In April 2012, the 80-year-old ban on hedge fund advertising and client solicitation was lifted by the signing of the JOBS Act. The Securities and Exchange Commission has not adopted the final rules regulating hedge fund adverts and client solicitation, however, and in a letter today supporting the new law, the Hedge Fund Association asked the SEC to create a clearer set of regulations about the way hedge funds solicit clients.
The SEC has stipulated that funds may sell their securities only to individuals with a minimum $1 million net worth and qualified institutional investors. While managers have had subscription agreements and internal policies in place to ensure compliance, the HFA says, having rules in place to verify that potential investors are indeed accredited will add further stability to the industry.
Addressing the concern that opening the door to general solicitation may, to some degree, open the door to people who wish to perpetrate fraud, the letter says that existing anti-fraud regulation in the Securities Exchange Act would not be affected by the JOBS Act.
The new regulation is expected to allow hedge fund management companies to communicate directly with potential investors for the first time in their history, according to an HFA statement.
Hedge funds were banned from advertising by the Securities Act of 1933, but in exchange were not required to register with the SEC. Since March 30, U.S.-based private fund advisers, including hedge funds, with more than $150 million in assets under management have been required to register. The first Form PF submissions from those advisers with $5 billion or more in regulatory assets under management (RAUM) must be filed by June 15.
However, information about hedge funds is also readily available online, blurring the lines of current regulation, practically rendering the law obsolete, HFA President Mitch Ackles says.
In the comment letter, the HFA says lifting the ban would help the hedge fund industry grow and encourage emerging managers to continue to enter the industry.
The SEC is currently soliciting comments before implementing the regulations, which are scheduled to be published July 5.
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