Laws protecting investors from fraud, mismanagement, or from losing their assets if the company in which they invested goes bankrupt, have existed for a long time. In the United States, such laws include:
- the Securities Exchange Act of 1934, which created the Securities Exchange Commission (SEC) to regulate securities trading on the secondary market
- the Securities Investor Protection Act of 1970, which created the Securities Investor Protection Corporation (SIPC) as a safety net
- the Investor Protection Act of 2009, which gave additional powers and funding to the SEC with the goal of preventing another financial crisis
Protection Agencies and Regulations in the United States
One of the most well-known organizations involved in providing a form of investment protection is the Securities Investor Protection Corporation (SIPC), which effectively acts as an insurance of sorts. SIPC members include broker-dealers registered under the Securities Exchange Act of 1934, members of the National Association of Securities Dealers (NASD), and members of securities exchanges.
If any of these SIPC members go bankrupt or lose their customer's assets, the SIPC is able to do whatever they can to get back the money that customers have invested in them. In short: if you've invested with a SIPC member and that company goes bankrupt, you have a chance at getting your investment back thanks to the SIPC.
What Is an Investment Protection Agreement?
There are also several investment protection treaties in place between the United States and other countries. These aim to ensure that investors can rely on certain legal protections when they invest internationally. That being said, assets in other countries are still subject to regional laws and regulations, so there is always a certain amount of risk involved.
Any company offering securities for sale publicly is required to register these with the SEC, in accordance with the Securities Act of 1933. Registering with the SEC, in this case, means disclosing detailed financial information about both the securities and the corporation issuing them, certified by independent accountants. The purpose of this regulation is to make sure buyers have all the information they need to make investment decisions. The registration process is designed to ensure the information given is complete and reliable, so investors are aware of any potential risks – it's a measure intended to protect them from fraudulent or risky investments.
Financial funds such as hedge funds are also legally required to register with the SEC if they have more than $100,000,000 in assets under management (AUM). This requires them to disclose many of their investments publicly via SEC Form 13F on a regular basis. Once again, this is intended to make the biggest hedge funds more transparent to (potential) investors and protect them from investing in questionable strategies.
Importantly, however, hedge funds are not limited to trading in securities registered with the SEC – in contrast to other types of financial funds such as ETFs or mutual funds. This means hedge funds can invest in assets that have not disclosed all relevant financial information as per SEC regulations, which leads to increased risk but also potentially increased rewards. The SEC effectively lifts some of its regulations intended to protect investors, but it only does so for accredited investors. The government assumes that people of accredited investor status have the knowledge required to make sound investment decisions – and the means to deal with any negative repercussions if the investment turns sour.
In short: hedge funds generally have fewer protections in place in exchange for offering you the opportunity for significant returns that you wouldn't get with most other investment vehicles. If you're looking to invest in hedge funds, you're legally required to qualify as an accredited investor to prove you don't need such protective measures before gaining access to hedge funds.
CARL provides accredited investors with unprecedented access to sophisticated quant hedge funds, with a reliable due diligence process in place to make sure these quants meet certain reliability requirements before they can be accessed via the app. While this process cannot offer the same amount of investment protection guaranteed by SEC regulations, it does mean the quants in our portfolio are typically more reliable than hedge funds that have not undergone this process.
CARL cannot eliminate the risk inherent in the hedge fund investment model, but we can ensure we have the utmost confidence in the quants available via the CARL app. Set up your CARL account today and benefit from our due-diligence process and the reliable information that the CARL app can offer you, including performance analyses, a real-time portfolio overview, and the ability to withdraw from any of your investments on a monthly basis, thanks to no lock-up periods.