Mutual Funds Push To Ban Hedge Fund Ads
The mutual fund industry wants the SEC to impose restrictions on advertising by hedge funds and private equity funds
Hedge funds will soon be able to advertise broadly to the public thanks to a measure in the recently-passed JOBS Act that directed the SEC to repeal a longstanding ban on publicizing private securities offerings.
The mutual fund industry’s main lobby group, the Investment Company Institute, is asking the SEC to subject hedge funds to the same or more-stringent restrictions that apply to advertisements by mutual funds, which are heavily regulated.
ICI President and CEO Paul Schott Stevens, in a letter to the SEC last week, said the limits are needed to protect investors. “Private fund advertising is particularly susceptible to fraud,” he wrote, because private funds “often pursue investment strategies that are opaque” or “invest in securities that are difficult to value or relatively illiquid.”
The hedge fund industry rejects the argument.
The Managed Funds Association, which represents the largest hedge funds, and BlackRock Inc. (BLK), an asset manager that has $110 billion in private fund assets, argued in separate letters to the SEC that the restrictions for retail fund advertisements aren’t needed for private funds since they can only sell shares to “accredited investors”, institutions or wealthy people deemed sophisticated enough to participate in private securities offerings.
“BlackRock does not believe that any additional regulatory framework for private fund advertising is necessary for the protection of investors,” BlackRock Vice Chairman Barbara Novick wrote in a May 3 letter to the SEC.
ICI also is asking the SEC to raise the income and net worth thresholds for people that meet the definition of accredited investor.
Congress gave the SEC 90 days from the enactment of the JOBS Act to write rules lifting the so-called “ban on general solicitation and advertising” for private offerings.
SEC Chairman Mary Schapiro, through a spokesman, declined to comment on whether the SEC should place limits on hedge fund advertising. “Staff will thoughtfully consider all of the issues raised in public comments as it formulates a rulemaking recommendation,” the spokesman said.
Even if the regulator doesn’t impose restrictions on hedge fund advertising, hedge funds will have to adhere to laws that broadly forbid securities issuers from defrauding investors.
The mutual fund industry faces several additional restrictions, including prohibitions on making misleading or incomplete claims to investors or exaggerating management skill in marketing materials.
The SEC also began requiring mutual funds to follow a precise methodology for reporting performance in advertisements following a period in the 1980s when wild or misleading performance claims were frequently made by funds.
The AFL-CIO, the federation of labor unions, and four advocacy groups argued in a letter to the SEC that the regulator can’t legally lift the ban on mass marketing of private offerings without taking additional measures to protect investors.
“They need to develop a standardized calculation of performance if used in an ad and parallel rules to deal with the issues that have arisen in mutual fund advertising,” argued Mercer Bullard, president of Fund Democracy, one of the groups that wrote the letter.
Mitch Ackles, president of the Hedge Fund Association, a lobby group that represents mostly smaller hedge funds, said his group expects the SEC will impose restrictions on hedge fund advertisements that will be “similar to what the mutual fund industry faces.”
Read More: WSJ