Managers still unaware of CFTC marketing restrictions
Concerns are mounting that few managers are aware they cannot take advantage of the JOBS Act's eased marketing and advertising restrictions if they claim the exemption to CFTC registration under Rule 4.13(a)(3).
“If a commodity pool operator (CPO) wants to claim the Rule 4.13(a)(3) exemption, the JOBS Act is void. A lot of managers are unaware of this provision but will find out very quickly if they are non-compliant,” said Greg Farrington, partner and managing director at Constellation Investment Consulting, a New York-based boutique consultant, speaking at a Bovill regulatory briefing on Thursday.
As well as meeting the de minimis swaps trading requirements, Rule 4.13(a)(3) stipulates managers hoping to avoid CFTC registration cannot market their product to the US public. While the JOBS Act instructed the SEC to remove its historic clause prohibiting hedge fund solicitation and advertising, it did not tell the CFTC to make similar changes to its rules.
This regulatory arbitrage between the SEC and CFTC is unlikely to be fixed anytime soon. “The JOBS Act is still a work in progress and the CFTC has said it is not changing its rules. But I believe there will be a lot of industry pressure on the CFTC to get on the same page as the SEC in regards to hedge fund marketing and advertising,” he added.
CFTC registration, some have argued, is more onerous than Form PF. CPOs will be required to submit data not too dissimilar to Form PF, and will also have to become National Futures Association (NFA) members. This will subject them to additional disclosure, reporting and recordkeeping requirements while portfolio managers and marketing executives will be forced to sit a Level 3 examination.
“CFTC registration is a huge workload, and I doubt many managers are going to want to take advantage of the eased rules on hedge fund advertising if it means they cannot claim the Rule 4.13(a)(3) exemption. Some people believe hedge fund advertising will cheapen the brand anyway,” commented Farrington.
Whether the benefits of hedge fund advertising outweigh CFTC registration costs is open to debate. Most industry experts and associations including the MFA, AIMA and Hedge Fund Association, have all welcomed the JOBS Act, arguing the solicitation and advertising ban was an outdated relic. However, many doubt the eased rules will lead to managers using high profile advertising but rather result in them being more open with media or at industry events.