JOBS Act delayed amid pressure on SEC

20 Aug, 2012

The SEC is to delay rules which would enable hedge funds to market and advertise their businesses amid pressure from consumer groups and state regulators.

Regulators under pressure on JOBS Act

Mary Schapiro, chairman of the SEC, told Congress last week more public comments were needed before they could liberalise the solicitation ban on hedge funds, as mandated under the JOBS Act. The rules were supposed to be implemented from Wednesday, August 22. The delay has led to a chorus of protests from  the bill's Republican backers.

The SEC has faced serious pressure from consumer groups, state regulators and mutual funds who warn that investor protection must be guaranteed before the law is enacted. The North American Securities Administrators Association (NAASA) submitted a letter on  August 15 urging the SEC “to resist pressure to act hastily” on the ban’s rescission. Jack Herstein, president of NASAA, advised the SEC to refocus its efforts on Dodd-Frank implementation, which was a far more pressing issue.

Meanwhile, in May 2012, the ALF-CIO, a US labor organisation and the Consumer Federation of America insisted the solicitation ban not be lifted until investor protection guarantees were hammered out.  According to reports, the finalised rules might not appear until sometime next year.

Don Steinbrugge, managing partner at AgeCroft Partners, a third party marketing firm, said some firms had set their expectations too high about when the SEC could realistically implement the rules. “The SEC will not rush passing this bill. I do believe some people thought the act would be implemented during the comment process but this will not happen,” he said.

The delay, however, should not come as a great surprise. The SEC is struggling to implement Dodd-Frank while several experts have said the regulatory body is understaffed, under-resourced and has antiquated technology. Furthermore, Congressional Republicans have repeatedly threatened to slash the SEC’s already limited budget while a Republican victory in the White House would certainly facilitate greater cuts.

“The JOBS Act is high on the SEC’s agenda – the President has signed it into law after all. But the SEC does have a lot of priorities at the moment, namely Dodd Frank, and it is a big organisation which moves slowly,” said Steinbrugge.

There was speculation earlier in the year the SEC wanted hedge funds to impose tougher checks and controls verifying their investors are fully accredited. An accredited investor is an individual with at least $1 million in investable assets. One expert reckoned managers could be forced to ask investors for bank statements or tax forms to ensure they are fully accredited.

Hedge fund industry bodies including the Managed Funds Association and the Hedge Fund Association welcomed the JOBS Act, with the former stressing it would lead to greater transparency. AIMA too supported the legislation although cautioned hedge funds should only be marketed to accredited investors.

Most experts anticipate the JOBS Act is unlikely to lead to massive change in hedge fund marketing and advertising strategies. Hedge funds will, however, be more open about speaking to media and at industry events while some may use targeted advertising in trade journals. Last week, Marc Elovitz, partner at Schulte Roth & Zabel (SRZ) in New York, predicted an increase in  managers using social networking sites such as LinkedIn.

Others are confident managers will not target unsophisticated investors. The majority of managers will expect ticket sizes of between $500,000 and $1 million – well beyond the means of most unsophisticated investors. Furthermore, unsophisticated investors might expect mutual fund liquidity provisions – something which will be unacceptable to the majority of managers.

Steinbrugge said hedge funds were being unfairly targeted and there was widespread misunderstanding about the JOBS Act. “Most consumer groups are demanding investor protection yet many hedge funds have minimum investment requirements at or above the threshold for what qualifies as an accredited investor.  Furthermore, I would argue investors who put capital into stocks are more at risk of losing their money than if they put cash into a diversified hedge fund portfolio,” he said.


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