NASD Steps Up Scrutiny Of Hedge Fund Marketing Practices

by Carla Johnson, Investors Offshore.com

16 September 2005

US financial services body, the National Association of Securities Dealers, is intensifying its efforts to stamp out the improper marketing of hedge funds to retail investors, who may not have the requisite wealth or experience to invest in these currently unregulated private investment pools.

Traditionally, hedge funds have been strictly off limits to all but the wealthiest of investors, and the usual minimum investment limit is $1 million. However, as the industry has more than doubled in size over the last two years, and the number of hedge funds has ballooned to an estimated 8,000, regulators are growing concerned that the more unfussy hedge funds are targeting less experienced - and less wealthy - investors.

"There is a concern that this asset class is expanding down-market," Gary Goldsholle, NASD associate general counsel, Regulatory Policy and Oversight, told a Securities Industry Association conference in New York. Mr Goldsholle went on to relate as evidence of the trend the case of a hedge fund that approached his 91-year-old grandmother, who was invited to "learn about hedge funds" at a seminar in a Florida steakhouse.

The NASD, which oversees around 5,200 brokerages, is reluctant to release details of cases which it intends to investigate. However, in June it was reported that the regulator sent a letter to about ten large investment banks asking them what warnings they gave investors when selling them hedge fund products with a minimum investment of $50,000 or less. Banks including Citigroup Inc., Merrill Lynch & Co. and UBS AG were among the firms contacted by the brokerages watchdog, according to Bloomberg.

The NASD is looking for evidence that some firms have been pressuring private investors into making unsuitably risky or expensive investments, although the letter stressed that the enquiry "should not be construed" as an official investigation.

Nonetheless, Barry Goldsmith, NASD executive vice president of enforcement, has intimated that the marketing and sales of hedge funds to individual investors has been "an ongoing focus" of the NASD.

"We are continuing to look at issues in this area, but cannot comment on any of the specifics," he was quoted as saying by Reuters last month.

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