On September 30th 2026 the US SEC proposed changes to certain rules governing investment funds. These changes will permit individuals to have access to higher yielding fund investments – which have previously only been available to wealthy investors and institutions. However, higher yield also comes with higher risk. Allowing more of the public to direct their retirement savings into riskier funds may provide higher returns, but will certainly increase over-all risk to savers and the financial system.
Securities Laws after 1929
After the Market Crash of 1929 and the resulting Great Depression, experts created laws and rules designed to prevent a repeat of the financial excesses which caused the deep destruction of the Crash. The US created the Securities and Exchange Commission and enacted a series of Securities, Investment Fund and Banking Laws. Other Western nations did the same.
The primary underlying factor behind the Crash was bogus companies issuing basically worthless shares to the public in hyped-up IPOs. Shares were racing up so fast that any new shares issued (regardless of the company behind them) would be hungrily bought up and race up in price further still. Unscrupulous brokers and banks enabled the system by promoting such shares, selling them to unknowing customers, and lending those customers money to buy yet more shares.
Because there was so much borrowing against shares, when share prices started to fall there was panic to sell. The desperate selling at any price led to further price falls which required yet more selling, etc.
Because so many people had borrowed so much and the banks had lent so much against shares, the quickly falling share prices wiped out both investors and the banks. The resulting Great Depression was so deep and long because people lost their savings when the banks closed (because of losses on stock loans), and even good businesses who never touched the stock market could not get loans to operate and build their businesses without any banks.
The core of the new Securities Laws prevented new unproven companies without real business or three years of audited financial information from doing an IPO or having shares traded on the stock exchanges. Banks and brokers were limited on how much they could lend against shares, and what they could sell to the public. These rules remain basically the same today.
Investment Funds
Investment funds also played a major part in the Crash of 1929. New funds would be set-up by inexperienced promoters to purchase new shares issued by unknown companies in IPOs. Here again the banks added risk by lending freely to these IPO Funds.
So for example, a new IPO Fund would be set up to invest in IPO shares with five-times leverage. This Fund would raise $1 million from investors (sold to by high-pressure sales people) and borrow $5 million. With this $6 million the IPO Fund would purchase IPO shares. When these shares went up, IPO Fund investors got five-times more returns. But as was obvious in hindsight, when the IPO shares started to fall, because of the leverage owed to the Bank, the IPO Fund would have to sell its shares immediately – regardless of the price. This further exacerbated the price fall as every fund rushed to sell shares at once (or tried to). Investors in the IPO Funds and their bank lenders were quickly wiped out.
If that wasn’t enough, even more risky funds were set up to invest into the leveraged IPO Funds. These fund-of-funds also borrowed from banks; creating leveraged on top of leverage. These double-leveraged funds generated insane performance when shares were going up – perhaps ten times more than the share price itself! But even worse than the IPO Funds, these leveraged fund-of-funds and their lenders were wiped instantly when share prices fell.
Post 1929 Fund Laws
In response to these issues, after the Crash, new laws and SEC regulations imposed limits on investment funds that the public could invest their savings into. Time and time again, investors just can’t help putting their money into risky and speculative investments – and promoters just can’t help creating ever riskier funds and pushing them on unsophisticated investors. When such high-risk funds go wrong, everyone suffers, and people can be left destitute and without any savings. So the new laws and rules sought to prevent sales of risky funds to naive people.
Public Funds – Simple, no leverage, no performance fees
The post Crash fund laws limit funds available to the public to simple investments in stocks and bonds, and prevent any leverage (borrowing). This remains true today for Mutual Funds in the US and UCITS Funds in Europe. Of course, leveraged fund-of-funds are also prohibited. These rules make the funds less risky and safer for retirement investing, and safer for the over-all financial system.
Also, fund managers for public funds may only earn a basic fixed management fee. To reduce risk, public fund managers may not earn a “performance fee.” When fund mangers may earn a performance fee (a fee based on how much the fund increases in value over the year (or quarter)), they have the incentive to put more risk into the fund to try to earn a performance fee, which may not be in the best interest of investors. Therefore, performance fees on public funds have been banned.
Private Funds
The laws recognise that large, rich, sophisticated or “accredited” investors may invest in private funds which are exempt from the public fund limits. Such investors are thought to be smart enough to invest intelligently and can bear the risks, and the government does not need to protect them. The majority of such investors are pensions funds, endowments, corporate treasuries and trusts. However, rich individuals also qualify if they pass the “accredited” investor test – earning $200K or more per year or having over $1mm net worth.
All the exciting and high-profile funds making news are types of private funds. Hedge Funds, Private Credit Funds, PE Funds, Venture Capital Funds, etc. are all exempt from the safety rules imposed on public funds – they have more (or much more) risk, but should generate higher returns as a result. Regular individuals are not permitted to invest in these risky funds.
Given the strong returns being generated in Private Funds and the pressure from Private Fund managers to manage public money, the SEC has proposed weakening some of the limits.
SEC Proposal
Fund rules have evolved since the 1930s, but the basic limits have remained mostly unchanged. However, on September 30, 2026, the SEC proposed changes to the fund rules https://www.sec.gov/newsroom/press-releases/2026-96-sec-proposes-amendments-expand-responsible-retailization-private-markets. The stated goal is to allow the public to have more investment choices; 1) by allowing public funds to be risker, and 2) allowing more individuals to invest in private funds.
1. Performance Fees in Public Funds
The SEC proposes to permit managers of public funds to earn performance fees. This is supposed to encourage better returns and more interesting public funds as higher-quality talent is brought in to manage public funds with the hope of earning a performance fee. However, it will also encourage managers of public funds to take more risk in those funds.
2. Non-financial accreditation test
The SEC proposes a “non-financial pathway for investors to demonstrate their sophistication” to allow them to invest in private funds. This way, individuals with less money will get access to the exciting private funds, without needing to have the financial resources previously required.
The combination of these things will undoubtedly increase risk to public investors and the financial system over-all.
Recent Credit Crisis
The depression-era Securities Laws and Regulatory framework prevented a repeat of the total market collapse of 1929 for almost 100 years. Sadly, finance firms are creative and always find ways to lend into (and further inflate) booming markets in new ways. The Credit Crisis was not a stock market collapse. Rather, banks and others had lent too much against poor quality real estate or bonds backed by real estate … which had been racing up in price and seemed to be as safe as traditional real estate had always been. Unfortunately, and yet again, such a rapid price increase fuelled by debt was eventually followed by the inevitable collapse. And again, because banks and others had lent so much, the price fall was accelerated, and the banks were all made bankrupt.
Luckily, given the lessons of 1929, this time governments effectively nationalised the banking system and prevented a banking collapse. There were huge losses, but the entire financial system did not self-destruct. Savers did not lose their bank accounts, and banks remained in business. New rules were enacted to prevent banks repeating excess real-estate backed lending, and require them to hold more capital cushion in case they do suffer losses.
The result is a much more resilient financial system with stronger banks and lower levels of debt. However, current market conditions do again look like a boom, with AI and tech stocks continuing to rise and lending to data centres seemingly unlimited. Historians might recommend the SEC place stricter limits on investing and lending, rather than removing protections which have served well for almost 100 years.
– Jeffrey Bronheim
