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Hedge Fund Industry Divided on Advertising Rule Changes

The Hedge Fund Association and the Managed Funds Association disagree on proposed changes to the SEC’s rules on certain issuers advertising, but have found common ground on one area.

Two hedge fund industry groups disagree on how the Securities and Exchange Commission should handle advertising in the industry — but they concur that the regulator should relax the so-called accredited investor standard. 

The SEC closed its comment period on its regulations that affect hedge fund firms and other investment groups this week. The Managed Funds Association, the industry’s largest trade organization, and the Hedge Fund Association, a lobbying group for the industry, both submitted comment letters to the SEC just in time for its deadline.  

The SEC said in its request for comment that it was seeking feedback on “possible ways to simplify, harmonize, and improve” the framework that allows some types of investments — such as those offered by most hedge fund firms and other alternative investors — to be exempt from certain registration requirements, enabling those firms to offer private investments. The SEC said it is hoping to “promote capital formation and expand investment opportunities while maintaining appropriate investor protections.”

One area the SEC is examining is Rule 506(c), a provision of the 2012 Jumpstart Our Business Startup Act (JOBS) that allows certain types of funds to advertise and solicit investments from accredited investors. The SEC is asking industry participants whether amendments to or clarifications around the rule might result in more funds using it to raise capital.

The Hedge Fund Association said in its letter that it supports the SEC’s proposed change that would allow certain issuers to advertise fund offerings as long as certain conditions are met. Meanwhile, the Managed Funds Association said it would not recommend changes to Rule 506(c).

“We believe concerns about the legal uncertainty and costs the proposed amendments would impose on private fund managers deterred issuers from conducting Rule 506(c) offerings,” the Managed Funds Association’s letter said. The MFA noted that some issuers have only just recently started offering this type of investment and said any new changes to the rule now would likely deter others from doing so in the future. 

Both groups came to a consensus on another major issue the SEC is considering, however. The organizations are pushing for the SEC to loosen its regulations on accredited investors and allow folks who have passed certain financial exams to be allowed to invest in private funds. Accredited investors are investors who have a net worth of more than $1 million, or an annual income of more than $200,000 on their own or $300,000 with a spouse, excluding the value of their homes. 

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“HFA supports an expansion of the accredited investor pool to include knowledgeable investors with substantial industry experience,” Michael Tannenbaum, HFA regulatory and government committee chair, in a statement published Wednesday.

“Certainly, if meeting the net worth thresholds qualifies an investor to meet the sophistication requirement necessary to be an accredited investor, then substantial industry experience must qualify a person as well,” the Hedge Fund Association said in its letter, which was addressed to the SEC on September 23.  

The Managed Fund Association said it also supports the SEC allowing any entity that meets the financial threshold to be considered an accredited investor. This could include limited liability companies and certain governmental units, according to its letter.  

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