Thursday, February 2, 2006

NASD Investigating Hedge Fund Sales to Small Investors

Back when the SEC decided, on some very questionable grounds, to start regulating hedge fund managers, a constant theme in the Commission's analysis was the "retailization" of hedge funds. I commented then that if in fact hedge funds were being sold to Mom and Pop, there was no need for additional regulation, since such sales would violate the fund's private placement exemptions. I suggested looking into that aspect of the supposed retail sales, and enforcing existing rules.

It appears that this is what the NASD is doing - enforcing existing rules rather than creating new ones. The NASD cannot go to the hedge funds themselves, they do not have jurisdiction over the funds, so the NASD is coming at the issue from a different direction - it is looking at hedge fund recommendations to individual investors at major retail firms.

It is pretty clear that if hedge funds are being retailed to the average investor to any significant degree, the NASD should find a significant number of such trades, and many of those trades will be unsuitable for those investors.

On the other hand, if the sales are to sophisticated investors, the trades will be suitable, and there will be no problem with the sales, or the "retailization" of hedge funds.

Nice to see a regulator approaching an issue in a rational way.

Now if we can only get the SEC to admit the folly of its "hedge fund" registration rule.
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