WASHINGTON (HedgeWorld.com)–NASD announced that it has censured and fined Altegris Investments Inc., La Jolla, Calif., US$175,000 for marketing hedge funds to investors without fully explaining the associated risks.

Alternatives investment consultant Altegris consented to these actions but neither admitted nor denied the charges by NASD.

The firm’s chief compliance officer, Robert J. Amedeo, also was censured for failure to supervise. He was fined jointly and severally US$20,000.

“The NASD acknowledged that we delivered offering documents to investors that may have described some or all of the risks associated with hedge fund investing,” said Jon Sundt, president of Altegris, Tuesday. “However, they are requiring that each piece of sales literature independently comply with their risk disclosure standards.”

According to Mary L. Schapiro, NASD vice-chairman and president of regulatory oversight, the censure and fine are part of NASD’s broader review of hedge fund sales practices Previous HedgeWorld Story. They reinforce “NASD’s commitment to ensuring adherence to the highest standards of good faith and fair dealing,” she said in a statement.

Mr. Amedeo, an attorney active in the alternative investments field for 25 years, said he understands that hedge funds are coming under increasing scrutiny, but he said he is “bullish” on the market for such funds. As to the instant censure and fine, he said, “The gravamen of their interest in this is that they’re requiring that all risks must be disclosed within the four corners of each marketing piece.”

He said that he had mistakenly assumed that the incorporation by reference of disclosures to the risks in other documents, in particular in the offering memorandum, would suffice. “In every case,” of which the NASD has complained, “an offering memorandum was sent either before or with the sales materials.”

Messrs. Sundt and Amedeo both emphasized that many other hedge fund professionals will want to read this NASD action carefully and that it could prompt many to reconsider their current marketing and advertising policies.

A lawyer familiar with the hedge fund industry, Patricia Gillman of Schiff, Hardin & Waite, Chicago, expressed surprise at NASD’s focus upon Altegris and Mr. Amedeo. Ms. Gillman said she has known Mr. Amedeo for 20 years. “This guy is very careful,” she said. She also said that there can be a lot of sloppiness when some hedge fund managers draft marketing materials.

What is key, according to Ms. Gillman, is that the NASD is sending a clear message to hedge fund managers and marketers that each document may be examined separate from the offering memorandum. She predicts that although very few hedge funds are NASD members or registered broker/dealers like Altegris similar cases will crop up.

NASD found that between October 2002 and February 2003, Altegris distributed 26 different pieces of hedge fund sales material to its customers. Two of the literature pieces in particular were referenced in NASD’s public statement on the matter: research reports on specific hedge funds written by a registered representative at another member firm.

“These research reports contained exaggerated and unwarranted statements and claims,” the NASD statement said. One of them described a specific fund as “an ideal fund for conservative investors,” although the offering memorandum indicated that the fund had a limited operating history, was speculative and involved a high degree of risk. The other report made a projection of future results: “Is he likely to continue to give us 12% to 14% years over the next four to five years? In my opinion, I think it is likely he will.” NASD described that projection as unwarranted. That second research report also stated that the fund in question is “subject to NASD inspection” and that “for some, this layer of regulatory oversight is comforting.”

Susan Barreto contributed to this story.

CFaille@HedgeWorld.com