With SEC registration coming, 'private placements' should be unmuzzled

Hedge funds may soon be competing with mutual funds for ad space on radio and TV.

The 30-year-old SEC regulation banning private companies - including hedge funds -- from engaging in "general solicitation" or "advertising" is apparently now in play.

Earlier this month, an SEC Advisory Committee recommended eliminating the federal ban on general solicitation in private securities offerings on the ground that they are directed solely at 'accredited investors.' Such investors are deemed to be able to fend for themselves and not need protection against public promotions. Since hedge funds can only be marketed to 'accredited investors,' they could take advantage of the relaxed rule, especially funds seeking more than 100 investors which can only be sold to substantial institutions and ultra-high-net-worth individuals.

Managed Funds Association, the hedge fund trade group, immediately threw its support behind the initiative arguing that revocation of the ban on general solicitation would increase the transparency of hedge funds in the investment marketplace for which regulators have been clamoring.

Because of the advertising ban, hedge fund managers currently have to tread a fine line between self-promotion and fund promotion in their dealings with the press. In media interviews, managersare constrained to limit their remarks to market commentary and general statements about themselves, their firms and their investment strategies. No mention can be made of their funds.

One good reason why the SEC may adopt the Advisory Committee's recommendation is that the manager of any hedge fund(s) with $150 million or more in aggregate assets will have to be registered with the SEC by July 21st of this year. Once registered, managers will have to expose themselves and their funds to much closer government and public scrutiny than ever before, thanks to Dodd-Frank. What sense would it make, then, to prohibit the broad dissemination of hedge fund information that is already in the public domain?

If the ban on general solicitation does get revoked, however, hedge fund managers will still have to be very cautious in what they say to the press. Client testimonials and 'cherry-picking' their winners, for example, will still be outlawed, and even track records will have to be carefully crafted to satisfy other SEC regulations (see Performance Presentations, December 2011). In addition, if asked by reporters about what securities or industry sectors they like, managers should avoid or hedge specific investment opinions upon which their listeners may seize, but which they themselves may later modify or reverse.