A Super Bowl ad for a hedge fund? It could happen.
If the hedge fund industry has its way, the Securities and Exchange Commission will lift a longstanding rule that prevents hedge funds and other alternative investment firms from advertising and communicating openly with the media and general public.
The Managed Funds Association (MFA), the industry”™s Washington, D.C.-based lobby group, submitted a petition to the SEC last month asking that the ban on general solicitation and advertising by private investment funds be lifted.
The marketing prohibition is contained in Regulation D of the Securities Act of 1933.
The issue of whether to modify the rule is currently under consideration by the SEC”™s Advisory Committee on Small and Emerging Companies, which met Feb. 1 to weigh possible rule changes. To date, the agency has not taken a position.
Eliminating the ban on advertising would “enhance the regulation of private fund offerings” by reducing legal uncertainty, increasing transparency, and facilitating capital formation, argued Richard Baker, MFA”™s CEO, in the letter.
Fairfield County impact
Lifting the prohibition would have a significant impact in Fairfield County, home to a hedge fund cluster that ranks third in the world behind New York City and London.
It could help the hedge fund industry by increasing the number of potential investors and making the private offerings better known to the general public.
It could be especially helpful in allowing startup hedge funds and smaller players to raise capital and become better known to investors.
The ban on advertising was originally created in part to prevent the public from investing in vehicles they could not afford. Typically, hedge fund investors ”“ so-called accredited investors ”“ must have a net worth of at least $1 million. Also, many hedge funds pursue high-risk strategies, and the theory is that wealthier investors are able to shoulder more risk and are therefore better able to absorb a loss than smaller investors.
Mixed views
“I think it (removing the restriction on advertising) is a bad idea,” said one attorney with hedge fund clients, who agreed to speak off the record. “You don”™t want fraudsters to have the ability to advertise, with everybody asleep at the switch. Hedge funds have no trouble raising money now ”¦ There is a move afoot to remove all restrictions on private capital raising. This is just the first foot in the door.”
The definition of an accredited investor changed in December, when the SEC removed the equity in an investor”™s home from consideration in calculating the net worth standard. With home equity contributing a significant amount to net worth in affluent Fairfield County, the change is likely to shrink the pool of people meeting the $1 million standard, creating the need to cast a wider net for eligible investors.
The Connecticut Hedge Fund Association, which works closely with MFA, has lined up behind lifting the ban.
“In summary, repealing the rule (prohibiting advertising) will promote better transparency and eliminate the public misperception that hedge funds are operating in a murky, secretive and unregulated fashion,” said Bruce McGuire, president of the CTHFA.
McGuire added that repealing the ban would also allow hedge funds to “respond to media inquiries, report fund data to investor data bases, participate in industry conferences in a manner that will allow them to invite the general public and media to attend, and provide more detailed in information on their firms and investment strategies on their public websites.”
However, industry executives are not unanimous in their support of lifting the ban on advertising.
“Personally, I am against it,” said Steve McMenamin, executive director of the Greenwich Roundtable, an investor group based in Greenwich that includes some of the biggest hedge funds.
Hedge funds “operate on the notion that they are in business to capture inefficient pricing,” McMenamin said. “Inefficient pricing anomalies would evaporate” if hedge fund strategies became known to a wider public.
“We have a good thing going. We”™d like to keep it to ourselves,” he said. “It”™s like saying, ”˜I”™ve struck gold. Let”™s put out neon signs and advertise it.”™”
The House of Representatives recently passed a bill, HR 2940, which instructs the SEC to amend Regulation D and lift the ban on advertising. A similar bill has been introduced in the Senate as S. 1831.
