January 15, 2004

NASD Allows Related Performance Info in Sales Material

NEW YORK (HedgeWorld.com)--The National Association of Securities Dealers Inc. issued an interpretive letter to a partner at Davis, Polk & Wardwell, New York, that substantially liberalizes its position on use of performance data in hedge fund sales material, the position it took in an October letter to the Securities Industry Association.

The change was prompted by a letter sent to the NASD Dec. 1, 2003, by Davis Polk partner Yukako Kawata, on behalf of Credit Suisse First Boston. Ms. Kawata expressed concern about possible implications of the October SIA letter, which banned the use by NASD members of related performance information (defined as information about the performance of other accounts managed by the same investment adviser or portfolio manager who manages a particular hedge fund) in order to sell hedge fund products, even if the materials were prepared by non-members.

"In particular," said the NASD's response to Ms. Kawata, issued Dec. 30, "NASD staff recognizes that the presentation of related performance information with respect to an unregistered private fund (including an unregistered private hedge fund) that is excluded from the definition of 'investment company' under Section 3(c)(7) of the 1940 Act does not present the same investor protection concerns as the presentation of related performance information with respect to the sale of mutual fund shares. Accordingly, as a general matter, the NASD staff would not object if a member includes related performance information in sales material for Section 3(c)(7) funds, provided that the member ensures that all recipients of such sales material are 'qualified purchasers' under Section 2(a)(51) of the 1940 Act."

This response goes a good deal further than Ms. Kawata's question. She had asked only that the NASD staff specifically exclude private equity funds from the scope of that ban, because investors frequently and reasonably request information about a private equity fund managers' past performance as part of their due diligence. Such a fund has no performance history of its own prior to formation and won't have any meaningful history during the often-brief period that it remains open to investors, she had observed.

"They gave us the result that we were really hoping for, although it did surprise us a little bit," Ms. Kawata said Jan. 6, when asked about the NASD response. "We were very pleased with the result."

The response, signed by Thomas M. Selman, NASD senior vice president, said that the NASD staff recognizes Ms. Kawata's concerns and that the October letter was written out of specific concern to exclude related performance data from sales materials for registered hedge funds or funds of funds that might be targeted to retail investors. Unregistered private funds, including unregistered private hedge funds do not present the same concerns, Mr. Selman wrote.

CFaille@HedgeWorld.com

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