The Managed Funds Association, following the direction of many of its hedge fund members, is moving to get ahead of an expected trend toward increased regulatory oversight.
The Managed Funds Association, following the direction of many of its hedge fund members, is moving to get ahead of an expected trend toward increased regulatory oversight.
That orchestrated effort, which will rely heavily on diplomacy, is being led by former Congressman Richard Baker, who took over in January as president and chief executive of the Washington-based trade association.
Treasury Secretary Henry Paulson's recent proposal to overhaul the financial services regulatory landscape is only the latest example of why the $1.2 trillion hedge fund industry needs to be on its toes, according to Mr. Baker.
"The hedge fund industry is getting more attention, and more questions are being asked," Mr. Baker said. "We want to try and lift that veil that has been wrongly cast over the industry as being secretive."
Mr. Baker, a member of the House of Representatives for Louisiana's 6th Congressional District from 1987 to 2008, was scheduled to meet late last week with Securities and Exchange Commission Chairman Christopher Cox. Mr. Baker wasn't available to discuss the meeting, while an.SEC spokesman declined to comment.
"Coming from 20 years on the Hill, I understand the value of early and frequent conversations," Mr. Baker said. "I have actively reached out to the regulatory teams on duty now to let all the relevant people know we want to work with them and we do not wish to be an obstinate opponent."
MARKETING ISSUES
One item that Mr. Baker plans to address with regulators is the matter of hedge fund marketing prohibitions, which, if relaxed, could help financial advisers gain access to hedge fund information more easily.
"We are hoping to seek clarification as to what would be permitted and what is prohibited," he said.
According to the SEC, private-investment vehicles such as hedge funds have always been prohibited from making public offers. The debate, however, is in the margins.
"Hedge funds are not allowed to make public offerings, but the gray area is the question of what qualifies as a public offering," said Robert Plaze, the associate director of the SEC's division of investment management.
"Chatting up the press about performance would be considered a public offering," he added. "But there are some questions with regard to the use of websites and whether or not they are password-protected."
The confusion is apparent across the hedge fund industry, where some hedge fund managers will speak openly about their strategies, while others follow securities lawyers and consultants in being more cautious.
"The bottom line is, the SEC has never taken action against a hedge fund for talking to the media," said Richard Dukas, president of Dukas Public Relations Inc., a New York-based hedge fund consulting firm.
But when asked if he would make any of his hedge fund clients available for an interview, he said, "I don't think my clients would want to be the poster boys."
The long-running public-offering debate was reignited last year when Saddle Brook, N.J.-based hedge fund manager Phillip Goldstein was charged in Massachusetts with soliciting a non-accredited investor through his website.
Mr. Goldstein, who manages $325 million in his Bulldog Investors fund, has pushed the issue to the federal level and plans to sue the SEC for what he considers a violation of his First Amendment right to free speech.
"Initially, I thought they were going to bend, but saying, 'No marketing and no advertising,' is unconstitutional," he said.
Two years ago, Mr. Goldstein led the fight to overturn a rule requiring hedge fund managers to register as investment advisers by suing the SEC.
In addition to his push for more-relaxed marketing limits on hedge funds, he has also asked the SEC for an exemption to the so-called 13-F rule, which requires hedge fund managers to disclose portfolio holdings to the commission regularly.
In protest of what he deems an unjust rule and the SEC's lack of a response to his request for an exemption, Mr. Goldstein said, he hasn't reported his portfolio data to the SEC in 18 months.
NEW ORGANIZATION
Next on his agenda is the creation of a non-profit organization, tentatively named the Rational Regulatory Policy Institute, to represent the hedge fund industry against regulatory injustices.
"I'd like to see an organization that's willing to litigate on behalf of the industry on some of these issues, because a lot of people are intimidated by the regulators," Mr. Goldstein said. "I'd like people to be able to contact me so they could anonymously have their voices heard."
If it weren't for the fact that Mr. Goldstein and the MFA aren't deliberately working together, their combined efforts might be described as a classic good-cop, bad-cop strategy.
"I don't think Mr. Goldstein's efforts are misguided and misplaced, but he is taking a more combative approach," said Terry Davis, a Washington-based securities lawyer for New York-based law firm Pillsbury Winthrop Shaw Pittman LLP. "Conversely, the more diplomatic tack [taken by the MFA] could lead to a better understanding between the regulators and the industry, but the downside is, it will take longer."
Mr. Baker, who replaced John Gaine after his 10 years as head of the MFA, said he hopes to work with regulators to avoid the creation of knee-jerk regulations.
"There are consequences to regulatory overreach, and in the past, [hedge fund industry representatives] have not explained ourselves as well as we could have," he said.
The timing of the MFA's ramped-up lobbying efforts is crucial, Mr. Baker added.
"Virtually every candidate running for president will be on the hunt for new revenue, and all the alternative investments will be examined as the next administration looks around for an extra dime," he said. "I believe all the financial services sectors will be scrutinized, but the subprime crisis has caused people to look more closely at some of the less regulated areas."
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
