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Hedge fund ads the next step?

Date: Tuesday, March 16, 2004

Would likely extend market via advisers: by Jeff Benjamin-- Hedge fund advertising may be moving a step closer to becoming a reality.
     In a March 1 opinion letter, the US Securities and Exchange Commission’s division of investment management indicated “a good relaxation of the rules regarding hedge fund advertising,” said Michael Tannenbaum, a New York-based lawyer and president of the Hedge Fund Association.
     Hedge funds, which are private investment partnerships designed primarily for wealthy individuals and institutional investors, are prohibited from any form of advertising or general solicitation. If those restrictions were relaxed, hedge funds would likely reach a wider market of investors through financial intermediaries.
     While the latest clarification of the rules is subtle, and some might say subject to interpretation, it fuels debate about where the SEC might be headed when it comes to oversight of the loosely regulated hedge fund industry.
     “I think most [hedge fund managers] should welcome this letter,” said Mr. Tannenbaum, a partner at the law firm Tannenbaum Helpern Syracuse & Hirschtritt LLP, which specializes in servicing hedge funds.
     According to him, the SEC’s letter, signed by division associate directors Robert Plaze and Doug Scheidt, clarifies exactly how a hedge fund manager that is registered as an in-vestment adviser can respond to unsolicited requests for information from potential in-vestors.
     In essence, a hedge fund manager doesn’t have to respond to requests for information with a complete history of performance and underlying transactions but can instead “fairly represent” that performance with select examples, Mr. Tannenbaum said.
     “Under the old rules, disclosure needed to be made of all transactions, which can be so voluminous as to lose their value,” he added. “What the SEC is doing is, for the first time, making a distinction between a [hedge fund manager] going out and advertising, and a potential investor looking for information.”
     The information presented is still subject to hedge funds’ antifraud rules, which require that any disclosure presentation be “fair, complete and accurate,” Mr. Tannenbaum said.
     There is also the “sticky issue” of who initiated the contact between the hedge fund and the investor, he added.
     But, ultimately, Mr. Tannenbaum said, the letter is a foot in the door toward a more relaxed SEC policy on hedge fund advertising.
     “I think the rules should be relaxed even further to allow managers to disclose examples of trades, whether solicited or not,” he said.
     Mr. Tannenbaum took over as president of the Aventura, Fla.-based HFA last month. He isn’t alone in his belief that the SEC is warming to the idea of expanding investor access to hedge funds, but not everyone follows his line of thinking.
     James R. Hedges IV, president of LJH Global Investments LLC in Naples, Fla., thinks there will be a time when hedge funds are allowed to advertise, but he doesn’t see the industry inching its way in that direction right now.
     “When it comes to hedge funds, the whole advertising and reform issue is going to be discussed in one fell swoop, not in dribs and drabs,” he said.
     Mr. Hedges thinks the issue will be handled along with considerations related to hedge fund registration requirements and increased investor net-worth qualifications. Those are the kinds of issues in which the SEC expressed interest last May during round-table discussions on the hedge fund industry.
     Jeff Collins, a partner in Boston law firm Foley Hoag LLP, agreed that the SEC’s focus on hedge fund ad-vertising last year opened a door, but said: “I’m a little dubious that it will be allowed.”
     “The SEC putting the issue out in a written report says that somebody there thinks it’s worth looking at,” Mr. Collins added. “But I don’t see it happening.”
     According to some in the hedge fund industry, the ability to advertise is the next logical step after registration, which is already under consideration by the SEC.
     “I think it’s an unstoppable force, and eventually, advertising will be allowed,” said Jeff Joseph, managing director of the alternative-products group at Rydex Global Advisors Inc. in Rockville, Md.
     The major stumbling blocks to the use of advertising by hedge funds, according to him, are resistance from the mutual fund industry, and the fact that it is an election year.
     John Van, chief financial officer at Van Hedge Funds Advisors International Inc. in Nashville, Tenn., said the SEC would be forced to address the issue of advertising in the context of modern technology.
     “We have already seen a lot more indirect hedge fund advertising in the form of Internet websites and press releases,” he said. “I’m not sure I even see the harm in advertising because when it comes down to it, retail investors still can’t get in.”