The National Association of Securities Dealers (NASD), the US body that regulates securities firms, has backed away from an earlier policy interpretation that would have prevented placement agents from showing the performance of previous funds in marketing materials.
In an 'interpretive letter' dated December 30, the NASD gave further guidance to the marketers of private funds, easing off a previously released interpretive letter which many argued would have made more difficult the jobs of most placement agents.
In October, the NASD issued an interpretive letter stating that its members – meaning all US broker-dealers and broker-dealer affiliated placement agents – may not use “related performance” to market a current fund. That policy clarification would have prevented, for example, the presentation of the IRR of Fund I in a marketing campaign for Fund II.
The interpretive letter was initially targeted at hedge funds, but the NASD later stated that the policy applied to the marketing of private equity funds, as well.
That policy clarification was ostensibly to bring alternative investment funds in line with rules that govern the marketing of mutual funds.
The rule applied only to marketing materials – such as “flipbooks” – and not to private placement memoranda.
In the wake of the October rule clarification, placement agents and legal professionals servicing the private equity industry complained that related-performance restrictions were not appropriate for long-term, illiquid private partnerships, and that private equity investors were sophisticated enough to judge the value of previous fund performance data.
In its most recent letter, addressed to Yukako Kawata, an attorney in the New York office of Davis Polk & Wardwell, the NASD stated that it would not object to the presentation of related performance information in sales material so long as the placement agent ensured that the recipients of the material were “qualified purchasers” as defined by the Investment Company Act.
The letter, signed by NASD senior vice president Thomas Selman, stated that the NASD 'recognizes that the presentation of related performance information with respect to an unregistered private fund. . . does not present the same investor protection concerns as the presentation of related performance information with respect to the sale of mutual fund shares.'
In its original interpretive letter on the matter, the NASD held open the possibility that it might revise its policy on related performance.
The December 30 interpretive letter may be viewed at the NASD Web site.