Hedge fund marketing rules relaxed in US
US hedge funds will be able to advertise their businesses following Congress’ passing of the US JOBS Act.
The JOBS Act, which aims to help boost funding to new and small businesses, instructs the Securities and Exchange Commission (SEC) to scrap the prohibition on hedge funds’ general solicitation and advertising within 90 days of implementation.
Hedge funds are currently banned from advertising their products under Regulation D of the 1933 Securities Act. While hedge funds can market themselves to sophisticated investors, they are strictly forbidden from tapping into the retail space.
Managers therefore have to be careful when discussing their products in the public domain – for example, at seminars or in publications. Many compliance professionals and lawyers encourage hedge funds not to speak to the press at all about their products so as to avoid accusations of advertising. Some lawyers even argue hedge funds’ websites need to be as vague as possible so as not to incur regulators’ wrath.
“Relaxation of this component of private securities offering is not going to lead to a significant change in hedge fund marketing in private offerings exempt from the registration requirements for securities and investment companies. Most will continue to target wealthy and sophisticated investors only and conduct private, non-retail offering activities,” said Holland West, partner and hedge fund specialist at Dechert.
“However, I suspect managers will become somewhat more open and relaxed when dealing with the press and investor conferences since the original laws were outdated and artificially constraining in the current information age,” he added.
Industry associations such as the Managed Funds Association (MFA) have long argued Regulation D was out-dated. Scrapping the rule, it said in a comment letter penned by its CEO Richard Baker in January 2012, would reduce legal uncertainty and improve transparency in the alternatives space. Easing the rules, the MFA said, would also enable regulators to obtain information about managers more easily, and could even help dispel widely-held negative stereotypes about the industry.
The MFA welcomed the development. In a statement, it said “the measure also includes a number of important provisions that will modernise existing securities laws in a manner that will enhance financial market transparency and investor protection. MFA applauds President Obama and Congressional leaders in the House and Senate for their leadership, and respective efforts, in getting this much-needed, bipartisan legislation one step closer to enactment.”
Predictably, there are fears managers could target unsophisticated retail clients, although West acknowledged these were unfounded. “Most hedge fund managers do not want to access the retail market anyway because minimum investments are too low, liquidity too frequent and number of investors too great. Their trading strategies work best with committed capital and additional regulations and constraints will be imposed (if they market to retail). Hedge fund managers want sticky money as they are not set up as mutual funds offering daily liquidity. Scrapping this requirement in Regulation D is not going to lead to mass marketing towards retail,” said West.