The Securities and Exchange Commission finally laid out a proposed rule that will allow hedge funds to market their wares to the general public, and despite the repeated delays, it's about as good as the industry could have hoped.
The regulator voted 4-1 yesterday to propose the new rule, mandated by April's JOBS Act, which will end an 80-year-old ban on general solicitation by private funds. The rule as proposed places no restrictions at all on hedge fund advertising and does not specify how hedge funds must verify that their investors are qualified.
The proposed rule, which will undoubtedly draw howls from state securities regulators and the mutual fund industry, which urged the SEC to codify strict verification procedures, now goes to a 30-day comment period.
"I recognize that there are very real concerns about the potential impact of lifting the ban on general solicitation," SEC Chairman Mary Schapiro said. "While I believe it will be incredibly important for the commission to take a thorough look at the private placement market in the future, I think at this point it is appropriate that we undertake this more narrow mandate that Congress placed upon us."
Luis Aguilar, a Democratic commissioner, voted against the proposal, citing its lack of fraud protections. The rule requires hedge funds only to consider certain facts and circumstances related to each deal, among them who investors claim to be, how those investors were solicited and the terms of the offering.
The SEC missed the original deadline set by the JOBS Act. A second vote is expected shortly after the comment period ends; Schapiro said that the rule could be in place by the fall.
"The 90-day deadline did not provide a realistic time frame for the drafting of a new rule, the preparation of any accompanying economic analysis, the proper review by the Commission, and an opportunity for public input," SEC spokesman John Nester said.