Can JOBS Act Lead To The Next Financial Trouble?

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Finra study shows investors lack financial literacy to understand JOBS Act hedge fund advertising provision can lead to next financial crisis.

Congress passed the JOBS Act, allowing hedge funds and private equity groups are allowed to advertise their offerings to the general public.

While hedge funds are open to individuals who are accredited investors (meet certain net worth criteria), the possibility that a new wave of investors will be caught in hedge fund transactions for which they are not well suited is quite high.

Most recently, the Hedge Fund Association petitioned the SEC for a “safe harbor” from investor claims.   Their request is to put the burden on investors to provide guarantees that they meet the definition of accredited investor to invest in hedge funds.

Now, a recently released Finra study shows that most Americans do not understand the basic concepts of finance and investing.   The Finra study followed a similar study recently prepared by the SEC comes to the same sad conclusion: most Americans lack knowledge of investing and finance.   And this should be raising alarm bells given that the national economy continues to struggle in the wake of the financial crisis of 2008.

In particular, Finra’s survey of general public investors found that only 53% answered this question correctly: “True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.” And here’s another stumper: “If interest rates rise, what will typically happen to bond prices?

Now, as we saw with the subprime mortgage crisis, borrowers often provided brokers and lenders with bogus income documents that were used in underwriting trillions of dollars in bad mortgage paper; and the rest as they say is history.

Another concern, investors tend to overly on personal relationship with the money manager often blindly following manager’s advice no matter what the advice might be.  In turn, the money manager takes advantage of the trustful personal relationship and defrauds investors.   Notorious examples come to mind are Bernie Madoff, Allen Stanford and there are others.

In conclusion, one can only wonder the perils that wait in the wings for unsophisticated investors who may get lured into the hedge fund game.   And the potential for damage to the hedge fund sector could be the gateway to the next financial crisis.

Anna Timone (195 Posts)

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