A Bill to peek at secret world of hedge funds

Written by New York Times | Updated: Mar 31 2012, 05:53am hrs
Investors may soon get a keyhole view into the cloistered world of hedge funds and private equity firms, thanks to a little-known provision in a new Bill that would relax rules on how investment firms can market themselves to the public.

The Bill, called the Jump-start Our Business Start-ups Act (JOBS Act), would reverse parts of a nearly 80-year-old regulation preventing these funds from discussing even the most basic items, like performance or investment strategy, with outsiders. The rule, part of the Securities Act of 1933, gave an already secretive industry the regulatory cover to remain silent.

Its a dramatic change from where the industry is, said Tripp Kyle, a partner at the public relations firm Brunswick Group, which works with some of the largest investment firms in the world. I think it presents a real opportunity for firms to evolve their mind-set from what they cant do to what they can and perhaps should be doing.

The bipartisan Bill, which President Obama is expected to sign next month, enables hedge funds and private equity firms to solicit investors directly, instead of through third parties, which typically vet the firms before introducing them to clients. While the Bill could ease the path to fundraising, it could also introduce new risks to small investors unaccustomed to the complex and risky strategies the firms deploy.

If you have a blizzard of advertising, its going to be much more difficult for people to do due diligence, said Philip H Harris, a partner at the law firm Skadden, Arps, Slate, Meagher & Flom.

Still, some say a new advertising climate would change little about the way individuals look at so-called alternative investments. Its always been a buyer beware scenario, said Irwin Latner, a partner at the law firm Herrick, Feinstein.

Whether they like it or not, hedge funds and private equity firms have increasingly been in the spotlight, facing unwanted government scrutiny and their own investors clamoring for more transparency. In response, the industry has been rapidly institutionalising, tossing aside its freewheeling culture for large operations with top-notch compliance teams.

The final rules would be written by the SEC within 90 days of the Bills signing. A lot could change through the process, including just how broadly the hedge funds can market themselves. But there is little argument in the industry that the move is a much-needed update to the current regulations.