|| MFA executive vice president and managing director D. Brooke Harlow|
By D. Brooke Harlow
Many in the hedge fund industry will look back on 2013 as a year of important change that ushered in a new — overdue — era of communication and transparency between funds and investors, though that era has yet to begin. Throughout the year leaders in the industry eagerly anticipated action by the Securities and Exchange Commission to finalize a set of rules mandated by the Jumpstart Our Business Startups Act (known as the JOBS Act) to remove the ban on general solicitation and advertising in certain offerings by private funds.
For years the general solicitation ban left fund managers at a clear disadvantage, unable to discuss — or defend — their funds in public for fear of regulators interpreting their words as an advertisement for new investors. These antiquated regulations created a communications vacuum around the industry, allowing for dangerous misconceptions to take root and go unchallenged.
Removal of the advertising ban led many observers to speculate about when we might see the first wave of advertisements from hedge funds on interstate billboards or as Super Bowl commercials. Anyone holding their breath for a flurry of hedge fund ads running alongside holiday commercials as we close out the year might be disappointed, but commentators attributing managers’ lack of engagement in public communication to widespread disinterest or fear of tarnishing their image with investors are ill-informed.
While the new SEC rules removed restrictions for many funds, limitations remain for others. Many SEC-registered managers also claim a registration exemption from the Commodity Futures Trading Commission, and to qualify for the exemption managers are forbidden from marketing interests in commodity pools to the public in the U.S. The CFTC’s rule has not yet been harmonized with the changes the SEC has made, leaving many managers in a regulatory limbo — able to take advantage of the SEC’s rule change but unwilling to endanger their CFTC exemption.
Further, as the SEC finalized rules to roll back the ban on general solicitation, the commission simultaneously proposed rules that would seek to govern those solicitation activities — reports managers must file, disclosures that should be included on solicitation materials and penalties for violating these proposed requirements. Managers must also make extensive disclosures through form ADV and additionally, for larger managers, file quarterly reports through form PF. The proposed rules have not been made final, and the SEC has given no indication when it will act to do so. In effect, managers have been given permission to drive on the highway for the first time but with very limited information on the speed limit or the rules of the road.
The watchword for the industry with regard to general solicitation is uncertainty. Should that uncertainty be resolved, it is more likely that many managers will take advantage of their new ability to communicate freely. One of the areas where we are likely to first observe any change is to fund manager websites. In this digital age, most companies find they need a robust, informative and engaging web presence to thrive. Prior to the SEC rulemaking removing the advertising ban, funds were unable to use the web to tell their story. In fact, many websites were merely landing pages with limited content — often just a login for investors and a contact number for information. Removing the ban allows funds to enhance their web presence to engage and inform visitors, including investors, the media and the public, to better articulate their philosophy, performance history and approach to fund governance.
Fund managers are also likely to take greater advantage of public speaking opportunities. Previously, managers had to walk a tightrope when speaking in public to ensure their words could not be interpreted as a solicitation for investment capital. Once they obtain greater certainty of the rules, managers might engage more frequently and at a deeper level, sharing their view of current trends and issues in financial markets. This will also serve to inform the public about how the industry operates and benefits individuals who might not always understand how they are connected to hedge funds.
For too long, the hedge fund industry was at a competitive disadvantage in the communications landscape. Recent regulatory changes will help the industry evolve to provide a greater level of transparency and information sharing with investors and the public. While more regulatory work is needed, the rules written in 2013 could help ensure that next year is one in which hedge funds are able to seize new opportunities to grow and educate the public – to the benefit of everyone involved.
D. Brooke Harlow is executive vice president and managing director of the Managed Funds Association.