Will the JOBS Act Transform the Hedge Fund Industry?

There has been a lot of chatter surrounding the JOBS (Jumpstart Our Business Startups) Act and its inevitable impact on the job market. But what impact, if any, will it have on the hedge fund industry?

“For more than 60 years, hedge funds have never been allowed to advertise,” said Mitch Ackles, President of the Hedge Fund Association and CEO of Hedge Fund PR. “They haven’t been allowed to do the same things that mutual funds are currently allowed to do. Many managers are advised by their legal council and compliance people never to talk to people like you, never to talk to a reporter. Some don’t even speak at events because they’re scared that what they say might be construed as a solicitation to an unqualified person.”

With the JOBS Act, that could soon change.

“Some of the larger managers have been comfortable with it — you see them on CNBC or Bloomberg TV or The Wall Street Journal,” Ackles told StreetID. “Those managers tend to stick to the big picture, and this has been a safe haven for managers of all sizes. They can go on TV and be quoted in the press if they talk about their big picture view of a sector — the economy, regulation. They can certainly give those opinions (and be quoted) and not have that be construed as, you know, trying to offer something inappropriate to someone that’s unqualified that might read it.”

The real problem, however, is that there has not been any clarity regarding the things that hedge fund managers can and cannot do. “So there’s a good chunk of people that you will never see get quoted and will never want to talk to [reporters] until the JOBS Act rules [are finalized] and the SEC comes out with specifics that will guide the industry and hopefully provide that clarity that has been missing for so many years,” said Ackles.

This is not the only challenge that hedge fund managers have encountered, but things are starting to get easier. “The secondary aspect of the Hedge Fund Association — which was only established as a result of Dodd-Frank — is our lobbying,” Ackles explained. “I myself am a registered lobbyist and part of a core team of about four or five people at HFA that airdropped ourselves into DC during Dodd-Frank before everything was finalized. We were really speaking up for the industry participants that don’t usually have a voice in DC — the smaller and emerging managers.”

Ackles said that the reason the Hedge Fund Association decided to take action and become lobbyists “is because the original Dodd-Frank proposal was that every manager that managed $30 million and up would need to register with the SEC.”

“We thought that might impede new funds from forming,” said Ackles. “It’s obviously increased costs for running the business, and you would need additional service providers, legal advice, compliance, if you were to have to register at that threshold with the federal government.”

In the end, the association’s efforts were not in vain.

“We were successful,” said Ackles. “It was our first effort and they raised the AUM level to $150 million. That really taught us that speaking up for that group, our main constituency, was worthwhile.”

That said, Dodd-Frank is not over. “They are only part-way through implementing it, so there are still concerns relating to Dodd-Frank here in the United States,” said Ackles, adding that hedge fund managers should also keep an eye on FATCA, the Foreign Account Tax Compliance Act.

“FATCA is interesting because it is actually making governments share data about investors and where their money is, and it will have an impact on the investor side of the equation.”

Beyond that, hedge fund managers need to pay attention to Form PF. “It’s a 49-page, five-section document that hedge fund managers have to fill out,” said Ackles. “It’s got 79 expandable questions, and they have to submit it to the SEC and the CFTC using a specific protocol.”

Ackles said that the Hedge Fund Association has the view that if President Obama is re-elected, “all of these things will continue to go as they are currently in place.”

“Romney has indicated that he is going to look back at some of these things and potentially roll them back in congress,” Ackles added. “The uncertainty on the regulatory front is also a challenge to not just the hedge funds but all of Wall Street.”

Regardless, the Hedge Fund Association does not support a particular candidate. “The Hedge Fund Association is non-partisan,” said Ackles. “What we are hoping for is smart, efficient regulation that’s not overly burdensome.”

Ackles said that by “overly burdensome,” he means that the government cannot expect hedge funds to “spend all of their money on lawyers and compliance people.”

“Contrary to what some mainstream media have said about hedge funds and private equity, they are job creators,” said Ackles. “There is a benefit to hedge funds, and obviously there’s a benefit to Wall Street. Main Street may not see it, and politicians may use it as a way to almost re-create class warfare. But capitalism is not a bad thing. It’s what this country was based on.”

Ackles said that the Hedge Fund Association supports regulation, as it is an important part of the industry. He also said that hedge funds need to realize that they must adhere to these regulations.

“We certainly want the bad apples to go away and face the music,” Ackles continued. “But it is our view that it just needs to be done in a way in which it’s not too complicated. Look at what I just told you about Form PF [and] Dodd-Frank — there’s hundreds of pages! To be able to interpret this, and then have the right guidance from your legal counsel as a hedge fund manager, and you have to rely on that. You can’t be the legal expert interpreting what’s okay and what’s not.”

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