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The Morning Brief: SEC Warns Funds Not to Abuse JOBS Act Power

Just a couple of weeks or so before hedge funds and other private funds will be permitted to promote and advertise, the Securities and Exchange Commission warned the industry not to abuse the power or commit fraud. In a speech on Wednesday, Norm Champ, director of the SEC’s Division of Investment Management, said he has instructed his rulemaking and risk and examination staff to pay particular attention to the use of performance claims in marketing materials.

Separately, the SEC official said the commission has begun a review of the definition of accredited investor as it relates to individual investors. Under the current rule, individuals cannot invest in private placements — including hedge funds — unless their net worth exceeds $1 million or they have annual earnings of $200,000 for two straight years ($300,000 for a couple). Under a revision several years ago, an individual can no longer count the value of their home as part of their net worth.

A total of 288 new hedge funds debuted in the second quarter, down slightly from 297 in the previous quarter but up more than 17 percent from 245 in the second quarter of 2012, according to a new report from industry tracker HFR. Some 1,144 hedge funds launched in the 12-month period ending in June, the highest total since nearly 1,200 funds were launched in the 12-month period ending in March 2008, the eve of the global market meltdown. Meanwhile, 190 funds were liquidated in the second quarter, down slightly from the first quarter of 2013 (196) and the year-ago quarter (192).

HFR also noted that fees continue to decline, a long-term trend we have been reporting for some time. The average management fee for the industry fell to 1.54 percent, according to the report. Macro funds charge the highest management fees, while relative-value arbitrage funds charge the lowest. Meanwhile, average incentive fees declined to 18.31 percent. For funds launched in the second quarter of 2013, the average management fee was 1.45 percent, while the average incentive fee was 17.39 percent, below the industry average and down from 17.74 percent in the first quarter.

Smithfield Foods issued a press release announcing that Institutional Shareholder Services (ISS), the proxy advisory firm, recommends that shareholders vote for the proposed strategic merger with Shuanghui International Holdings Limited at Smithfield’s special shareholder meeting on September 24. Smithfield quotes the IS report’s assertion that “the $34.00 per share cash offer provides shareholders with a considerable and certain premium to the company’s standalone trading price.”

We recently reported that New York-based activist hedge fund firm Starboard Value, which owns 5.7 percent of the stock, is urging the food processor to seek a higher price, claiming its sum-of-the parts value of the company’s operating divisions far exceeds the current price of the stock. In addition, the hedge fund manager recently said he would oppose the deal because he has found several interested parties willing to buy the various pieces of the company.

“We have received non-binding written indications of interest from third parties, based on publicly available information, for each of Smithfield’s assets, which in the aggregate imply a total value for Smithfield at a price substantially in excess of the $34 cash deal with Shuanghui,” Smith stated in a recent letter to Smithfield shareholders. He wants the company to put off the scheduled meeting for about two months, to no later than November 29, the latest date the deal could be approved based on the negotiated merger agreement.

Kenneth Griffin’s Citadel disclosed it owns 5.1 percent of specialty retailer Finish Line. The Chicago hedge fund firm made its filing in a 13G, meaning the position is passive.

Herbalife surged to a new all-time high, closing Wednesday at $69.01, up 3.54 percent for the day.

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