This post was also written by Paul Bond, Keri Bruce, and Frederick Lah.

Last week, the SEC proposed amendments (PDF) to Rule 506 of Reg D to lift a long-standing ban on advertising for hedge funds and certain other investments in the United States. Over the course of the next few weeks, Reed Smith will be releasing a series of blog posts about the various implications this proposed rule may have if it goes into effect. For this post, we consider the potential data privacy implications with the proposed rule.

Hedge funds and other issuers seeking to conduct publicityhound.net.jpgprivate offers under Rule 506 of Reg D have long been banned from advertising in public forums like billboards, newspapers, television, or publicly-accessible websites in the United States. Previously, such issuers could only offer their securities to persons with whom they had a pre-existing substantive relationship based on which the issuer was able to conclude that the offeree was likely to be an appropriate offeree (i.e., a sophisticated person capable of bearing the financial risk). The ban was designed to prevent issuers that were not subject to full burden of the Securities Act’s disclosure and registration requirements from targeting investors whose relative lack of sophistication or bargaining power might prevent them from having all the information necessary to make an informed investment decision. But under the new rules hedge funds and other issuers would be able comply with Rule 506 and still publicly advertise to anyone, so long as the actual purchasers of the securities are “accredited investors,” as that term is defined in the Rule.

While hedge funds and other Rule 506 companies are now technically permitted to advertise widespread and publicly, it is dubious that we’ll see hedge funds competing with major consumer brands for prime advertising real estate. A more likely scenario will be that hedge funds will become more aggressive buyers in the information market and use that information to tailor their advertising efforts to customers likely to be “accredited investors.” Perhaps this will take the form of email marketing campaigns, direct phone marketing, or possibly even online targeted advertising, for example, on a mutual fund or brokerage firm’s website. Each of these types of advertising comes with its own unique set of privacy considerations. It should also be noted that this new avenue of information sharing then becomes a compliance consideration for both the hedge fund and the information provider. For example, if a financial institution ends up providing such information to a hedge fund, the financial institution may need to update its privacy policy accordingly to make sure it is complying with regulatory requirements.

The extent to which hedge funds and other issuers seeking to comply with Rule 506 will take advantage of these proposed rules (once and as adopted), if at all, remains to be seen. The resultant data privacy implications will vary depending on the exact advertising measures employed. We will be monitoring this situation for developments.