Consumer advocates are not happy with a Securities and Exchange Commission (SEC) proposed rule that allows hedge funds for the first time to publicly advertise private placements to average investors.
Public Citizen’s Bartlett Naylor said in the agency’s first rulemaking effort following the April 5th passage of the Jumpstart Our Business Startups Act, “the SEC failed to propose concrete solutions that would prevent average investors from being duped by hedge funds managers and other issuers of private securities.”
Transactions involving private offerings already result in more enforcement actions and investigations than any other kind of financial transaction, according to the North American Securities Administrators Association.
The number of actions grew to 410 in 2011, a 60 percent increase from 2010.
“Private offerings are so risky that, to date, hedge funds and other firms could only offer these high-risk deals to proven, ‘sophisticated’ investors, such as professional money managers with whom they have an ongoing business relationship,” Naylor said. “The JOBS Act permits advertising such deals to the public.”
“One of the very few investor safeguards from Congress is the requirement that firms offering private securities have to take ‘reasonable steps’ to ensure that the investor is sophisticated and has a net worth of $1 million or $200,000 in annual income,” Naylor said. “Significantly, the SEC’s proposed rule fails to adequately define these ‘reasonable steps’ a hedge fund is required to take before it can categorize a prospective client as sophisticated. This is a grave oversight.”
SEC Commissioner Luis Aguilar opposed the proposed rule.
Senator Carl Levin (D-Michigan) said that with the proposed rule, the SEC “began undermining significant investor protections and putting ordinary Americans’ investments at risk.”
“Just a few years after the financial crisis, it is disappointing that the SEC is proposing a rule that ignores years of experience and the law,” Levin said.
“The SEC rule should require those who advertise private deals to take specific steps to ensure that investors have the wherewithal and expertise to make these risky investments,” Levin said. “And it should require that the content of the advertising meets some minimum standards, such as those that mutual funds are subject to today. The proposed rule does neither.”