Sep 11, 2014 | News

Hedge Fund Advertising Ban – CFTC Eases Restrictions

Commodity regulators in the U.S. have made it easier for hedge funds and other firms to raise capital by publicly advertising stakes in their funds.

As of Tuesday, September 9th, the CFTC’s restrictions became more in line with similar rules set up by the SEC.

Last year, the SEC lifted the 80 year old advertising ban on hedge funds and other firms that raise capital through private placements, a requirement of the 2012 JOBS Act.   Most hedge funds could not take advantage of the eased advertising restrictions set forth by the SEC because of the CFTC rules that still applied to funds that engaged in derivatives trading.  This was the result of more than a year of lobbying from the hedge fund industry.

Regulators had felt in the past that the advertising ban was justified, arguing that it was unsuitable to pitch mom and pop types of investors on private placements due to their significant risk.   Per the JOBS Act, Congress argues that it shouldn’t matter who views the advertisements as along as the private offerings are only sold to wealthy individuals and institutions.

Hedge Funds will still have to file notice with the CFTC that they plan to advertise.

However, with the ease on advertising restrictions by the SEC and the CFTC comes higher scrutiny from both regulatory agencies.  The SEC has increased its examination staff significantly since 2012 and expanded it’s focus as well.  The focus of their exams include, but are not limited to:

  • Marketing Materials and the approach used to solicit investors
  • Allocation of investment opportunities among the funds
  • Transactions with related persons and fee/expense allocations
  • Custody of client asset Valuation

The SEC has no issues with publicizing compliance failures that include individuals, not just the firm as a whole.   We recommend making sure your firm’s compliance program is always ready for an SEC exam by identifying weaknesses on an ongoing basis.