ProPublica has a column, which also runs in the New York Times, critical of the Securities and Exchange Commission's decision to allow hedge funds and other private investment partnerships to advertise in search of investors. The columnist complains that the SEC "not plan to mandate any new process to ensure" that the "investments are appropriate" for the investors.
There are at least three flaws with this line of criticism.
The first is that the column asks the SEC to do something that Congress did not ask it to do. Congress was trying to make it easier for entrepreneurs to raise capital. If the SEC were to then go and erect new barriers that make it harder, the SEC would be acting opposite to Congress's intentions. The way it's supposed to work in this country is that the laws are made by elected members of Congress, not unelected SEC commissioners.
The second is that even if Congress had asked the SEC to make sure that "investments are appropriate" for investors, that's an impossible task. The SEC can't know in advance whether some investment is going to work out well or poorly. Investments that appear safe at the time — shares in AIG or General Motors, European sovereign debt — can turn out to be risky, while investments that appear to be risky — early shares in Facebook or Google, for example — can turn out to be mind-bogglingly lucrative. How is some SEC bureaucrat supposed to judge what investment is appropriate for an investor? The investor himself is likely in a better position to judge than the bureaucrat is, because the investor is the one most familiar with the investor's own risk tolerance and time horizon.
The third is that the column's approach would impose tougher bureaucratic restrictions on investment than exist on consumption. The New York Times is full of advertisements for ways that people can spend their money. Fancy clothing and jewelry, luxury cars, expensive hotels, and bottles of liquor. No one is demanding federal bureaucracies to make sure that purchases, or consumption, are "appropriate" for the people spending money. Yet somehow investing in a partnership is so dangerous that Americans need the SEC to protect them from the chance of a loss?
