Hedge funds continue to celebrate last month’s Securities and Exchange Commission vote to lift the ban on general solicitation, with the SEC’s rule amendment coming into effect on September 23, 2013. But before they launch marketing campaigns, fund managers should make sure they are not unintentionally marketing to European investors, which would force them to comply with arduous reporting requirements under the AIFMD.
Since 1933 fund managers have been prohibited from advertising to the public. The rule was to protect unsophisticated investors from risky and barely regulated investments, but in the past several years many have argued that the rule is outdated and does not reflect today’s modern world where information is freely exchanged. Last year the Jumpstart Our Business Startups (JOBS) Act—aimed at making it easier for private issuers, including hedge funds, private equity funds and start-up companies, to raise funds—mandated that the SEC lift the ban, and on July 10 the SEC voted to do so. The ban on advertising will officially end 60 days after the amended rule is published in the Federal Register.
[For more on the JOBS Act read: The JOBS Act: Hedge Funds, Start Your Engines! ]
Under the old rule, hedge funds and other private fund managers have been media shy, out of fear that their comments would be interpreted as advertising. Many hedge funds have no internet presence, or limit website access to current investors in order to avoid a claim that they are marketing to the public.
Today hedge funds and other private fund managers are thinking about the ways they can market their funds. Hedge fund managers can now participate in media interviews, appear at conferences and put information on websites.
However, marketing to European investors will bring US and other non-EU fund managers under the reporting requirements of the Alternative Investment Fund Managers Directive (AIFMD), which went into effect on July 22. The AIFMD is a European directive aimed at harmonizing supervision of fund managers. Under the AIFMD, if non-EU fund managers market to investors in EU Member States, they must comply with certain transparency requirements, which include annual reporting, disclosure to investors, and reporting to the regulators in each Member State where they are marketing. It is the mere act of marketing that triggers application of AIFMD, not an actual investment by a European investor.
Under the AIFMD, “marketing” means a direct or indirect offering or placement at the initiative of the fund manager or on behalf of the fund manager of shares of a fund.
As the AIFMD has developed over the past several months, hedge funds and other fund managers have been contemplating what, exactly, constitutes marketing and how a hedge fund can avoid “marketing” under the AIFMD.
Because US hedge funds have not marketed in the traditional sense, the questions have been mostly focused on the types of documents shown to potential investors, attendance at industry events, and capital introduction relationships. With the SEC vote last month, however, fund managers can now take part in marketing that reaches scores of potential investors. Accordingly, fund managers now need to determine whether a speaking engagement or a media interview will constitute marketing to European investors, and whether a website that reaches Europeans will constitute marketing. Fund managers need to look to individual Member States to understand what actions constitute marketing in each Member State and should carefully evaluate the marketing practices for each of their funds to ensure that only funds intended for AIFMD regulation are marketed to European investors.
Before the media blitz begins, fund managers need to take a moment to ensure they are not needlessly exposing themselves to additional regulatory requirements around the world.
Jeanette Turner is Managing Director and General Counsel at Advise Technologies, LLC. With more than 10 years of experience, she specializes in regulatory compliance for registered investment advisers and private fund managers.