Vanguard wrong to ground trading pilots Crowdfunding at risk of overregulation

I read the article “Vanguard threatens to ground pilots from making 401(k) trades” (InvestmentNews.com, Oct. 11)

A group of pilots take an active approach and actually get involved with their 401(k) plan assets. They move money in an attempt to either take advantage of market momentum or to reduce their losses in a falling market.

Shame on them for paying attention.

And, according to Reuters, investment activity by the pilots can generate as much as $45 million in trades within each fund after The 401(k) Maximizer newsletter adjusts its investment recommendations.

According to Morningstar Inc., the Vanguard 500 Index Fund has assets of $26.5 billion.

As a percentage of total assets, the $45 million is somewhere around 1.7%. Chump change, in my opinion.

Actively managed funds put up with this type of activity all the time and deal with it. Ask Direxion Funds, Guggenheim-Rydex or ProFunds Advisors how they deal with daily unlimited trading activity.

Steven D. Landis

Principal

Sojourn Financial Strategies

Baltimore, Ohio

After reading the article “Bipartisan Senate group pushes SEC on crowdfunding rules” (InvestmentNews.com, Oct. 21), I wanted to write.

Although I am glad to see your coverage, there are some key issues that could use a deeper examination.

Once we make an investment in crowdfunding a matter of self-assessment, we must look to even-more-strict controls for the offerers and the platforms. With the platforms already working within quite limited margins, the requirements quickly could become overbearing and choke out the intended raise.

Further, I would like to address a couple of the quotes included in the article:

For instance, Sherwood Neiss, a principal at Crowdfund Capital Advisors, said: “We live in the age of technology, and we’re going to use it to keep people within the speed limit.”

Although I am respectful of the role that he plays in equity crowdfunding in the United States, I am unsure to whom he refers with his use of the word “we,” as I don’t think that Mr. Neiss is a member of a regulatory or enforcement body.

I presume he means the Financial Industry Regulatory Authority Inc., the Securities and Exchange Commission and the state regulators, but their use of technology to keep people within the speed limit will certainly be up to them.

Here is another quote from Robert Carbone, founder and chief executive of CrowdBouncer, a provider of crowdfunding compliance software: “Never before has anyone had to baby-sit investors and make sure they’re not putting too much money into any particular asset class.”

Much of the Regulation D and our decades-old accredited-investor system is designed around the concept of limiting the percentage of funds that an investor may risk. The essence of equity crowdfunding is to break down the old accredited- investor limitations, but to say such government-enforced limitations have never existed is false.

A cursory look at this new ruling for self-attestation shows that by the time a person has overinvested, the damage most likely is already done — were the underlying deal to be a fraud. Further, the primary way his or her overinvestment violation likely will come to the attention of regulators is if the damaged investor files a complaint and has his or her overinvestment cross-pled as a mitigating factor.

Crowdfunding is already highly dissuasive for investor complaints, due to the typical small investments, and this provision could well blow in the final chill. No doubt, pure self-attestation is better for portals and issuers, but it does little, if anything, to protect investors and increases the risk of limited success for the whole of equity crowdfunding.

We must understand that when we remove for all practical purposes the limitation on personal investment, we have removed a major firewall in investor protection. The result would be a significant increase in due-diligence requirements for each transaction, driving up the internal costs of crowdfunding and the threat of overregulation.

David Marlett

Founder and executive director

National Crowdfunding Association

Dallas

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