IM Director Speaks About Hedge Fund Regulation

September 12, 2013

Norm Champ, the Director of the SEC’s Division of Investment Management, spoke at the PLI Hedge Fund Management Conference in New York about his division’s priorities with respect to hedge fund regulation. He discussed the regulatory landscape for hedge funds and their advisers.  He noted that the Dodd-Frank Act imposed greater oversight on advisers to hedge funds.
He reviewed the changes that were made to the private placement exemptions by the JOBS Act.  He stated that the SEC rule implementing the JOBS Act permits issuers to use general solicitation and general advertising to offer their securities if, among other things, issuers take reasonable steps to verify “accredited investor” status, and all purchasers of the securities are accredited investors.  He reminded the audience that that advisers to private funds are subject to an antifraud rule that prohibits fraudulent and misleading conduct with respect to fund investors, including making untrue statements of material fact to those investors.  He stated that hedge fund sponsors intending to rely on the new rule should also consider whether their current practices for verifying accredited investor status meet the requirements of the new rule.
Director Champ next spoke about a new inter-Divisional group that has been created within the SEC to review the hedge fund market practices that develop.  Staff from the Division of Investment Management will work closely with staff from the Division of Corporation Finance, the Division of Economic and Risk Analysis, the Division of Trading and Markets, the Office of Compliance Inspections and Examinations, and the Division of Enforcement.  Staff will evaluate the range of accredited investor verification practices used by issuers and other participants in these offerings, and endeavor to identify trends in this market, including in regard to potentially fraudulent behavior.  He also stated that staff will also develop risk characteristics regarding the types of issuers and market participants that conduct or participate in offerings involving general solicitation and general advertising and the types of investors targeted in these offerings.
Next he stated that he instructed the Division of Investment Management rulemaking and risk and examination staff to pay particular attention to the use of performance claims in the marketing of private fund interests.  In particular, this review will endeavor to identify potentially fraudulent behavior and to assess compliance with the federal securities laws, including appropriate Investment Advisers Act provisions.
Director Champ then discussed the “Bad Actor” amendment to Rule 506. Under the amended rule, an issuer cannot rely on the Rule 506 exemption from registration if the issuer or any other person covered by the rule is disqualified by a “triggering event,” which includes certain criminal convictions, certain SEC cease-and-desist orders and court injunctions and restraining orders. He noted that the final rule provides an exception from disqualification for issuers that can show they did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering.  He warned, however, that given the serious consequences of a bad actor finding, hedge  fund advisers should take care when hiring employees and screening investors, and conduct appropriate due diligence when retaining third party solicitors. 
Other topics discussed by Director Champ included:
• What the SEC’s knows about the hedge fund information;
• How the SEC is using information gathered about the hedge fund industry;
• SEC efforts to reach out to senior managers of hedge fund advisers;
• Other SEC regulatory initiatives; and
• Insider trading.
Click here to access the speech.


Investment Advisers, Investment Companies