Voices

SEC Makes Investors Jump Through Hoops as Fund Managers Wait for New Rules

Last year, Congress passed the JOBS Act, a new bill that was designed to foster the growth of startups. Hedge funds were particularly excited about the bill because it was expected to allow the Securities and Exchange Commission to form new rules for the industry.

However, in the months since the bill was passed, little has come from the JOBS Act. Hedge funds are still waiting to hear from the SEC, and investors are still jumping through hoops.

"That's something that's very frustrating for us as a firm because we are someone that provides data to only the accredited audience currently," Evan Rapoport, CEO of HedgeCo Networks, told StreetID. "In order to come on to HedgeCo, and to view hedge fund information, you first have to go through an online questionnaire that asks some pretty personal questions, such as your net worth, your liquid net worth, how many funds have you invested in, etc."

The SEC requires HedgeCo to ask those questions in order to prove that anyone who has access to hedge fund data "qualifies as an accredited investor pursuant to SEC guidelines."

"The user not only has to put this information online, but he then has to get a phone call from one of our representatives over here where we verbally verify that information prior to giving him or her access to the website," said Rapoport. "That's a fairly arduous process.

"With the JOBS Act passed, as the President and Senate said it should be passed, we can open this information to the world and not have to put people through this arduous process of giving up all their information just to see data."

This is the same process hedge funds force potential investors to go through. "The way they can raise capital is only through what we discussed -- password-protected websites or database like ours, talking to people they already know and have a pre-existing relationship with and understand that they are accredited investors, and then finally tell them about the fund," said Rapoport.

Part of the problem could be due to a change in management. In January, President Barack Obama nominated Mary Jo White to be the new head of the SEC. White replaced Elisse Walter, who temporarily led the organization after Mary Schapiro resigned last year.

"I think that was also some of the cause behind the pushback," said Rapoport. "That change had probably been in the work for some time, and as a result, it has put a stop to the regulations coming out."

Mutual funds have also pushed back.

"Mutual funds are concerned because hedge funds have become a huge industry over the last few years and have taken a lot of capital away from the mutual fund industry and have actually taken away a lot of talent away from the mutual fund industry," said Rapoport. "Frankly, hedge funds perform better than mutual funds over time and they do so with much less volatility. So they should be concerned, rightfully so, that hedge funds are going to become more popular."

When asked why hedge funds were believed to be so different in the first place (from a regulatory perspective), Rapoport pointed to the associated volatility.

"Hedge funds have been known to be very volatile, to use leverage," he said. "The potential to lose a lot of money in a hedge fund, just as there is to make money, is certainly there.

"Looking at all of the studies, hedge funds have managed to outperform [mutual funds] with lesser volatility but there will always be the few that cause more losses than gains and could potentially hurt investors. They [the government] were trying to limit investments to those who could afford the risk of investing in a fund."

Jesse Marrus is president of Street ID

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