US hedge fund industry pushing derivatives regulator to lift ad ban

Sarah N. Lynch
Wednesday, 8 Jan 2014 | 3:28 PM ET

WASHINGTON, Jan 8 (Reuters) - The U.S. hedge fund industry is making a fresh lobbying push to convince the federal derivatives regulator to remove a hurdle that could prevent private funds from advertising to new investors through television, the Internet or other channels.

The concern is that the Commodity Futures Trading Commission has outdated rules on its books that conflict with a 2012 law that lifted an 80-year-old ad ban for hedge funds and other private investment vehicles.

While the Securities and Exchange Commission revamped its rules in July to formally lift the ban, funds are concerned that the CFTC has not updated a parallel rule that prohibits the private funds it directly oversees from advertising to the general public.

Since hedge fund portfolios often include at least some derivatives trading, industry experts warn that fund sponsors may be reluctant to take advantage of the SEC's new relaxed advertising rules for fear of running afoul of the CFTC's regulations.

"I have definitely heard from members who are concerned about this and would like to see the CFTC update the language," said Matt Nevins, the managing director and associate general counsel for the asset management group of the Securities Industry and Financial Markets Association (SIFMA).

"It seems like a no-brainer. This is really language that is very clearly tied to the SEC's standards. The SEC has updated their standards, so why wouldn't the CFTC go and match ... what the SEC has done?"

The SEC's new advertising rules stem from the Jumpstart Our Business Startups (JOBS) Act, which eased federal securities regulations to help small businesses raise capital and go public.

But while the law requires the SEC to permit advertising private deals, it does not require the CFTC to take action.

The hedge fund industry's trade group, the Managed Funds Association, petitioned the CFTC to change its rules in 2012.

The MFA met with CFTC officials at the end of last year about the matter but the agency's outgoing chairman, Gary Gensler, indicated there were more pressing matters on the agenda, a person familiar with the matter said.

Now, the industry and other interested stakeholders are pinning their hopes for action on either Acting Chairman Mark Wetjen or on Timothy Massad, who was nominated as CFTC chairman by President Barack Obama and is awaiting U.S. Senate confirmation.

"I believe the CFTC should move forward expeditiously and harmonize its rules so that market participants may take advantage of the change in the law," said New Jersey Congressman Scott Garrett, a senior Republican on the House Financial Services Committee. "I hope the new acting chairman at the CFTC can work more constructively and follow the law better than his predecessor."

A CFTC spokesman declined to comment on the status of the MFA's rulemaking petition.


Hedge funds, private equity funds and other firms were officially free to begin broadly advertising certain private deals under the SEC's rules on Sept. 23, 2013.

The funds are allowed to raise an unlimited amount of money through private stock deals and avoid costly registration requirements, as long as the deals are only sold to sophisticated investors.

So far, the advertising has been slow to take off. In addition to the lack of synchronization between the SEC and CFTC rules, the industry is developing controls to ensure that only sophisticated investors buy into the deals.

There also is lingering uncertainty as the SEC considers a second proposal that would expand disclosure requirements for funds that advertise.

Since the rules kicked in, SEC filing data shows that hedge funds filed about 600 initial offerings to raise about $18 billion. Of that amount, the funds indicated in the filings that $1.4 billion could potentially be raised by taking advantage of the new advertising rules.

By comparison, other kinds of private funds such as private equity and venture capital have filed paperwork since September to raise $90 billion through 1,100 offerings. Of that amount, $1.8 billion could potentially be raised under the new JOBS Act provision.


To smooth the way for a larger advertising takeoff, fund groups want the CFTC to lift the advertising ban from two sets of regulations that private commodity pool fund sponsors often rely upon to operate.

One rule allows fund operators to avoid costly CFTC registration if they only trade a minimal amount of derivatives; the other relaxes some of the more onerous disclosure requirements that funds are typically required to make if they meet certain criteria.

In order to qualify for such regulatory relief, the funds that rely on these exemptions must agree not to broadly advertise their private deals.

Industry experts say that if these funds take advantage of the new SEC rules permitting advertising, then they risk being disqualified from using the CFTC's regulatory exemptions.

Although the CFTC adopted rules in August to sync up many of its fund regulations with the SEC's, the rules did not address the JOBS Act. In its final harmonization rule, the CFTC said the staff would "evaluate the issue and make recommendations to the commission for future action."

"This has simply not risen to the level of priority that we would like it to be, but 1/8the CFTC has 3/8 understandably been constrained in managing a lot of very difficult time frames," said Sean Davy, a managing director with SIFMA's capital markets group.

"We'd like it now to rise to the level of priority now that the rule is in effect and the marketplace is developing and starting to use general solicitation."