Ready For Hedge Fund Commercials? SEC To End Ad Ban

Date: Thursday, July 11, 2013
Author: Halah Touryalai, Forbes

Imagine driving down the highway and seeing Bill Ackman, Carl Icahn or Steve Cohen on a billboard asking you for money for their next fund.

Okay. That’s unlikely because none of those guys are hard up for assets, and two of them manage their their own money anyway. But under a new rule passed today they can occupy any billboard, commercial spot and newspaper ad they well please.

The SEC voted 4 to 1 in favor of a rule allowing hedge funds to advertise to the public–something they haven’t been able to do for decades. The investments would still only be open to accredited investors–those with a net worth of at least $1 million excluding their primary residence.

The rule is part of the Jumpstart Our Business Startups Act (JOBS Act) which intended to make it easier for companies to raise money, and in theory hire more people. Lifting the ad ban that private offerings and other hedge funds have been living under is one way to make it easier to raise funds.

But don’t expect a flurry of hedge fund commercials or print ads anytime soon. It’s more likely hedge funds will start slow. Some may start thinking about a real marketing strategy for the first time. Others might find the new rule as an opportunity to provide some more detail on their website, or speak in public about their funds.

The hedge fund industry has been notoriously secretive for decades, and that’s mostly because of rules and regulations that keep them from sharing information with the general public.

Slowly though, hedge funds have been coming out of the woodwork and sharing more information–again, because of changes in SEC rules.

The latest advertisement rule is one example but prior to that the SEC began requiring hedge funds to fill out the so-called Form ADV. This info-rich form gives the public more information about hedge funds than was ever available before; assets under management, fee structure, ownership structure, number of funds, types of clients and much more. Anyone can access these forms on the SEC website.

Today’s rule allowing hedge funds to advertise isn’t sitting well with everyone. Most notably, the mutual fund industry is not happy with the new rule.

The obvious tension is that mutual funds, which are allowed to advertise, will now have to compete with hedge funds more directly.

But more than that the mutual fund industry says it’s more concerned about the standards hedge funds will be held to when advertising–or lack thereof.

While the mutual fund industry has uniform rules on how it can advertise performance figures the hedge fund industry does not, argues Washington- based Investment Company Institute which represents the mutual fund industry.

The ICI says its members abide by a number of strict rules to ensure that performance numbers presented are “calculated based on highly specific, standardized methodologies, so investors can make accurate comparisons among funds.”

It adds, “By contrast, no such rules exist for private funds. They are not required to use any standardized methodologies for calculating performance, and they often invest in securities that are relatively illiquid and difficult to value.”

The SEC is expected to announce investor safeguards which may include a system that ensures investors are indeed accredited before allowing them in on a private offering. It’s unclear if uniform performance standards will be among the investor safeguards.