SEC Provides Guidance on When the Bad Actor Rule Disqualifies Hedge Fund Managers from Generally Soliciting or Advertising

In July 2013, the SEC adopted final rules under the JOBS Act that permit hedge fund managers to generally solicit and advertise so long as (1) the manager reasonably believes that relevant investors are accredited, and (2) the principals of the management company and certain other persons are not “bad actors” as generally defined in the rules.  See “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  Contrary to expectations in some quarters, the volume of hedge fund advertising following the relaxation of the ban on general solicitation and advertising has been modest.  See, e.g., “Seward & Kissel Study of 2013 Hedge Fund Launches Identifies Trends in Fees, Liquidity, Lockups, Structuring and Seed Investing,” Hedge Fund Law Report, Vol. 7, No. 8 (Feb. 28, 2014).  The emerging industry consensus appears to be that the JOBS Act will make accomplished managers less reluctant to speak at conferences and otherwise present in public, but will not result in a material amount of retail advertising by managers.  If anything, traditional advertising by a manager may indicate that the manager is on the wrong side of the adverse selection divide, and, in that sense, may backfire.  In any case, even for managers contemplating the “middle road” of less guarded public pronouncements, the bad actor disqualification provisions are complex in application because of the expansiveness with which the SEC structured the provisions.  Recognizing the complexity – and endeavoring to mitigate it – the SEC has issued, starting in December 2013, a series of bad actor disqualification Compliance and Disclosure Interpretations (CDIs).  This article synthesizes the guidance from the CDIs with the most direct application to hedge fund managers.  See also “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).

To read the full article

Continue reading your article with a HFLR subscription.