In his daily newsletter, Bloomberg columnist Matt Levine wrote on Earning the Right to Get Swindled.  He debunked the notion that because an individual earns enough money to qualify as an accredited investor under the SEC’s rule the individual becomes a sophisticated, savvy investor.  Then he offered his fantasy for consumer securities regulation:

• Anyone can invest all they want in a diversified portfolio of approved investments (non-penny-stock public companies, mutual funds and exchange-traded funds with modest fees, insured bank accounts, etc.).

• Anyone can also invest in any other dumb investment; you just have to go to the local office of the SEC and get a Certificate of Dumb Investment. (Anyone who sells dumb non-approved investments without requiring this certificate from buyers goes to prison.)

• To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”

• Then you take the form to an SEC employee, who slaps you hard across the face and says “really???” And if you reply “yes really” then she gives you the certificate.

• Then you bring the certificate to the seller and you can buy whatever dumb thing he is selling.

• If an article ever appears in the Wall Street Journal in which you (or your lawyer) are quoted saying that you were just a simple dentist, didn’t understand what you were buying and were swindled by the seller’s flashy sales pitch, then you go to prison.

I am open to compromise on the details. The point is that the right general approach to the problem of people buying dumb investments is to give them much, much, much clearer and starker and scarier warnings before they invest, and then much, much, much less sympathy if they do it anyway.

The Transparency Label Initiative embodies this general approach.  It uses labels to achieve Matt’s fantasy for securities regulation.

The presence of a label indicates an investment provides the necessary disclosure so an investor could know what they own.  Of course, the investor doesn’t have to assess the disclosure himself, he can hire a trusted third party expert to do the assessment for him (think mutual fund portfolio managers).

The lack of a label is a big red flag saying this investment is a blind bet on which the investor is likely to lose all their money.  Knowing it is a blind bet, nobody has any sympathy when the result is the investor loses money.