SEC's Atkins mulls tweaks to hedge fund ad rules

By Martha Graybow

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission should look at ways to "clear up some gray areas" on rules prohibiting hedge funds from advertising, a top U.S. regulator told Reuters on Tuesday.

The loosely policed hedge fund industry wants regulators to relax half-century-old advertising restrictions aimed at discouraging the general public from jumping into risky investments. Hedge funds say the rules are so broad they restrain them from publicly discussing fund performance, or responding to inaccurate press articles about them.

SEC Commissioner Paul Atkins, speaking at the Reuters Regulation Summit in Washington, said he does not envision big changes to the rule, such as possibly opening the door to allow hedge funds to advertise on television or radio.

But he said some modifications could be helpful as a way to unmask some of the secrecy that surrounds the funds.

"The whole advertising prong of the rule, I think, is problematic frankly," said Atkins, currently the longest-serving SEC commissioner. "That whole thing needs to be looked at again."

Hedge funds now find themselves in a position "where some lawyers advise their clients that you can't even put down on your business card that you are hedge fund X" or they won't identify themselves in the telephone directory as a hedge fund out of concern that could be construed as advertising.

He said the SEC should "look at this from a perspective of clearing up the gray areas, and making sure that this rule makes sense and it's not a trap for the unwary."

Hedge funds have seen a huge influx of investors, doubling their assets under management in the past five years to about $1.3 trillion.

The SEC recently proposed raising the minimum net worth of a hedge fund investor to $2.5 million in investments, excluding the value of the person's home, up from $1 million currently.

Atkins said he had not heard much feedback from hedge funds yet on the net worth proposal, but thinks the change is necessary to help prevent small investors from getting hurt in the event of a hedge fund collapses.

"Clearly I think the larger players in the marketplace don't mind because they are not looking for small investments anyway," he said. "Where a rule like this will hit more is for the start-ups, and so we have to always keep that in mind."