OFA: Some fund managers could charge advertising to funds post-JOBS Act
There is debate as to whether fund managers can offset advertising and marketing expenses in the post-JOBS Act environment to the fund instead of paying for it through the management fee.
“It could be possible for a manager to charge advertising expenses to the fund providing it was properly disclosed in the fund offering documents. However, they would have to argue that advertising would be an effective way to help them grow their business, which would be in the best interests for investors. It could be done in the private equity world, for example, where a fund manager is trying to raise assets in order to make acquisitions, which of course would benefit investors,” said John Roth, general counsel and compliance at Venor Capital, speaking at the Operations for Alternatives conference in Palm Beach, Florida.
However, Roth added the situation was less clear-cut at hedge funds.
The JOBS Act, which was enacted in September 2013, eases the historical ban on hedge funds advertising and marketing their vehicles publicly. Excitement about the JOBS Act has been somewhat muted. Just 1% of hedge fund managers intend to advertise their vehicles because of the JOBS Act, while approximately a quarter said they would adopt a “wait and see” approach, according to a survey by Aksia. Seventy-three per-cent of hedge funds told the Aksia study they would not take advantage of the JOBS Act’s liberalised advertising and marketing rules.
Charging advertising expenditure to the fund could prove a challenge for hedge fund managers given investor sensitivities to expenses. A survey of operational due diligence professionals by Deutsche Bank in 2013 revealed the majority of respondents had little or no tolerance of certain expenses, such as non-research related travel or employee compensation being charged to the fund. Other expenses that were frowned upon included outsourced compliance and marketing, although managers have been become more sensitive to what they charge to the fund post-crisis. One delegate, speaking on condition of anonymity, said investors would not look kindly on advertising being charged to the fund.
Regulators are also clamping down on hedge fund expenses. Both the Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA) in the UK are delving deeper into hedge fund expenses. The SEC, according to reports, has said it will be scrutinising hedge fund fees and expenses charged to investors, such as travel and entertainment.
“The SEC is looking at opportunistic behaviour by managers in regards to expenses. Our enforcement division is looking carefully at potential misallocations of expenses or if the expenses charged to investors are in contradiction to what has been stated in the fund documents,” commented Chad Earnst, assistant regional director in the asset management unit at the SEC’s Miami Regional Office.