Lawmakers Challenge Hedge Fund Ad Rules

Extra paperwork, 15-day waiting period said to be too burdensome and a delay on free speech

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Two lawmakers are warning Securities and Exchange Commission Chairwoman Mary Jo White that the agency must withdraw several amendments governing the newly allowed hedge fund ads or run afoul of the law.

Rep. Scott Garrett, R-N.J.In a July 22 letter to SEC Chairwoman Mary Jo White, Rep. Patrick McHenry, R-N.C., chairman of the Financial Services Subcommittee on Oversight and Investigations, and Rep. Scott Garrett, R-N.J., chairman of the Financial Services Subcommittee on Capital Markets, take issue with Proposed Rule 503, which they say “requires private issuers to file a wildly expanded Form D 15 days before” they start advertising.

"Congress did not say that the commission can delay free speech for 15 days," they wrote.

The lawmakers state that although they support the rule lifting the ban on hedge fund advertising, they request in their letter that the SEC withdraw Proposed Rule 503 “in order to uphold the intent of the law.”

Congress "specifically required the commission lift the ban on general solicitation for those Rule 506 offerings that solely target accredited investors and qualified institutional buyers," they wrote, arguing that the waiting period is in effect a ban, and that completing the paperwork requires "hiring qualified counsel" and can stretch the wait far longer than 15 days.

They called the pre-filing requirement "yet another unnecessary burden that prevents small businesses from accessing capital that they need to grow and create jobs.”

Garrett said in the letter that the SEC’s “proposed amendments to Form D filings — over the objections of two commissioners — are not called for under Section 201 of the JOBS Act.”

But A. Heath Abshure, president of the North American Securities Administrators Association President and Arkansas Securities Commissioner, says that McHenry and Garrett "fail to appreciate the need to balance the needs of business with the needs of investors" by asking the SEC to withdraw proposed Rule 503. "Such a failure would result in an unregulated ‘wild west’ market in which their constituents will lose money. Ultimately, their constituents will lose confidence in these new markets, stop investing, and look to Reps. McHenry and Garrett for answers. We encourage the SEC to resist this shortsighted political pressure and  move as expeditiously as possible to adopt the proposed investor protection amendments to Regulation D and Form D."

The lawmakers also took issue with the requirement under proposed Rule 510T to file all ads with the SEC for the first two years the rule is in effect. "Samples of data should clearly suffice" for market evaluation, they said, adding that for compliance purposes, the commission could gather the ads itself since they will be public.

They also criticized the mandate of "canned" disclosures on ads under Proposed Rule 509, saying that "in this modern Internet age ... investors generally ignore standard disclosures, either because of their overuse or limited utility."

These amendments, they wrote, “would likely increase regulatory burdens on small businesses seeking to conduct Regulation D offerings and thereby undermine the fundamental goals of the JOBS Act.”

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Check out Surprise! Not Every Hedgie Loves the Lifted Ad Ban on ThinkAdvisor.

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