't happy that the SEC seems to be attempting to reserve hedge funds for the very, very wealthy (as opposed to just wealthy). Others have pointed out that the new requirements might well have disparate impacts on various populations groups in the US, perhaps making the world of hedge fund investors even whiter and more male than it is today.
But one of the most trenchant criticisms is that the new rules would bar many individuals from participating in various alternative investment strategies despite the fact that they are permitted to invest in one of the riskiest strategies in the world—putting their savings into an individual stock or commodity.
Of course, much of this line of criticism ignores the very real danger that without minimum wealth requirements—and perhaps wealth requirements even higher than those currently in place—the marketing departments of hedge funds might push the funds on investors for whom they are entirely inappropriate. Stock brokerages at major financial institutions are highly regulated and brokers operate under obligations to consider the appropriateness of an investment for each investor. Hedge fund sales operate under far less regulatory scrutiny—in part because the wealth requirement is a kind of stand-in for an "investing sophistication" requirement. Do away with this—or allow it to be diluted by inflation or illiquid net-worth gains from real estate gains—and there is a real risk of growing the now nascent hedge fund boiler room industry.
One solution that gets trotted out now and then is to impose some sort of actual test of investment sophistication. Something like a Series 7 for accrediting investors. This strikes us as a simply terrible idea for the quite obvious reason that we already have enough tests and records governing our lives. What's more, we're skeptical that any sort of computer based or written test can really measure something like "investor sophistication" anyway.

SEC slammed over hedge fund 'wealth' test
[Fortune via CNNMoney.com]

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