Although the Laven US team is typically a huge fan of The Economist, we have to take issue with their recent piece dealing with rules for advertising of hedge funds. (“Bull Marketing”, The Economist, June 8th 2013.)
The Economist article discusses the impact that the 2012 JOBS Act may have on advertising for hedge funds in the US and cites a current ban on advertising which should be lifted once the SEC completes its rulemaking mandated by the legislation passed by Congress over a year ago.
However, the article misses a very important point about the current status of marketing rules in the US.
Historically, and strictly speaking, there has actually been no ban on advertising of hedge fund managers or their funds.
“Advertising” and “soliciting”, while very much related, are treated separately under existing rules. Funds are in fact prohibited from broadly soliciting investors under long-standing private placement rules. The JOBS Act, assuming the SEC actually does get around to its rule-making mandate, will modify those rules and allow Funds (and US businesses in general) to broadly solicit to a wider audience. But that audience will still need to be mostly restricted to “accredited investors” and issuers will need to demonstrate a good faith basis for believing that. Comments by the SEC indicate that lists of targeted investors maintained by broker-dealers, for example, will be given heavy deference when determining appropriate audience. But until the rules are written, we really do not know exactly how effective the JOBS Act will be for Funds as an asset raising vehicle permitting broader solicitation of investors.
More importantly for fund managers, the “ban” on advertising was not so much of a ban as it was a by-product of the Investment Advisors Act of 1940 that exempted fund managers from registration and oversight by the SEC, so long as, among other things, the manager refrained from holding themselves out as providing investment advisor services. This “holding oneself out as an advisor” standard and the desire to avoid regulation left fund managers with a de facto ban on advertising for their servicesWith the advent of Dodd-Frank Act, however, all that changed. Dodd-Frank amendments to the ’40 Act require most managers to register based on AUM, regardless of whether they are holding themselves out as advisors. Thus the practical reason for not advertising has been rendered obsolete. While advertising activity is not in the DNA of most managers, some media savvy managers we know have begun to take full advantage of this new opportunity – hitting the media and lecture circuit, developing a web presence, and publically letting the world know that they are in the business of managing money. That’s all new and permissible right now and has nothing to do with JOBS Act.
While advertising for those managers still has to follow very strict guidelines that have developed over time, most good CCOs can navigate through this easily and make sure that managers are staying well within the existing advertising rules.
