- - Friday, April 27, 2012


Last week marked the first day of the 2012 general election. As the competing campaigns kick into high gear, President Obama revived his Buffett-rule talking points on how raising taxes on the wealthy will restore the middle class. Actions mean more than such empty rhetoric. The president speaks of supporting fairness, but some of his actions actually favor the wealthy over lower-income earners.

Take the Dodd-Frank Act. Most people don’t know that buried in this financial reform bill, the president secured investment privileges for households, but only if they are worth at least $1 million. While one hand supports a millionaire tax, the other reserved special opportunities in private equity funds and hedge funds for millionaires.

Because of their risk level, we typically think of hedge funds and private equity funds as reserved for the very wealthiest investors. While that may be true, it doesn’t have to be the case. If not for the approach taken by the Securities and Exchange Commission (SEC) and the administration, ordinary investors could have a chance to invest smaller amounts and enjoy a chance at tremendous returns.

For example, large pension funds such as the California Pension Fund or the typical state retired teachers pension fund allocate anywhere from 5 percent to 20 percent of their investments in these types of securities. Workers who handle their own retirement investing and aren’t millionaires also should be able to allocate part of their portfolio to these types of investments.

Instead of imposing rules that discriminate against different income groups, Congress and the administration should provide the same opportunities to everyone. For example, without the Dodd-Frank accredited-investor provision favoring millionaires, average investors would be able to invest for their retirement in some hedge funds and private equity funds and get a chance at higher investment returns.

Historically, the SEC created a market for these securities exempt from many of its public-offering rules. The exemption relaxed the rules only for offerings to investors who were personally worth at least $1 million. Unfortunately, the Dodd-Frank Act raised the wealth threshold for those wanting to participate in the securities market by no longer letting investors include the value of their homes in determining whether they make the cut. Investors near the threshold typically have about one-third of their wealth invested in their home. This rule change ensures that only the top 1 percent of Americans will have access to these lucrative deals.

Proponents of the rule argued it was necessary to protect investors from being cheated in markets that are subject to fewer regulations. But there is no evidence that fraud is more common in exempt markets than in those more tightly regulated by the SEC. The logic behind the idea that personal wealth makes one a sophisticated investor able to uncover fraud is also suspect. Paris Hilton probably could use the protection of the securities laws more than your local financial adviser, and yet the SEC relaxes its rules for Ms. Hilton but not for a certified financial adviser if he isn’t wealthy enough.

Some have urged replacing exemptions based on wealth with a licensing system, in which investors who passed a simple financial literacy test could invest in whatever investment opportunities are made available to them. We give teenagers a license to drive a car after passing a much more simplistic test than what is envisioned for this approach, despite the fact that driving incurs potentially catastrophic financial risk to them and their parents.

The president hails the Dodd-Frank Wall Street Reform Act as one of his top accomplishments in office that will protect the middle class, but a closer examination shows there are provisions within that law that favor the wealthy over lower-income earners. Instead of supporting policies that protect Americans from achieving success, the president should support policies that provide equal opportunity for success, regardless of income earned.

J.W. Verret is a senior scholar at the Mercatus Center and an assistant professor of law at George Mason University.

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