MFA urges SEC to scrap rules banning hedge fund advertising

13 Jan, 2012

The Managed Funds Association (MFA) is urging the Securities and Exchange Commission (SEC) to change its rules preventing hedge funds from advertising to potential investors.

In a comment letter from Richard Baker, chief executive officer and president of the MFA, to the SEC, he urges the commission “to eliminate the prohibition on general solicitation and advertising in Regulation D under the Securities Act of 1933 for offerings or sales by private funds.”

Managers have to be careful when discussing their products in the public domain – for example, at seminars or publications. Many compliance professionals and lawyers encourage hedge funds not to speak to the press at all to avoid accusations of advertising.

However, the MFA argued scrapping this rule would reduce legal uncertainty and improve transparency. It would “facilitate capital formation and reduce administrative costs by allowing investors to more easily obtain information about private funds.” Furthermore, the MFA added that hedge funds would still maintain strong investor protections and only sophisticated allocators will be allowed to buy into funds. The transparency could even dispel widely held negative stereotypes about hedge funds, writes Baker.

Easing the rules would also give regulators more information about hedge funds – something that would certainly help these cash-strapped organisations implement Dodd-Frank more effectively. It would “reduce regulatory oversight costs and allow the SEC staff to reallocate resources to other aspects of investor protection including products offered and sold to retail investors,” writes Baker.

The House of Representatives passed a bill on Section 4(2) of the Securities Act in November 2011, which would require the SEC to amend Regulation D to eliminate the ban on advertising. An identical bill is currently under discussion in the Senate.