SEC Commissioner Questions Hedge Fund Advertising Rule

Nov 19 2012 | 12:56pm ET

The Securities and Exchange Commission is set to allow hedge funds to openly advertise and market their wares next year, but it certainly doesn't seem happy about it.

The regulator in August proposed to do away with an 80-year-old rule that bans general solicitations by private funds. The move was required by April's JOBS Act, and although the commission offered the rule on a 4-1 vote without any restrictions on hedge fund advertising, it is increasingly making clear that it did so under duress.

On Thursday, one of the commissioners who voted in favor of proposing the rule, Elisse Walter, warned that it could lead to an increase in fraud.

"If allowing general solicitation results in increased incidence of fraud or sale of securities to investors that don't have the sophistication to understand the risks and merits of a particular investment we will have failed not only investors but small businesses as well," she told a small-business capital-formation conference.

"I feel strongly that we should take those potential consequences seriously," she continued. "We must be vigilant about the potential consequences, particularly the unintended consequences of a change like this and consider ways to mitigate potential harms while preserving the rule's intended effects."

Walter did not say she would vote against the rule when it comes up for final approval—it is currently subject to a comment period. But she echoed concerns earlier raised by the commission's two other Democrats, Chairman Mary Schapiro and Luis Aguilar. Schapiro delayed for months proposing the rule and then warned that "there are very real concerns about the potential impact of lifting the ban," but acknowledged the "narrow mandate Congress placed upon us." Aguilar voted against proposing the rule, citing the lack of restrictions.

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