Service providers lick chops while investor advocates cringe at JOBS Act

By Lawrence Delevingne

Thu Jul 11, 2013

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The SEC's decision to lift the ban on hedge fund marketing has received mixed reviews.


   
   Carl Levin (Photo: Bloomberg)
Hedge funds are finally allowed to advertise freely, and the companies that serve them--especially public relations and law firms--are mostly thrilled, while others fear a proliferation of fraudsters. 

Many trumpeted their excitement following the Securities and Exchange Commission's adoption of a new rule yesterday to implement a JOBS Act requirement to lift the ban on general solicitation and advertising for private funds. 

Hedge fund lobbyists were also positive about the decision, but more cautious in their pronouncements. Investor advocates and some politicians were upset. And managers themselves? Largely mum. As Absolute Return has previously noted, it is unlikely that hedge funds will dramatically alter how they market themselves, especially the brand names that investors are already clamoring to get in. 

A sampling of statements sent to Absolute Return, none of which came from hedge funds themselves:

"MFA commends the SEC for continuing the implementation of the JOBS Act. MFA is hopeful that the steps the SEC has taken today will help modernize existing securities laws to enhance market transparency, improve capital formation, and strengthen investor protection."
--Stuart Kaswell, general counsel of the Managed Funds Association

"The SEC’s decision to adopt this final rule will do little to jump start investment, and much to weaken investor protections. The final rule puts essentially no effective limitations on the types or forms of advertising that can be used to promote high-risk investments, exposing unsuspecting investors to potentially misleading claims they will be unable to evaluate. And the rule provides almost no requirements to ensure that potential investors are in fact able to absorb the possible losses from these high-risk investments. The SEC appears to recognize these flaws by simultaneously saying it will consider some limited repairs, which I fear may be far too little and much too late. It’s as if the SEC is jumping out of an airplane today, and then proposing to check the safety of its parachute on the way down."
--Senator Carl Levin, a Democrat from Michigan

"The era of regulated secrecy for hedge funds is over. The veil has been officially lifted on hedge fund managers, who can now begin to more openly communicate with sophisticated investors and the marketplace, without fear of regulators shutting them down. Hedge fund executives will now be able--within reasonable limits--to tell their story, open their web sites, talk to the media, run advertisements, showcase their expertise, and generally run their businesses as businesses, without the government-imposed cone of silence that has constrained the industry for decades."
--Walek & Associates, a public relations firm 

"We believe the opening of the private hedge fund business to advertising will create commercial dynamics which favor incumbents with larger, developed businesses. Those larger, brand names will have an advantage, as they have the ability to distribute. The hedge fund business has been uniquely entrepreneurial, in part due to its lightly regulated and private structure. Hopefully, the industry can maintain its entrepreneurial spirit through these and other regulatory changes which benefit larger firms. It may take smaller, niche names, which often outperform due to their ability to be nimble, longer to catch up."
--Charles Stucke, chief investment officer of Guggenheim Investment Advisors, which provides a hedge fund investment platform

"In this era of mass communication, the notion of continuing to restrict advertising or general solicitation makes no sense. Private investment funds will continue to have the ability to protect investors by limiting access to those who are accredited. So the lifting of the ban on advertising as part of the changes under Regulation D is long overdue. It remains to be seen, however, if the proposed restrictions to Regulation D, if adopted, will undermine the potential benefits from the elimination of the prohibition on general solicitation."
--Wesley Nissen, chair of DLA Piper's Financial Services group

"As we fulfill our mission to facilitate capital formation and maintain fair and efficient markets, the Commission must always focus on strong investor protections. We want this new market and the private markets in general to thrive in a safe and efficient manner, and these rules we adopt and propose are designed to facilitate that objective."
--Mary Jo White, chair of the SEC

"Today's vote is a great step for capital formation--once effective, the new rule will allow sophisticated investors more equal access to investment opportunities and issuers to communicate more freely with those investors; I think that the rule will ultimately reduce the cost of capital formation. Initially, there’ll be some scrambling to develop best practices for complying with the rule’s heightened standard for verifying the accredited status, but I’m glad that the Commission is adopting some safe harbors for verification."
--Benjamin Alexander, partner at law firm Greenberg Glusker

"Small companies benefit by being able to raise money more easily under the new rules, but history has shown that consumers can be misled and exploited if steps aren’t taken to guard their interests. It’s all the more important to be vigilant against bad actors. More information will now be accessible to investors through the use of social media, and the ability of bad actors to pursue unaccredited, unsophisticated investors will grow."
--Jennifer Openshaw, founder of Women’s Financial Network and president of online financial industry network Finect

"I don't think the overwhelming majority of hedge funds will begin advertising or sponsoring industry events, mainly a few of the largest funds with AUM starting at about $5 billion. However, the ruling opens the door for funds of all sizes to be much more aggressive in their marketing, which can level the playing field for funds. These funds now can freely speak to the press, appear on broadcast TV, create more user-friendly websites, and take greater advantage of mass digital communications."
--Richard Dukas, CEO of Dukas Public Relations

"Fundamentally, we believe that these new rules will: (i) increase public transparency regarding the alternative investment industry, including hedge funds; and (ii) facilitate capital formation and ultimately enhance the capital markets. Though the HFA views this development as generally positive, we await publication of the new rules to determine whether particular requirements impose an unnecessary burden on our members."
--The Hedge Fund Association

ISSN: 2151-1845 / CDC10004H