Adoption of Rule 206(4)-8

August 30, 2007

In July, we told you about an SEC open meeting which would include the discussion of a new anti-fraud rule under Section 206 of the Investment Advisers Act of 1940. The new rule was aimed at advisers to pooled investment vehicles such as hedge funds. Earlier this month, the SEC adopted Rule 206(4)-8 which prohibits fraudulent and deceptive practices by investment advisers (whether registered or not) to many types of pooled investment vehicles. In response to the Goldstein v. SEC decision which vacated Rule 203(3)(3)-1 requiring advisers to hedge funds register as investment advisers, the SEC has passed Rule 206(4)-8 to clarify that action can be brought against advisers to pooled investment vehicles regardless of their registration status. This new rule is not intended to add or modify existing requirements or duties of investment advisers currently registered under the Advisers Act.

Specifically, the rule states, “It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business […] for any investment adviser to a pooled investment vehicle to: (1) Make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or (2) Otherwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.”

Posted by Bryan Hill
Labels: Hedge Funds