SEC votes in favour of proposal to scrap ban on hedge fund advertising and marketing
The SEC has voted 4-1 in favour of proposing a rescission of the ban on general solicitation and advertising for hedge funds. However, hedge funds must take reasonable steps to ensure investors are accredited.
Despite the vote, implementation could take some time
The public will now have 30 days to comment on the proposal, which was mandated under the JOBS Act. The measure has proved controversial with several commentators criticising the perceived lack of investor protection.
Luis Aguilar, Democratic Commissioner, was the lone dissenting voice in the vote, citing concerns over investor vulnerability. Democratic Senator Carl Levin also warned ordinary investors could be put at risk. Industry associations including the North American Securities Administrators Association (NASAA), an investor protection group, ALF-CIO and the Consumer Federation of America have made similar objections. Some mutual funds have expressed concerns too.
Hedge funds will only be allowed to market and advertise to accredited investors – individuals with at least $1 million in investable assets. In a statement, chairman of the SEC Mary Schapiro, said the rules would require steps be taken “to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings.” What these steps will be has not been revealed.
Some industry experts have speculated hedge funds will be forced to adopt tougher checks and controls to verify whether their investors or potential investors are fully accredited. One expert reckoned managers could be forced to ask investors for bank statements or tax forms.
Nevertheless, legal counsels from major law firms have said they are confident managers will not target unsophisticated investors. The majority of managers expect minimum ticket sizes of between $500,000 and $1 million – well beyond the means of most unsophisticated investors. Unsophisticated investors might also demand mutual fund-style liquidity provisions, which will be unacceptable to managers, particularly those invested in illiquid assets or distressed credit.
Republican commissioners have criticised the slow pace of reform and missed deadlines. The SEC’s original deadline for implementation was July 5. The advertising rules will also not be in the form of an “interim final” rule but a proposal, which is subject to public consultation and comment, and therefore more likely to suffer further delays. Implementation of the rules could be as late as 2013.
The changes have been welcomed in the hedge fund industry. The Managed Funds Association (MFA), AIMA and the Hedge Fund Association have all praised the proposed removal of the ban on advertising. The MFA have long argued the ban, which dates back to the 1933 Securities Act, was outdated. In January 2012, the MFA said ditching the ban would reduce legal uncertainty and improve transparency.
Whether the JOBS Act will have a significant impact is open to debate. Most experts doubt there will be a noticeable change in hedge fund marketing and advertising strategies. It is very unlikely managers will use high-profile advertising – at sport fixtures or on prime time television - to promote their products. However, some hedge funds might be more open about speaking to the media or at industry events, while others may use targeted advertising in specialist trade journals.
Hedge funds might also embrace social media such as LinkedIn, Twitter and Facebook more readily. Financial institutions are increasingly using LinkedIn. Morgan Stanley Barney Frank recently allowed its brokers to use LinkedIn and Twitter albeit under very strict guidelines. Despite the liberalisation around advertising, the SEC still maintains all information disclosed by managers cannot be false or misleading. The SEC has a very broad interpretation of what constitutes false and misleading so managers need to be careful about what they post on social media sites.