• SEC to Monitor Fund Performance Claims
  • October 1, 2013 | Authors: Michael G. Dana; Peter D. Fetzer; Terry D. Nelson
  • Law Firms: Foley & Lardner LLP - Miami Office ; Foley & Lardner LLP - Milwaukee Office ; Foley & Lardner LLP - Madison Office
  • Now that new Rule 506(c) is effective allowing issuers relying on the securities registration exemption under Rule 506 to conduct general solicitation and advertising provided the issuer’s securities are purchased only by persons that have been verified to be accredited investors, some managers of private funds may take the opportunity to promote their “private” fund offerings to the public. According to Norm Champ, Director of the SEC’s Division of Investment Management, the Division will be closely monitoring private fund performance claims by such issuers.

    Any item of public advertising in connection with the offering of securities by a private fund issuer must not violate the “anti-fraud” provisions under the Securities Act of 1933. Such provisions prohibit fraudulent and misleading statements. In addition, the Investment Advisers Act of 1940 prohibits investment advisers while managing a private fund from violating the anti-fraud provisions. According to the Director, the Division of Investment Management has set up a separate group to monitor performance claims by advisers with respect to private funds. In addition, the group will monitor the adequacy of the verification process utilized by the private funds and its sponsors to ensure that each investor is accredited.

    The SEC’s proposed amendments to Rule 506(c) include specific requirements for private fund issuers such as the filing with the SEC of general solicitation and advertising materials 15 days prior to use. Issuers and sponsors of private funds should seek the advice of securities counsel prior to utilizing general solicitation or advertising to ensure that: (i) they have adequate procedures in place for verification that each investor is an accredited investor; (ii) general solicitation or advertising materials to be utilized would not violate the anti-fraud provisions; (iii) policies and procedures within the adviser’s written compliance manual are adopted to address Rule 506(c) requirements; and (iv) compliance with all reporting obligations, when the SEC’s proposed rules are adopted regarding such requirements.