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The SEC Wants to Be Your Nanny

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A proposed rule would limit investments in risky funds to those with ‘financial sophistication,’ putting middle-class investors at a disadvantage.

Massachusetts once barred its residents from investing in the initial public offering of Apple. As the Journal reported on Dec. 12, 1980, state regulators declared the stock “too risky” for individual investors because its relatively high price-earnings ratio made it a “highflier” that lacked “solid earnings foundations.”

Luckily, this particular type of paternalism seems as much a relic of the ’80s as the floppy disk. A bipartisan 1996 law pre-empted such state restrictions. At the same time, the Securities and Exchange Commission has largely stayed true to its role, enshrined in federal securities law: to police disclosures of investment risks while letting investors decide the merits of the securities.

Unfortunately, the SEC has now proposed a rule that would take us back to the ’80s by imposing merit-based securities regulation. The rule would sharply restrict investment in several widely available exchange-traded funds because the SEC has deemed that these funds—designed as a way to manage risk—carry too much risk for ordinary investors.

Read the entire piece at WSJ.com.