Henrietta Hirst, Managing Director of Parex PR
New rules under the proposed JOBS Act are expected to bring dramatic changes to the marketing of hedge funds in the United States.
When President Obama signed the JOBS Act in April this year he brought the hedge fund industry one step closer to a relaxation on the rules of how managers market their funds. Initially designed to help companies looking to raise capital, the rather clumsily named, ‘Jumpstart Our Business Startups’ Act is a combination of legislation which the US government hopes will revive growth in the US economy.
There has been strong opposition from all sides over some aspects of the legislation. Crowdfunding and investor protection along with the speed in which the six-part Act is to be implemented have been singled out as the most controversial. Nevertheless, in an era of ever stricter rules and regulations in the financial services industry, the general consensus is that the lifting of the rule on “general solicitation” and “general advertising” would clearly be an improvement.
Currently, hedge fund managers are not permitted any form of marketing or advertising: they are not allowed to publish articles in newspapers or magazines even to the extent that any published errors cannot be corrected. And they cannot broadcast over the TV or radio.
Should the new law come into force as it stands today (and at time of writing the timing is still unknown), it will direct the US Securities and Exchange Commission (SEC) to allow hedge funds to advertise more openly and to more investors as long as managers take “reasonable steps” to verify their investors as “accredited investors”. Although the SEC has issued guidelines, it has not specified the reasonable steps as the aim is to “maximise flexibility and reduce potential compliance costs for investors”.
This means that the onus is on the manager to verify the accredited status of any potential investor. This has caused some concern among the hedge fund community although the high minimum investment that many funds require could help in the accreditation process. Ultimately, funds would be wise to review and possibly revise their investor screening procedures on a fund by fund basis.
Corresponding to the overall aim of the Act, the new rules are looking to aid the smaller and medium-sized managers (many of the larger managers already have sophisticated marketing methods) and these proposals should liberate managers in terms of industry discussion and engagement with the media, as well as allowing full participation in industry conferences and in the public arena. The new rules would also give managers greater freedom in approaching prospective investors; under the old rules, managers were restricted to approaching only current investors.
Coupled with this is another significant change for hedge fund managers. The JOBS Act plans to raise the threshold for the number of permissible investors before registration is required from 499 to 1999 (although the 35 person limit on investors that are not accredited investors will not been increased). This would allow funds to remain unregistered under the Securities Exchange Act while they grow their assets.
A Profound Shift Ahead
The proposed rules herald the beginning of a profound shift in the industry in the US and also Europe. Competition for AUM is intense, and with most inflows finding their way to the larger hedge funds, those hedge funds with US$100m to US$1bn should see this as an opportunity to promote themselves. As long as they comply with all other private placement rules, European hedge fund managers should have plenty of opportunities to compete for assets.
For managers who have had to watch every word so as not to flout regulations, these are exciting developments that have the potential to radically transform the marketing landscape for hedge funds. Hedge fund managers would be able to use technology to connect with current and potential investors. They would be allowed to maintain live websites with extensive information including the publication of up-to-date performance figures, and take advantage of different advertising methods including online marketing of their funds and the use of social media.
Managers must tread carefully however. Whilst there can be no doubt these rules should benefit the industry as a whole, the freedom to communicate presents the potential for structural and practical problems. Most hedge funds do not have Chief Marketing Officers or marketing functions in the traditional sense, or even any experience of publicity (apart from the threat of bad press). And similarly because many marketing organisations have no experience of US hedge funds there is a strong disconnect between the two industries. With so much to learn on both sides, managers need to take expert advice before launching themselves into the public domain.
One as yet unanswered question is how lifting the ban on advertising rules would fit with the plethora of other regulations that compliance officers have to deal with, both federal and state. They are already swamped with complying with Dodd Frank, the forthcoming Foreign Account Tax Compliance Act (FATCA) and other regulations coming down the pipe. These other restrictions on hedge funds all need to be understood and complied with.
Many US managers are also nervous about the transparency issue and the lack of privacy. There may well be a handful of managers who wish to see their names on the billboards, but the reality is that any advances in marketing practices would be incremental.
It remains to be seen whether the JOBS Act will help boost economic recovery but without a doubt it would be good news for the US hedge fund industry. Broadening the target markets and increasing competition is inevitable, but crucially, the JOBS ACT should enable managers to finally step out of the shadows.