SEC Lifts Advertising Ban on Hedge Funds, Equity Firms

The investment industry might welcome the Securities and Exchange Commission's decision to allow private securities firms to advertise, but consumer and regulatory groups criticize the lack of investor protections.

In case you ever wondered why you’ve never seen an ad for a hedge fund or private equity firm, there’s a reason for that—they have been banned for more than eight decades.

Or, well, they had been.

I am disappointed and saddened by the reckless adoption [of the rule]. I want to encourage you to fight on behalf of investors. They will need you now more than ever.

The Securities and Exchange Commission voted on Wednesday to change the longstanding rule, a move that has drawn mixed reactions from associations in the financial industry. More details:

Details on the Change

The SEC voted to lift a ban on private securities, which include hedge funds and private equity funds, advertising to the public.

The move came in reaction to passage of the 2012 Jumpstart Our Business Startups  (JOBS) Act, which relaxes regulations on companies looking to raise money from the public by methods such as crowdsourcing. The law’s implementation has faced challenges from the SEC.

Lifting the solicitation ban allows financial firms such as hedge funds to advertise on numerous mediums, including television. (However, as hedge funds often focus on exclusivity, you may not see a TV ad for one anytime soon.)

The SEC’s vote on the measure was not unanimous;  one Democratic commissioner, Luis Aguilar, argued it did not include protections for investors. “I am disappointed and saddened by the reckless adoption [of the rule], ” Reuters quoted Aguilar as saying. “I want to encourage you to fight on behalf of investors. They will need you now more than ever.”

The change will go into effect 60 days after the vote is officially added to the Federal Register, Reuters notes. However, it remains unclear who in the industry will actually take advantage of the new ability to advertise.

Groups React

Reaction to the move was mixed, with groups representing different sectors of the financial industry either wildly in favor of it or questioning the lack of investor protections. Among the reactions:

The Managed Funds Association, which represents the investment industry: “MFA supports the elimination of the prohibition.… Even before Congress enacted the JOBS Act, MFA supported eliminating obsolete restrictions on private fund communications while preserving the restrictions on who may invest in a hedge fund. We look forward to reviewing the text of the final rules. We also urge the CFTC [Commodity Futures Trading Commission] to harmonize its regulations with the JOBS Act in order to allow for commodity pool operators of privately-offered pools to operate under the new SEC rule.”

The North American Securities Administrators Association, which represents state, provincial, and territorial regulators: “The decision to lift the ban without simultaneous adoption of appropriate limits, guidance and investor protections for the most common product leading to enforcement actions by state securities regulators underscores the prospect that investors and issuers alike will be exposed to an indeterminate gap in protection. We therefore strongly urge the SEC to move as expeditiously as possible to adopt the proposed amendments to Regulation D and Form D.”

The Consumer Federation of America, an advocacy group that favors investor protection: “While the final rule includes some modest improvements on verification of accredited investor status, even these actions appear to be completely inadequate. They do not, for example, appear to clearly preclude practices, such as a reliance on self-certification for verification that would invite liar’s loan practices into the Reg D market.”



Ernie Smith

By Ernie Smith

Ernie Smith is a former senior editor for Associations Now. MORE

Got an article tip for us? Contact us and let us know!