Alex Wong/Getty ImagesA statement by Mary L. Schapiro, the S.E.C. chairwoman, left specifics of the hedge fund proposal unanswered.

The tight-lipped world of hedge funds is getting a license to shill.

A new proposal outlined on Wednesday by the Securities and Exchange Commission would remove a longtime restriction barring hedge funds from marketing themselves in public.

That would represent a big change. Currently, hedge funds must go through an onerous process before they can solicit potential buyers. It is also the latest data point in the evolution of the industry, which has seen its assets quadruple, to more than $2 trillion, since 2000.

Unlike their mutual fund brethren, hedge funds have long been prohibited from advertising in public forums like newspapers or televisions. Openly releasing information as basic as performance and assets was prohibited, the idea being that such complicated and risky investment opportunities should be pitched only to those who were deemed financially fit. (In this case, people with at least $1 million in liquid assets, a $200,000 annual income as an individual or a $300,000 annual income as a couple).

The move does not change the need for individuals to be accredited to invest with hedge funds. It merely allows hedge funds to pitch their services to a wider swath of people. The S.E.C. said that firms advertising their services must take “reasonable steps to verify that the purchasers of the securities are accredited investors,” but declined to specify what constitutes reasonable steps.

“I believe that the proposed rules fulfill Congress’s clear directive that issuers be given the ability to communicate freely to attract the capital they need, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings,” Mary L. Schapiro, the S.E.C. chairwoman, said in a statement.

But that was roughly where the revelations stopped; several specifics remain unanswered. For instance, the commission did not weigh in on what sort of content hedge funds could use to market themselves, a shortcoming that some worry could allow misleading ads aimed at vulnerable investors. The commission was also mum on what sort of advertising would be allowed – can a hedge fund rent the Goodyear blimp, or will newspapers be the upper limit of public exposure? Finally, few details emerged about how the proposal would mesh with similar restrictions at other regulatory bodies or with current state laws.

“There are no substantial proposals to address this increased vulnerability,” Luis A. Aguilar, an S.E.C. commissioner, said during a hearing on Wednesday.

The proposal will take months to wind through the regulatory process before it is finalized. It could change during that period, when the public will be allowed to submit comments.

Removing the restriction is part of a Congressional bill, called the Jump-start Our Business Start-ups Act, also called the JOBS Act. One provision of the bill reverses parts of the Securities Act of 1933, which prevented firms from marketing certain private offerings.

While industry insiders were quick to note the shortcomings of the proposal, some were more sanguine about its effect. The largest, most credible hedge funds already have large asset bases and gold-plated client rosters of pensions and endowments. There is little incentive for those firms to market more widely, some say. The effect is expected to be more broadly felt by smaller funds, which struggle to get the attention of the well-known players in the highly competitive industry.

S.E.C.’s fact sheet on eliminating the prohibition on advertising in certain offerings

Article source: http://dealbook.nytimes.com/2012/08/29/hedge-funds-rules-allow-secretive-enclave-to-open-up/?partner=rss&emc=rss