Don't Blame SEC, They Were Left Out

Ignorance is never good, it is not cute, it is not funny and it is not clever. So when scores of commentary came out attacking the Securities and Exchange Commission's (SEC) decision (even though it wasn't their decision but part of the JOBS Act passed last year) to lift the ban on advertising for hedge funds, I was not laughing.

Humor is an effective tool for the writer/commentator in revealing truth, but when it instead reveals ignorance, it does not help the public discourse. Like when someone makes an off color remark in the hope of getting a quick laugh. Most people know better but when it comes to hedge funds, a national magazine can even question their masculinity.

The purpose of journalism is to inform, but you can't do that when you are not informed. Hence the attack on the SEC for something that was mandated by Congress more than a year prior.

Here are a few attempts at humor by the Al Lewis from Market Watch. "Here's a slogan: We've got your pensions in our pockets. Institutional investors have long flocked to hedge-fund managers in their constant chase for performance, putting the life savings of cops, firefighters and public employees in the hands of high rollers."

High rollers? Most hedge funds have lower volatility than your basic long-only mutual fund and investors -- especially institutional and high net worth investors -- select different investments for specific needs. Some may be conservative, some may take on more risk but it is best to have a diversified group of investments. And stocks and bonds or mixing small-cap, mid-cap and large-cap stocks is not diversification.

Perhaps some of these hedge funds critics will look at the new rules passed by the SEC and learn that the secrecy hedge funds are so famous for, which they love to lampoon is mandated in their exemptions from registration. It's not personal.

And what is the obsession with fees -- these are big boys with free will and allowing hedge funds to advertise can only help to put competitive pressure on price.

Or how about the nugget from Lewis, "Don't forget, a rich rube is still a rube."

True enough, but they are rich enough to make their own mistakes. And I don't mean to pick on Lewis as the wires are rife with dire warnings regarding the danger of what the SEC just unleashed with their new rule.

And I just can't get over the number of business media folks who keep on harping on the SEC. The Jumpstart Our Business Startups (JOBS) Act was signed into law on April 5, 2012. It was a rare bit of bipartisanship, a testament to just how weak the job market was 15 months ago. The whole point of the JOBS Act was to kick start private enterprise. Get rid of some of the rules and regulations that make it difficult to start or expand a business. Lifting the ban on advertising private placements was a small part of it. So small, that Congress apparently didn't consult the SEC.

In fact the attacks on the SEC are misplaced because they may have been kept out of the loop. Drinker Biddle & Reath Partner David Matteson wrote this in the June 2012 issue of Futures: "Ordinarily, a change in the law this dramatic and far reaching would be the subject of numerous SEC studies, hearings, industry input, proposed SEC rules, industry comment to such proposed rules, revised proposed rules, etc. The legislative record of the JOBS Act does not show any involvement by the SEC, which is highly unusual because the Act directs the SEC to amend drastically its private offering regime. Did Congress intend to keep the SEC in the dark?"

Remember the purpose? Maybe Congress, knowing the SEC's penchant for studying an issue to death before not taking action, decided to leave them out. A rare bit of wisdom from Congress.

Matteson also pointed out that the JOBS Act requires the SEC to revise its rules within 90 days of enactment, which would be July 5, 2012. They were only late by a week -- and one year. Now you can begin to understand why Congress didn't consult with the SEC.

If the scores of business columnists want to take on the SEC it should be over this. Congress passes and the President signs a piece of legislation -- the only attempt outside of Federal Reserve policy--by government to try and stimulate the economy in the midst of a historic downturn and the SEC is more than a year late in writing rules. And these folks are upset that hedge funds will be able to advertise! I guess if they really think it is bad they should congratulate the SEC for dragging their feet so long.