The SEC thinks it needs to do more to “protect” wealthy retail investors from the secretive world of hedge funds. To do so, it is entertaining the idea of enacting more stringent rules as to who can invest. Here’s the irony: The agency is now faced with negative feedback from those very investors it is trying to safeguard. Many wealthy investors say they can take care of themselves, thank you very much.

In December, the SEC proposed to raise the financial criteria for investors wanting to invest in hedge funds to $2.5 million in investable assets, excluding real estate. The current minimum is $1 million in net worth, including real estate. The agency asked for public feedback through March 9, 2007, and has received over 300 responses—most of them asking the agency to back down. (Click here to read more.) (Meanwhile, yesterday, The Presidential Working Group on Financial Markets said there’s no need to enact any new rules—keeping a watchful eye on them is good enough.)

The popularity of hedge funds has increased greatly over the last few years. According to Hedge Fund Research, the number of hedge funds has more than doubled between 2001 and 2006, to 9,462. In that same period, estimated assets grew nearly threefold, to $1.4 trillion, and net asset flow more than doubled, to $126 billion.

There are hundreds of investors writing to the SEC telling them to back off. Take Michael Guerra of Kerrville, Texas, for example. He writes to the SEC, “I think all Americans should be free. It is paternalistic and immoral for government to prohibit freely entering into transactions. As such, I support allowing any American to invest in any fund they choose. Net worth is not determinant of critical thinking and keen analysis.”

To view more comments or read the SEC’s full proposal, click here.

But, if passed, will the SEC proposal put a damper on such hedge fund growth? Not really. According to Hennessee Group, a registered investment advisory firm in New York, less than half a percent of the $1.2 trillion assets in hedge funds belong to retail investors. Therefore, Ken Heinz, president of Hedge Fund Research, says, “I don’t anticipate the new rule having a meaningful impact on either industry asset growth. Most hedge fund investors will still exceed the increased requirement.”

But Charles Gradante, co-founder and managing principal of the Hennessee Group, disagrees. He says the proposed $2.5 million minimum is not high enough. “If you take inflation into account, there are many more millionaire households today. Yet the accredited investor rule hasn’t been updated since 1982.” He adds, “The SEC is trying to protect, not hurt, these investors.”