Changes To SEC Rule 506 Reg D Stirring Opposition From Mutual Fund Industry As Rule Change Would Mean Increased Competition

ICI’s members are mutual funds for whom hedge funds are a primary source of competition. ICI members say that allowing private funds to advertise will send confusing messages to investors in all types of funds.
The private fund market raised more than $1 trillion last year, beating out the $984 billion raised by registered offerings. Many other industry participants see no problem in letting private funds advertise, noting that Reg D has other provisions with which private funds still must comply.
The main sticking point in the regulatory change is in verifying that an investor is indeed accredited. Issuers want to be able to get a signed statement from investors attesting to the fact that they are accredited.
State regulators say allowing such a relaxed from of verification would only lead to more fraud. They want the SEC to require verification of accredited status through investor income and tax records.
SEC head Mary Schapiro had intended to implement an interim rule but rescinded that action after complaints poured in about not having the normal 30-day comment period.
There are no specific verification measures included in the revisions. This would be a bonus to the private fund industry and other private issuers.


This means that advisors and investors will both have to do more due diligence in selecting which funds for investment. With broader advertising for private funds, investors will also need more education about risks inherent in the funds.

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