Friday, August 03, 2007

Hedge Fund Advertising Ban to be Tested

Todays Comment: While the stock markets remain nervous, they are reacting positively to good corporate results, which we see as a good sign. However, the US real estate crisis is likely to weigh on the markets in the coming days and weeks. Nevertheless, we think now is a good time to buy favorably valued stocks, so we have increased the equity component of our investment strategy. In the US, labor market data for July are due out today. The second round of purchasing manager data is also being published in Europe and the US.


The long-standing rule against hedge funds advertising is facing its first significant test, as the industry awaits a ruling on whether a hedge fund manager broke the law by e-mailing performance data in response to a query sent to his website.

William Galvin, the Massachusetts securities regulator, in January lodged an administrative complaint against the manager, Phillip Goldstein. The hearing was in April and a decision is expected imminently.

Mr Goldstein last year derailed, through court action, the Securities and Exchange Commission's attempt to force hedge funds to register with it. He told the Financial Times that he plans to make the advertising complaint against him a freedom of speech issue.

He expects the ruling to go against him and he has already sued the Massachusetts regulator, saying he has the right under the First Amendment to post such data on his website. The case will go to court as soon as the administrative ruling is announced.

Mr Goldstein said: "The State cannot bar truthful communication . . . I have never heard of a successful case against a hedge fund, where there was no harm done. If I said you can invest in our fund with no risk, then we should have been prosecuted, but someone asks me what my performance is, and I can't say?"

Hedge funds are not specifically proscribed from advertising, but under US law, only registered investment funds, such as mutual funds, can solicit money from the public.

Hedge funds' widely differing interpretations of this rule have meant that some speak and write freely about their funds and others refuse to reveal anything at all for fear that it be construed as a solicitation.

The law dates from the 1930s private placement rules and most lawyers believe it should be updated.

Paul Roth, of law firm Schulte Roth and Zabel, said: "The SEC ought to make up its mind and decide who can invest in hedge funds, and those limitations should be the criteria rather than the issue about who can receive information."

In 2003, SEC staff recommended that the prohibition on advertising and solicitation be abolished, saying that the rule was unnecessary so long as the restrictions on who could invest remained.

At present only qualified individuals – usually those with $1m or more – can invest in hedge funds. However, the recommendation has not been acted on.

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