At long last, an arcane S.E.C. rule that has impeded PR people and reporters for some time appears to be on its way out. The rule, known as 502(c) of Regulation D, prevents anyone raising capital for a private investment fund, such as a hedge fund or private equity vehicle, to market or advertise to “non-qualified” investors, basically people with less than $1 million in net worth.
In addition to a ban on traditional advertising, the rule means hedge fund managers have to be extremely careful not to actively solicit investors when speaking to the media. Most lawyers, who are generally conservative when dealing with S.E.C. rules, interpret this to mean that managers can’t discuss performance with the press and are forced to be generally cagey about their operations. In part, this has led to a hedge fund industry that has been described as “secretive” or “in the shadows.”
If passed as part of the Obama Administration’s Jobs Act, which seems likely in early April, the S.E.C. would have 90 days to implement the changes. The Managed Funds Association, the hedge fund industry’s primary trade association, recently came out in favor of this change in a letter to the S.E.C. On the other side is the Investment Company Institute, the mutual fund and ETF industry’s primary trade association. In a February letter, they urged the S.E.C. not to change the rule, which they said would harm investors and could lead to scams that target unsophisticated investors.
It will be interesting to see how the S.E.C. implements the law. However it comes out seems likely though to change the way hedge funds and private equity firms communicate with the media and the public at large. Here’s Robert Kiggins, a lawyer at McCarthy Fingar, with his views on the law in Hedge Funds Review:
“This is a potential game changer,” says Robert Kiggins, counsel at the law firm McCarthy Fingar. “Subject to the SEC rule-making, this means hedge funds can promote and market their products through mass media channels, from television adverts to newspapers articles and websites.”
– Zach Kouwe