Despite all the noise and complaining, I'm having a hard time recognizing the real downside of allowing advertising by certain private investments like hedge funds.
It is completely understandable – and even predictable – that the Investment Company Institute would be protesting last week's proposed ruling by the Securities and Exchange Commission.
In response to the SEC's decision to put the issue of private investment advertising out for public comment, ICI chief executive Paul Schott said in a statement that, “We are keenly disappointed … the commission apparently has not included … investor protection measures in the proposal, beyond those few specifically mandated by the JOBS Act..”
As the main lobbying organization for the registered mutual fund industry, the ICI is likely to oppose any rule that would allow promotion, solicitation or advertising by another class of investment products.
On the surface it might be easy to follow the logic that
hedge fund advertising could introduce a slew of investor-protection challenges. After all, hedge funds, as we've all come to know, are dangerous, risky, complicated, expensive, and unregistered.
However, in addition to all that scary Wild West stuff, most private investment products are also limited to investors who meet certain net-worth requirements.
Thus, while it might seem illogical that somebody like Paris Hilton is more qualified to invest in a
hedge fund than your basic economics professor, the rule does prevent most mutual fund investors from gaining access.
Perhaps the ICI is also worried that advertising could lead to some kind of slippery slope that might ultimately include more relaxed investor net-worth requirements, or that more information on private investments might make mutual funds seem less appealing.
Either way, it's hard to imagine the harm that might be caused through the process of basic advertising.
We can look in almost any direction to find ads and promotions for things we can't afford and don't need. But, aside from having a billboard fall on your head, the advertising can't really hurt you.
What the rule change could do, however, is introduce more transparency in the private investment space where firms are often so worried about violating the solicitation rules that they can't even set up a basic website.
Hedge fund manager Phillip Goldstein learned this first hand a few years ago when the State of Massachusetts charged him with illegally soliciting non-qualified investors because he responded to a request on his website for information about his fund.
Mr. Goldstein, the ever-colorful co-founder of Bulldog Investors General Partnership, insisted he didn't do anything wrong.
“Providing information is not the same as selling something, and this is still a free country, and that includes Massachusetts,” he said. “What's the big deal? We're not planning a kidnapping here.”
