Mutual Funds Group Urges Limits on Hedge Fund Advertising

Mutual funds are pushing for limits on hedge fund advertising permitted under the Jumpstart Our Business Startups Act, saying such ads may hurt investors and damage the entire fund industry.

The law’s repeal of a ban on the marketing of private offerings to the general public may result in misleading advertisements for hedge funds, Robert Grohowski, a senior counsel at the Washington-based Investment Company Institute, wrote in a blog posting yesterday. The group represents more than 13,000 funds with over $13 trillion in assets.

“Most of the JOBS Act has little to do with the fund industry, but one provision, the repeal of a long-standing ban on advertising private securities offerings, has the potential to open the door to misleading ads for private funds, such as hedge funds,” Grohowski said.

In the past, securities laws generally required firms to market non-publicly traded securities only to so-called accredited investors with whom they’ve had an existing relationship. That generally meant individuals with assets of greater than $1 million, excluding a primary residence, or those earning more than $200,000 annually. The solicitation rules were designed to protect the average investor from deals with less disclosure and higher risks.

In a comment letter to the Securities and Exchange Commission last week, the ICI urged regulators to impose restrictions on private fund advertising that are at least as extensive as those for mutual funds. The group also suggested a ban on advertising hedge funds’ performance until rules are established governing how to calculate the returns, according to the letter, which is posted on the ICI’s website.

BlackRock Differs

Not all fund companies share the ICI’s view. BlackRock, the world’s largest asset manager with $3.68 trillion in assets, supports the removal of the ban on general advertising, according to a letter the firm sent to the SEC last month.

“We believe that this prohibition has unnecessarily limited the methods by which issuers can reach sophisticated investors,” Barbara Novick, a co-founder and vice chairman at the firm, said in the letter. “Investor protection concerns are adequately addressed by existing regulatory requirements,” Novick said.

BlackRock manages more than $110 billion of alternative assets globally, including through offerings of private funds such as hedge funds, private-equity funds and funds of funds.

While private funds can now market to any investor, they still can only sell to accredited investors, Grohowski said in his posting.

The ICI’s position was reported earlier yesterday by Dow Jones.

The JOBS Act, which was signed by President Barack Obama April 5, also permits companies to sell equity through crowdfunding websites and eases funding rules for closely held firms and newly public companies.

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