Critics Slam SEC Hedge Fund Ad Rule

Sep 4 2012 | 9:51am ET

The Securities and Exchange Commission's vote last week to propose allowing hedge fund advertising opened a 30-day comment period, and the regulator is likely to get an earful.

Eliminating the 80-year-old rule against general solicitations for private offerings was mandated by April's JOBS Act, backed by both President Barack Obama and Republicans in Congress. But that rare piece of policy concert doesn't impress critics of the measure, who fault the SEC for not imposing restrictions on hedge fund advertising or putting into place strict verification procedures to ensure would-be investors are accredited.

Sen. Carl Levin (D-Mich.) complained that the rule as written—it includes no restrictions on solicitations and does not specify any rules regarding verification—"began undermining significant investor protections."

“The SEC rule should require those who advertise private deals to take specific steps to ensure that investors have the wherewithal and expertise to make these risky investments,” Levin said. “And it should require that the content of the advertising meets some minimum standards, such as those that mutual funds are subject to today. The proposed rule does neither.”

Levin isn't alone in voicing his discomfort. One of the SEC commissioners, Luis Aguilar, voted against the proposal, and consumer groups, state securities regulators and the mutual fund industry aren't happy either.

The current proposal would have "dire consequences," Heath Absure, Arkansas Securities Commissioner, warned.

“Private offerings are so risky that, to date, hedge funds and other firms could only offer these high-risk deals to proven, ‘sophisticated’ investors, such as professional money managers with whom they have an ongoing business relationship,” Public Citizen's Bartlett Naylor said. “The JOBS Act permits advertising such deals to the public.”

“One of the very few investor safeguards from Congress is the requirement that firms offering private securities have to take ‘reasonable steps’ to ensure that the investor is sophisticated and has a net worth of $1 million or $200,000 in annual income,” Naylor continued. “Significantly, the SEC’s proposed rule fails to adequately define these ‘reasonable steps’ a hedge fund is required to take before it can categorize a prospective client as sophisticated. This is a grave oversight.”

"This is a huge disappointment," the Consumer Federation of America's Barbara Roper told Bloomberg News. "It appears that none of the investor protections that we or others have advocated are included in this proposal."

At last week's vote, SEC Chairman Mary Schapiro conceded that the rule was something of a work-in-progress, but argued that the JOBS Act left very little wiggle room for the Commission—indeed, the SEC is already late in approving the mandated rule; the JOBS Act demanded one within 90 days.

"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."


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